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.

The Middle East has been a relative bright spot for upstream activity during the oil price downturn. International land rig contractors, such as Saipem, are actively focusing their strategy and drilling campaigns on the region in the attempt to limit the negative impact of low oil prices.

Looking at drilling activity, it is clear why the Middle East is a good prospect for contractors hit by the falling rig count. Between 2014 and 2015, Douglas-Westwood’s Drilling & Production Market Forecast saw global onshore wells drilled fall by a staggering 32% as operators slashed drilling campaigns. The Middle East – characterised by low lifting costs and containing almost half of the OPEC membership – was relatively immune from this decline, growing at 3%. Douglas-Westwood expects the Middle East to continue to buck global trends, anticipating another 3% increase in the number of onshore wells drilled this year.

Despite this growth, the region has not been completely exempt from the impact of the downturn – NOCs such as Saudi Aramco have slowed progress at a number of projects. Indeed beyond drilling & production, heavily commodity dependent Gulf producers have felt the strain on their finances. Non-OPEC member Oman has been hit particularly hard, with both Moody’s and Standard & Poor lowering their credit rating – the latter to just one notch above junk status.

However, a regional reliance on oil exports is expected to support continued activity and there are clear bright spots within the region. Since economic sanctions were lifted in January, Iran has stood out as a potential golden opportunity for international rig contractors – Douglas-Westwood’s Iran Oil & Gas Market Forecast expects demand for land rigs to increase at 6% to 2020. However, some bilateral US sanctions remain. This has created uncertainty with regards to payment – understandably a key concern for any potential entrant. This may restrict US based contractors from entering the market directly, therefore, the opportunity – at least in the short term – is likely to be most accessible to indigenous contractors based in the Middle East. As a result, it may be contractors in neighbouring markets that find themselves with an early mover advantage.

Kathryn Symes, Douglas-Westwood London

Leading procurement services specialist, Craig International, has launched a ‘win-win’ platform to help oil and gas companies off-load surplus stock worth billions of dollars and buy products and equipment they need at competitive prices.

Craig Collaboration connects companies looking to sell stock with those looking to buy. Oil and gas companies around the world have billions of pounds of surplus stock, much of it sitting in costly storage and Craig Collaboration will allow them to realize value from this.

A radical shift in procurement in the industry, Craig Collaboration represents a major investment by Craig International in an immediate, collaborative solution towards increasing efficiency. It is already gathering momentum with several major exploration and production companies expected to start using it following today’s launch.

Steve McHardy and Jill MacDonald, joint managing directors of Craig International, which has launched the pioneering Craig Collaboration platform.

Steve McHardy, joint managing director of Craig International, said: “With the oil price set to be lower for longer, the industry requires immediate action towards achieving enhanced efficiency and cost control. We have developed a platform which the whole industry can use to buy and sell stock. Using our bespoke electronic tools, our network of buyers and our global experience, Craig Collaboration will, at no cost to industry, ensure that their products are offered to buyers looking to purchase them.

“Our research found that two exploration and production companies had, between them, almost half a billion dollars’ worth of surplus stock. Multiply that by the number of companies operating in the Gulf of Mexico and that’s a considerable amount of products and equipment lying around not making any money and incurring warehousing costs.

Craig Collaboration is accessed through a portal and powered by Craig International’s bespoke SmartBuyer software. For example, if operator A, who is looking for a pump which operator B has in surplus stock, then Smartbuyer would search the inventory on Craig Collaboration, find the pump and offer it at a reduced cost to operator A.

Craig Collaboration will also provide an analysis of the interest expressed on their surplus equipment, allowing clients to make an informed decision on disposal or not.

Craig International has this year secured $60 million in new contracts as a result of the efficiencies delivered by their ecommerce initiatives. A bespoke web-based tool, SmartBuyer makes the procurement process much simpler, more accurate, less time-consuming and much less expensive.

With an increasing marketshare in the Gulf of Mexico, Craig International is in a unique position to observe trends and offer solutions to dramatically reducing costs when it comes to buying oilfield products and services.

Mr. McHardy added: “We already have the buyers looking to purchase the products and equipment that companies have in surplus stock and we have the electronic tools to ensure confidential and efficient transactions between buyers and sellers.

“We are buying the same products over and over again and, with our 16 years’ experience, we are well-placed to exploit this knowledge and buying power to the benefit of the wider industry."

Latin American Light Product Imports Level Off/Decline

Latin American oil demand is downshifting in 2016 with gasoline expected to grow only slightly and diesel to contract. Product imports into the region are down, but there is upside risk stemming from operational issues in the Venezuela refining system. Latin American refinery runs are expected to improve in Mexico, Colombia and Brazil, but Venezuela is deteriorating. PIRA’s analysis of Latin American heavy crude values in different markets shows that since 2015 Maya has been relatively more attractive versus alternatives in some European/Asian coking capacity. Whereas for the U.S., Maya remained in the middle of the range of competition.

The Recovery in U.K. Gas Production Is Not the Start of a New Trend

A key shift in European gas balances in the years ahead will be increasing dependence on LNG and Russian gas in N.W. Europe. U.K. and Dutch production are both shadows of their former selves at 121 mmcm/d and 184 mmcm/d, respectively, in 2015, and declines almost guarantee this shift to occur. Buyers have prepared by investing in more import infrastructure and working gas storage, while sellers are also positioning themselves to be more competitive. Gazprom has recently converted more major customers to spot gas indexation, and if Nord Stream 2 does manage to be built, access to Russian gas at the farthest reaches of N.W. Europe will be in play and more transparent pricing will make it a more competitive environment.

Gas Units Online After Years of Hibernation, with the Help of Resilient Carbon Prices

Increased dispatching of gas has already emerged in the U.K. so far this year, with an extra 5 GWs on average dispatched year-on-year, but as the oversupply in the LNG markets continues to build, coal-to-gas switching will increasingly become a reality on the Continent. Gas prices have been drifting low enough to push RWE to announce that it will bring back online the Dutch MOERDIJK 2 gas unit (430 MWs). This move suggests that the positioning of gas is improving relative to coal on the Continent, with this outcome also in part the result of resilient carbon prices. Will carbon pricing continue to ignore the overwhelmingly bearish underlying fundamentals?

Gas Surplus Weighs on Coal

Low gas prices continue to result in cannibalization of coal dispatch, aided by robust growth in wind generation due to new capacity in service. At the same time, U.S. coal producers are slashing output dramatically, especially in the PRB. This sows the seeds for a market recovery in 2017 once gas and coal stocks normalize and natural gas prices recover.

Freight Market Outlook

Volatility in the tanker sector seems to be increasing as evidenced by wide swings in VLCC rates. Rates in the benchmark AG-Asia trade plunged from WS 115 early in January to WS 49 early in March then back to WS 97 by mid-March, only to fall again to WS 60 in April. But the daily drip feeding of new tonnage into the fleet with few offsetting deletions will ultimately result in lower peaks and deeper rate troughs in 2016 and next year. Tanker demand has also been helped immensely by a bloated supply chain, but PIRA expects this support to wane as global inventories start to decline beginning late in 2Q with the decline accelerating in 2H16.

European LPG Catches a Bid

Closed arbitrage economics from the US to NW Europe over the past months have led to reduced cargo flow between the regions. This has helped tighten supplies in local European propane markets, which is beginning to affect a price response. May propane futures added a solid 5% last week to $298/MT — a premium of over $100 to Belvieu propane, the largest since January. Butane continued to languish however, as a lack of gasoline blending hinders demand. Cash butane cargoes were at a $20/MT discount to propane futures on Friday.

Brazilian Political Upheaval

Lots of moving parts as a new trading week begins, and we’re not just talking tractors with planters attached. With that said, there’s very little in the way of surprises as the OPEC meeting in Doha yielded no agreement, the Brazilian lower house voted to move forward with impeachment proceedings against Dilma Rousseff, and weekend weather saw an awful lot of planting activity from Minnesota and Iowa east. With soybeans leading this most recent rally, the question on everyone’s mind is whether or not the real will continue to rally now that a vote has been taken and remain the force behind higher prices.

U.S. Ethanol Prices and Margins Jump

Ethanol assessments climbed to new 2016 highs for the week ending April 8 as the long anticipated reduction in output and stocks finally materialized. Strengthening corn and oil prices supported the move.

April EUA Price Bump Temporarily Camouflages Bearish Market

Despite the expected EUA price bump during the April compliance period, bearish indicators remain in the EU ETS. Power sector EUA demand is weak, with competitive gas generation, coal retirements and a downward revision in implied CO2 prices. The bearish supply picture includes incoming 2016 free allocations, higher auction volumes, and little expectation of pre-2019 policy support. Excepting the possibility of greater alignment with rising oil prices, there is little upside price potential through summer 2016.

Global Equities Resume Their Advancing Trends

Global equities resumed their broad based gains for the week. In the U.S., the banking index had a particularly strong performance. Retail and materials also outperformed. Only consumer staples posted a small decline. Internationally, all the tracking indices gained and outperformed the U.S. overall tracking index.

Crude Imports and Crude Stock Build Drive Record U.S. Commercial Stock Level

A sharp week-to-week increase in crude imports, partially driven by a recovery from fog-impeded flows the week before, contributed to a 6.6 million barrel crude stock build. This crude build drove a 6.9 million barrel build in total commercial stocks, driving them to a new record high. With a similar build last year, the surplus remained about the same. Domestic crude supply increased sharply on the week, but we think another week of data will better gauge April’s apparent production recovery.

Competing Forces Emerge in Near-Term LNG Spot Price Discovery

Don’t forget that for key LNG buyers in Japan and Korea, low spot priced cargos, as attractive as they may be, cannot always find a home owing to limited LNG storage. In the second quarter, when Asian demand is at its seasonally weakest point, this effect is exacerbated, particularly as Asian buyers emerged from a warmer-than-normal winter with stocks intact. For now it appears that current levels of spot gas are not yet low enough to trigger a substitution effect for coal, at least not in Japan.

Fuel Forwards Rally; Power Prices Lag

Influenced by mild weather, March spot power prices were down from February levels in every market except NY-A, where transmission congestion caused spreads with Ontario to expand to nearly $40/MWh. Since bottoming in late February, NYMEX winter 2016-17 gas contracts have risen, bringing the market into closer alignment with PIRA’s forecast. Wind provided over 20% of SPP and ERCOT generation in March, limiting gas burn. Fewer nuclear outages are scheduled this spring and fall than in 2015, which will also restrain gas burn.

Fresh Chinese Data Release Points to Potential Coal Demand Stabilization

Seaborne coal pricing moved decidedly higher last week, aided by a firming in oil prices and newly released data showing a potential resurgence in Chinese coal demand. Atlantic Basin prices rose more than Pacific Basin pricing, with stockpiles at ARA declining last week and shipping data indicating a sizeable reduction in Colombian exports in March, particularly in Europe. Additionally, tightness has emerged for higher grades of South African coal, causing API#4 (South Africa) to remain out of sync with API#2 (Northwest Europe) and FOB Newcastle (Australia) prices.

Financial Stress Stable

The S&P 500 gained on the week after a slight decline the previous week. It has now posted gains the past eight of nine weeks. Most of the other key indicators improved. The yield of the BAA-rated corporate bond has continued to decline. Commodities, including total, energy and ex-energy, were higher on the week. The Cleveland Fed released its inflation expectations series for April, which showed a raise for all maturities.

Ethanol Manufacture Plummets

U.S. ethanol production plunged 38 MB/D last week to a six-month low 938 MB/D as more plants reduced output to perform annual maintenance.

Producer Selling Opportunity

Fundamentally there is still no reason to own these markets, but the power of money flow was on full display last week after a mundane WASDE on Tuesday. Planting conditions and soil moisture profiles were impressive for many we visited in the Midwest. Planters were starting to roll late week and should be out in earnest by the weekend. Planting in Iowa and Missouri was ahead of pace this past week while others are just biding some time while watching the impressive rally.

Japanese Crude and Product Stocks Build, with Weaker Demands

Crude runs were modestly lower and crude imports remained around 3.8 MMB/D, which built stocks 2.8 MMBbls. Finished product stocks built with increases in gasoline, gasoil, and kerosene. Naphtha stocks continued to decline. Gasoline demand fell back from strong levels with much lower yield, and stocks posted a minor build. Gasoil demand also fell back with much lower yield and a drop in exports, such that stocks built similarly to gasoline. Kerosene demand again declined seasonally. Refining margins remain good, but have eased. All the cracks gave ground on the week.

Shoulder Season Stockpiling Threatens Early Entrants

With NYMEX prices challenging $2/MMBtu earlier in the week, or ~25% higher than last month’s lows, cautious optimism might be returning to the market. Signs of slowing domestic production and recent “tightness” revealed in early April storage reports have arguably fueled more bullish sentiment than the prior month, when Henry Hub (HH) cash traded $1.49/MMBtu. The lethargic pace of restocking thus far, i.e. ~2.5-3 BCF/D less than 2012, has provided fodder to those looking to build opportunistic length. Should such tightness continue, gas prices would naturally recover to levels more aligned with lifting costs. However, extrapolating early-season tightness is probably unreasonable given looser shoulder season balances.

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

At midmonth, April looks to be warmer than normal (-7%) in the three major OECD markets with a net effect on oil-heat demand to be -91 MB/D. On a 30-year-normal basis, the markets are almost 17% warmer.

Upside Surprises for China, But Downbeat Data from the U.S.

In China, the first quarter GDP reading matched the market’s expectation exactly. Underlying data from four key sectors (manufacturing, housing, consumer spending, and trade), on the other hand, were better-than-expected, and indicated a strengthening in the economy’s momentum. These improvements owed significantly to the Chinese government’s recent policy stance on credit creation. In the U.S., the latest industrial production data disappointed significantly, but manufacturing is still expected to strengthen in the coming months.

Asian Demand Update: China and India Pushing Faster Growth

PIRA's latest update of Asian product demand shows improved growth due to acceleration in China and India. China and India show combined growth of over 1 MMB/D, a pickup from the last update and incorporating the latest three-month actuals through March. China posted growth of 528 MB/D (vs. 394 MB/D in last update) and India was higher by 528 MB/D (vs. 358 MB/D, previously).

Fracking Policy Monitor

President Obama has taken aim at regulating methane emissions from the oil and gas sector, announcing new EPA regulations for existing oil and gas sources but leaving follow-through to the next administration. 2016 Presidential candidates have shown predictably opposing views on the importance of fracking along party lines. The USGS released its seismic forecast, for the first time taking account of induced quakes, prompting policy discussion on the state level. Oklahoma is likely to continue with its current voluntary compliance scheme despite increased quakes, lawsuits, and a difficult business environment. Limits on local control remain a key issue in Colorado and West Virginia.

Iran Set to Lower Petrochemical Gas Feedstock Price

Iran is preparing to cut the price of natural gas as a feedstock for petrochemical plants for the next six months, the deputy minister of oil for planning and supervision of hydrocarbon reserves Mohammad-Mehdi Rahmati said on April 11. He said that the final price hasn’t been set yet, but it would be announced in a week. It will be the first time for two fiscal years that Iran has cut the gas price for petrochemicals despite falling oil prices since mid-2014.

Electric Vehicle Outlook: Tesla, Batteries, and the Transport Fuel-Power Intersect

Tesla Motors unveiled its all-new Model 3 electric vehicle on March 31, 2016, attracting a record-breaking number of pre-orders. PIRA does not view Tesla’s new vehicle and pre-order announcement alone as reasons for adjusting the short- or long-term outlook, which already models significant growth in plug-in electric vehicle (PEV) sales after 2017. Nevertheless, competitive pressures from additional PEV models, the downward trajectory of battery costs, and upcoming Environmental Protection Agency (EPA) standards review will be important trends to watch over the medium term.

PIRA Expects Record Summer Gasoline Demand, Albeit with Lower Hydrocarbon Portion

PIRA expects gasoline demand this coming summer to finally exceed the peak period of 2006-2007. Demand had fallen sharply following a period of high prices and weak economic activity. The increased use in ethanol, however, means the hydrocarbon portion of demand this summer will be down from previous peaks. From the refiners' perspective, this fact is mitigated by a significant reduction in net imports of total gasoline, requiring record production this summer to meet domestic and export demand.

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.

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.”

The Maersk Group delivered a profit of USD 224m (USD 1.6bn) and an underlying profit of USD 214m (USD 1.3bn).

The result was negatively impacted by the low oil price and low average container freight rates. The return on invested capital (ROIC) was 2.9% (13.8%).

The underlying profit was significantly lower than same period last year due to all businesses except Maersk Drilling, Maersk Tankers and Damco being lower and Svitzer being at the same level.

The Culzean gas field project is on track within budget and according to plans.Image courtesy:  Maersk Group

“The Maersk Group delivered an underlying profit of USD 214m in the first quarter. While market conditions remain challenging, we continue to adjust our cost base to the new conditions and maintain a good operational performance across our businesses. We maintain our focus on strengthening the Group’s position in the market and have completed acquisitions within APM Terminals and Maersk Oil, and in Maersk Line we have defended our market leading position,” says Group CEO Nils S. Andersen.

Highlights:

• The Maersk Group delivered an underlying profit of USD 214m with six out of eight businesses returning a profit.

• Though profit remains challenged by the market conditions, Maersk Group continues to see good operational performance resulting from cost and optimization programs.

• Reduced cost levels bring break-even to the range of USD 40-45 per barrel from previous USD 45–55 per barrel in Maersk Oil.

• Maersk Line improved utilization, lowered unit costs by 16% year on year and defended their market leading position, delivering an underlying profit of USD 32m.

We are strengthening the Group’s position in the market and have completed acquisitions within APM Terminals and Maersk Oil.

Supply Rebalancing Is Well Under Way

Supply rebalancing is well under way. Year-on-year non-OPEC output declines are accelerating, while demand growth has not disappointed. Worries of excessive Saudi, Iranian or Libyan supply growth are unwarranted. Prices will have to rise to the level where they begin to create supply. The signal will have to be there at least one year in advance for shale crude reserves to significantly contribute. The end of OPEC market management will lead to more price volatility and PIRA continues to see elevated risks of supply disruptions in the near future. Product markets are carefully balanced with strong demand growth and high refinery production/stock levels.

Too Soon

Despite growing bullish sentiment, the market deemed it too soon for $2+/MMBtu gas as per the final settlement price for the May futures contract. The related tepid May contract termination underscores concerns regarding the timing of supply rebalancing. With the June contract now in the “pole position,” traders will be more focused on weather and related demand prospects this summer. Yet, HH cash will still remain susceptible to renewed weakness due to building storage congestion — at least for the next few weeks. Such a backdrop would require supply to be pushed (or kept) out of the region, thus requiring MW basis premiums. Meanwhile, the more acute price weakness in western Canada is being “exported” into the West — especially when demand is weak — as highlighted by the depths prices at Sumas reached this month.

NP15 Rises on Firmer Gas While SP15 "Ducks"

On-peak prices rebounded at NP15 and Palo Verde assisted by a rebound in Southwest gas prices and the start of a refueling outage at Palo Verde 1. Mid-Columbia and SP15 markets continued to move lower, however. PIRA expects gas prices to move higher during the second half of the year as a tighter supply/demand balance shrinks the storage overhang. Higher gas prices will exert downward pressure on implied heat rates in most markets. The CA ISO released a preliminary assessment of summer 2016 loads and resources in late March, but it did not include possible impacts of the Aliso Canyon outage. PIRA believes that mitigation measures will be largely successful in preserving LA Basin reliability except under severe weather/outage conditions.

Coal Prices Rally; PIRA Remains Bullish for 2017

Seaborne coal prices moved up notably from the end of last month, particularly deferred prices, flattening the backwardation and bringing the market up to PIRA’s Reference Case. We have moved our pricing outlook for 2017 over the past month, on a stronger oil price forecast and some evidence that demand in Asia will strengthen next year.

Why Did Distributed PV Developers Abandon Nevada? A Comparison of Policy Drivers in Nevada and California

Nevada recently moved to address the contentious issue of cost-shifting from customers with distributed photovoltaic (PV) installations to those without via implementation of new and additional charges for distributed PV. Afterwards, three major distributed PV developers exited the state. Nevada’s experience can offer guidance for the numerous states that are considering new charges for distributed PV or revisiting Net Energy Metering policy. Nevada’s revisions immediately reduced the value proposition for distributed PV installations, but the revisions could still result in lower customer annual electricity costs relative to no solar. By comparison, California’s recent decision to address cost-shifting through broader retail rate design changes may have little practical impact on distributed PV penetration for the foreseeable future and earned solar industry support.

Global Equities Ease

Global equities generally fell back on the week. In the U.S., energy continued to outperform, up 0.7% for the week. Utilities and consumer staples also posted gains. Technology and housing were the worst performers and posted moderate declines. Internationally, many of the indices lost ground. Latin America, however posted a strong gain, while Japan posted a sharp decline as the yen strengthened.

An Impressive April Comes to a Close

After making a low of $3.5125 on April 1st, the day after the surprise 93.6 million acres in the Prospective Plantings at the end of March, July corn had quite the month, closing up 38 cents, although no fireworks were set off at the close of this impressive month of trading. July soybeans had an even more impressive month, closing up $1.13 at the end of the 21 trading days, but nothing out of the ordinary there either. As compared to the 10.7% gain in corn and 12.3% in soybeans, wheat couldn’t even return 2% for the month.

Ethanol Output and Stocks Plunge

For the week ending April 22, output plunged as many plants were shut down for maintenance. The output of ethanol-blended gasoline surged to the highest level since October.

U.S. Commercial Stocks Build

Overall stocks built 5.3 million barrels this past week, with a 2 million barrel build in crude oil, mostly in Cushing. Gasoline inventories had their largest build (1.6 million barrels) in the last nine weeks, while distillate stocks had their second consecutive weekly decline (-1.7 million barrels). Domestic crude supply continues to average 8.92 MMB/D in April, 30 MB/D below March and 770 MB/D below last year.

Ukraine’s End-Users See Gas Price Revision

Ukraine’s new government overhauled household heating prices to help restart a $17.5 billion loan from the International Monetary Fund as the U.S., another major donor, told the ex-Soviet republic it must start prosecuting corrupt officials. A cabinet meeting Wednesday in Kiev approved a new natural gas tariff to strengthen the budget, as sought by the IMF. The new gas tariff eliminates separate winter and summer prices for households, and it unifies what they pay with the cost for industrial customers.

Is the Price Surge Justified?

For the moment, PIRA doesn’t see an extended contract price breach as sustainable over the course of a season. Additionally, PIRA believes that the supply and demand for forward gas is very different than for spot gas, making NBP and TTF very vulnerable to these sharp swings upward. Many natural gas producers avoid forward selling, leaving the forward curve to be filled with net buyers. This forward market imbalance can create high spike risk when strong hedging activity gets concentrated in a short amount of time, which may have easily been the case here.

S&P Eases, Key Indicators Mixed

The S&P 500 eased up this past week. It was only the second decline in 11 weeks. The key indicators were mixed with high yield debt (HYG) and the Russell 2000 improving, while volatility increased and emerging market debt eased off. The yield on the BAA-rated corporate bond has continued to decline, although the pace of decline has slowed. The U.S. dollar was mixed. The British pound strengthened, as did many of the currencies of the key commodity producers, along with the South African rand. The Polish zloty has been notably weaker. Commodities, including total, energy, and ex-energy, were again higher on the week.

Freight Rates Rally on China Optimism

Freight rates rallied in April, having been pulled up by surging steel and iron ore price in China. Bunker fuel prices have continued to climb, adding upward pressure on spot rates. We have trimmed our Cape fleet supply projections, but we have also downgraded our Cape demand forecasts, largely due to the slump in the Chinese steel market over the winter. The net effect was to leave our Cape utilization and freight rate forecasts largely unchanged. PIRA expects bunker fuel prices to increase in the coming months, boosting spot freight rates.

The Soybean Games

The length in soybeans seems to have fallen into slightly less stronger hands. The drop in open interest suggests to us that strong players have left the arena, leaving latecomers with some length. Soybeans remain a money game at this point as fundamental confirmations remain unfounded, except maybe for the Brazilian real continuing to find a bid. PIRA would not be surprised to see this week’s soybean highs hold for a while, while corn may have some room to go.

U.S. Ethanol Price Surged

Lower production and stocks drove the market. Rising corn and oil prices were supportive.

Japanese Crude Stocks Drew

Crude runs rose under the influence of the Kawasaki restart, while imports fell sharply and crude stocks drew 4.8 MMBbls. Finished product stocks built slightly. Gasoline stocks were little changed despite higher demand, while gasoil stocks drew due to a low refinery yield. Kerosene stocks reverted back to building at a rate of 33 MB/D, with higher yield. Refining margins were modestly higher on the week, but they have clearly weakened.

PEMEX Cash Infusion; Production Outlook Unchanged

U.S. gas exports to Mexico continue to ramp higher, with April exports projected to near 3.6 BCF/D, ~1 BCF/D more than the prior year. For the year as a whole, exports to Mexico look equally striking, topping the year-ago period by a similar margin. Such growth has been particularly impressive given that daily flows on Net Mexico (range-bound since January) suggest the commissioning of Los Ramones Phase II – North may have been delayed. Moreover, despite the government’s recent ~$4B capital infusion to PEMEX, reversing structurally declining production will remain difficult, particularly as financial strains within the company limit its ability to invest.

French Policy and Oil Reverse Bearish Run

While the fuel pricing complex has been rallying, driven primarily by recovering oil prices, French President Hollande's formal endorsement of a unilateral carbon floor in France has added a significant dose of risk for prices in the upcoming year. The French proposal is ironically also a gift for German coal-fired generators, as it will lead to higher German exports toward France. At the same time, reported nuclear availability is bullish for German forward prices. Downside risks for gas prices remain a concern for German margins, but we believe current 2017 power prices are already aligned with PIRA's bearish gas prices.

Stocks Mirror 2012 Levels

PIRA estimates that power sector coal stocks have seasonally risen by ~5 MMst as of end-April with demand losses in the power sector to natural gas and other renewables (hydro, wind) exceeding falling production levels. To add insult to injury, mild April weather resulted in flat load levels. PIRA estimates U.S. electric power sector coal stocks will reach 202 MMst as of the end of this month, close to its historic maximum level.

LPG Weekly Scorecard

U.S. propane prices narrowly outperformed the broader energy market last week with May Belvieu 5.2% higher. Butane was better bid, up 6.8% to just under 63¢/gal. Ethane was up only marginally, while natural gasoline prices improved by 3%.

U.S. February 2016 DOE Monthly Revisions: Demand and Stocks

DOE released its final monthly February 2016 (PSM) U.S. oil supply/demand data. February 2016 demand came in at 19.68 MMB/D. Growth was particularly strong for gasoline (+6.4%, 556 MB/D), kerojet (+5.8%, 83 MB/D), and "other" (+4.8%, 218 MB/D), though the overall barrel was up 1.5%, or 284 MB/D. The performance was stronger than PIRA had been assuming in its balances, and total stock levels came in lower than assumed by 4 MMBbls. Warmer temperatures depressed distillate demand performance, but also boosted gasoline demand. End-February total commercial stocks stood at 1,349.5 MMBbls, lower than what PIRA had assumed by 4 MMBbls, but revised up 3.5 MMBbls compared to the preliminary data.

NYMEX Futures Trying to Look Beyond Storage Overhang

The supply-side rebalancing currently under way has seemingly provided the necessary encouragement for sidelined investors, with broad price gains lifting the NYMEX price curve closer to PIRA’s forecast. Moreover, the collapse in drilling and protracted capital constraints implies more headroom for recovery — not just in 2017, but also for 2H16.

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

April weather was warmer than normal by 2% in the three major OECD markets, bringing the month’s oil-heat demand below normal by 17 MB/D. The three-region composite was almost 11% warmer on a 30-year-normal basis.

Market Takes "Show Me" Attitude

Thursday’s EIA release marked the onset of larger and more normal injections after a final push of late season cold limited builds earlier in the month. For the next two releases, PIRA estimates point to similar week-on-week additions near 70 BCF. While that would still trail the year-ago figure, matching those 2015 levels is not an option with a storage surplus at 870 BCF and expected end-month storage near levels seen at the end of June last year.

French President Hollande Blesses the French Carbon Floor

While uncertainties exist on the timing, magnitude and form, the fact that President Hollande — the central political figure in France — blessed the introduction of a French carbon floor "unilaterally" is very notable. The impact of a carbon tax similar to the U.K. could be more significant for French winter pricing, with the summer prices less impacted. With the French market significantly interconnected, this policy move would end up lending support to the surrounding markets, primarily Germany.

The Fed Is Not Likely to Rock the Boat, but What About the BOJ?

U.S. GDP growth during the first quarter, while sluggish, was in line with the market expectation. The Fed stood pat at its policy meeting last week. Based on various signals, it is unlikely that the central bank will make a move at its next meeting in June. The Japanese currency strengthened sharply against the dollar after the Bank of Japan stood pat at its meeting this week. At this point, the monetary easing cupboard may be bare for the Japanese central bank. European GDP data for the first quarter were encouraging, while South Korean data disappointed.

Brazil Production to Remain Buoyant in Low Price Environment

Brazil has been one of the main drivers of ex-U.S. Non-OPEC crude and condensate production growth, growing 375 MB/D from 2012 to 2015 (6% CAGR). Growth is expected to continue at a much lower pace (2% CAGR) until 2020 despite low prices as projects under construction — sanctioned when crude prices were higher — come online. Longer term, Brazil represents the third largest Non-OPEC source of growth (behind U.S. and Canada), with development breakevens around $50/Bbl and a world class resource in the pre-salt formations. More robust growth (4% CAGR) is projected between 2020 and 2025, as new developments come on line.

Solving India's U.S.-Sourced Cargo Dilemma

India’s chronic shortage of gas comes from two fundamental truths: End-user prices are not necessarily high enough to support additional LNG imports for many buyers without additional subsidies, and domestic production is stymied by government limitations on what producers may charge. These structural issues often make LNG imports by India difficult to predict and this past week showed just the latest example. The same week that India was broadly swapping out its long position in U.S. LNG, it was also importing U.S. LNG cargoes for the first time. The longer-term swap arrangement highlights what PIRA sees as an emerging trend around the world: end-user buyers optimizing import costs by cutting new deals with portfolio players in a position to do the optimizing for them.

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.

In 2015, Russian onshore drilling bucked global activity trends and reached record highs. Depreciation of the rouble cushioned the Russian oil industry, incentivizing operators to boost activity and pay for services in roubles while gaining dollars on international markets. Last year, the global number of onshore wells drilled decreased 31%, yet the Russian market – notable for its comparative resilience – experienced year–on–year growth of 6%.

Unfortunately, 2016 is not shaping up to be a bumper year. Onshore drilling within the country is expected to fall, as major operators reduce capital expenditure to cope with a “lower for longer” price environment. As operators focus on maturing fields in Western Siberia and Volga-Urals, the industry will need to embrace new trends in drilling in order to maximize production.

DW expects any recovery in onshore drilling activity to be predominately driven by an increase in horizontal wells. Vertical wells drilled in Russia are expected to grow modestly at CAGR 3% through to 2020, however, growth in horizontal wells drilled is anticipated to be robust – CAGR 14%. Horizontal wells take longer to drill and require comparatively higher specifications (hookload and drawworks ratings). This is expected to boost demand for >1250HP rigs – sheltering both utilization and dayrates.

Indigenous contractors – led by Eurasia Drilling and Rosneft – continue to lead the market, accounting for approximately 93% of the total fleet. Low horsepower rigs (<1250HP) dominate Russia’s active rig fleet, accounting for an estimated 80% of the total identified fleet. This trend is anticipated to reverse over time as demand for >1250HP rigs increases. Current market trends suggest that contractors with greater portion of >1250HP rigs in their portfolio are likely to be well positioned to take advantage of any recovery.

Iva Brkic, Douglas-Westwood London

U.S. Commercial Stocks Draw as Demand Increases Sharply

U.S. commercial inventories drew for the second week in a row, the first time that has occurred this year. However, the decline was modest. Crude stocks saw a gain, while the four major products drew sharply; it was the largest weekly drop of the year and more than experienced at any weekly point in 2015.

Something Has to Give

NYMEX futures brief excursion back below $2/MMBtu suggests the market is having second thoughts about the industry’s ability to cope with surplus supplies this season. Though the largest weekly storage injections typically occur during the spring, when weather-related demand is at a low ebb, the recent acceleration in stockpiling has nevertheless reignited oversupply concerns.

Qatari LNG Pricing Is Getting More Competitive across Europe

LNG pricing around Europe is not so clear cut as Henry Hub + X or JKM – Y. As LNG globally is a continually maturing market, we are seeing gas pricing evolve in multiple ways across different regions of Europe. Based on volume of sales and available data, Qatari LNG prices offer the best window into the competitiveness of LNG on the Continent until now, but we are going to see U.S. LNG stake its claim in the months ahead and subvert the status quo.

U.S. Gulf LNG Cargos Ship Out; FOB Pricing Details Emerge. Liquefaction Costs?

As Shell’s first “contracted” cargo sets sail from Cheniere’s Sabine Pass terminal as part of a BG legacy tolling agreement, the first official FOB pricing data from February/March for U.S. Gulf-generated cargos at the export point at Sabine Pass is registering from U.S. government sources. The numbers, while striking, offer little in the way of information regarding the actual unit costs for U.S. liquefaction.

Indonesian Industrial End-Users Get Price Relief

The Indonesian government lowered the price of natural gas for seven industry sectors to accelerate economic growth and improve the competitiveness of national industry. The decline in gas prices retroactively from January 1, 2016, is contained in the Presidential Decree No. 40 of 2016. The seven industries that obtain the reduced gas prices are fertilizer, petrochemical, oleochemical, steel, ceramics, glass, and rubber gloves.

Italian Gas-Fired Dispatching Surges

In spite of a surprisingly low day-ahead price settlement, Italian day-ahead prices have been generally supported during May, in tandem with a significant recovery in the utilization of the Italian gas fleet, as shown by gas burn increasing over 25% Y/Y so far during May. While a lack of solar output has contributed to a larger increase in Italian gas dispatching over the past weeks, we see a structural trend toward a higher utilization of the CCGTs in the Italian market, in line with the recovery in the spark spread we have also seen along the curve. This is in part tied to the retirements of older steam units and, most likely, lower load factors of less efficient coal units.

A Tighter Market in 2017

PIRA’s outlook for the U.S. coal market in 2017 projects that the current trajectory of coal supply cuts will ultimately drive stockpile levels back into balance early next year. Rising natural gas (and oil) prices will result in potential coal market shortfall, as coal demand recovers against a backdrop of a much smaller and perhaps constrained coal logistics chain.

Massachusetts Supreme Court Decision: RGGI Is Not Enough

The Massachusetts Supreme Court handed down a unanimous opinion that found that the state’s DEP had failed to properly implement regulations as required under the state’s Global Warming Solutions Act. The DEP is now required to issue new regulations, but it is unclear how this can be enforced from a practical and political standpoint. The Court faulted the RGGI as inadequate because it allows Massachusetts entities to purchase out-of-state reductions. Massachusetts is the third-highest RGGI-emitting state and its emissions exceeded the state budget in 2015. More broadly, this decision highlights issues with the RGGI program review and its alignment with individual state climate goals.

Global Equities Fractionally Changed

Global equities were, on balance, modestly changed. The broad U.S. market was higher on a Friday-to-Friday basis. The growth indicator moved higher, while the defensive indicator gave ground. The strongest sectors were banking and energy. The weakest sectors were the defensive sectors of utilities and consumer staples. Internationally, most of the tracking indices moved higher, though Latin America posted a moderate decline.

Freight Market Outlook

Low oil prices are causing non-OPEC production to decline by 870 MB/D in 2016, offset by a near equal rise in OPEC output, benefiting the tanker sector. Most of the non-OPEC production declines in 2016 are for onshore grades in the U.S., China and Canada and shorter-haul grades from Mexico and the North Sea. These are being replaced by higher output from OPEC, mostly Iraq, Iran and Kuwait, boosting waterborne trade and ton-miles. While there are still substantial volumes of excess crude being contained on tankers via floating storage or operational slowdown, these will soon decline as excess stocks are worked down over the balance of 2016.

Propane Stocks in U.S. Build Slowly; Surplus Narrows

Strong export volumes and higher propane demand caused a relatively small build in propane (excluding propylene) stocks last week. The DOE reported the total propane inventory to be 70.2 MMB with a week-on-week build of 920,000 barrels. The year-on-year surplus narrowed by 1.3 MMB to a slim 4.6 MMB.

Stocks and Production Declined

Ethanol stocks declined for the ninth time in 13 weeks the week ending May 13. Output fell to 948 MB/D as several plants were undergoing routine maintenance.

Meal’s the Deal

Without question the meal market has been the bullish star since the May WASDE. The soybean complex is full of rumors as to why meal has outperformed everything else in the grain/oilseed sector, especially soybeans themselves. Speculative upside pressure continues to be strong despite an increase in futures margin last week, which seemed to do nothing but squeeze out some weak shorts. Traders appear desperate to find both a reason for the extended meal rally as well as searching for that elusive “top.”

Japanese Runs Ease; Both Crude and Product Stocks Build

Crude runs continued to fall amid increasing turnarounds. Crude imports fell back, but not sufficiently to prevent a crude stock build. Finished product stocks also built, largely due to middle distillate stocks moving higher. The kerosene stock build rate throttled back with higher demand and lower yield. Refining margins remain very soft, though on the week light product cracks improved.

State of the Global Economy in Early Second Quarter

In PIRA’s economic outlook for 2016, global activity is expected to pick up steam after a sluggish start to the year. For this forecast to track, data for the second quarter will need to register meaningful improvements from the first quarter. It is too early to determine whether the expected lift is taking place — key global statistical releases currently extend only through April. But available information has been generally encouraging for the U.S., Europe, India, and Brazil, while growth in China will probably stay similar to the pace observed during the first quarter.

Biofuels Prices Increase the Week Ending May 13

The main driver of increased biofuels prices was sharply lower stocks. Rising corn and petroleum prices provided support. Margins jumped.

Freight Rates Hold Steady on China’s Solid Start to 2016

Cape fixing volumes have slowed and bunker prices have continued to climb, giving fundamental support to rates. In a rollercoaster month, 180,000 dwt Cape rates have generally covered typical operating costs although the Baltic 5TC average weakened recently to close at just under $7,000/day. With the Panama Canal Expansion now a reality, voyage calculations show that exporting Colombian coal to Asia via an expanded Panama Canal will prove hard to justify in comparison to sending fully-loaded Capes to Asia via the Cape of Good Hope.

D.C. Circuit Grants En Banc Appeal for Clean Power Plan Litigation

In another unusual move in a litigation that has been marked by unusual moves, the D.C. Circuit, of its own volition, decided to shorten the review of the Clean Power Plan by bypassing the three-judge panel and preemptively granting review to the entire D.C. Circuit Court en banc. PIRA had expected a review by the Court en banc in the event EPA lost in the initial panel decision. That it has been granted now does not change our expected timeline much. Key to whether the move actually impacts the CPP’s chances at being upheld is whether two Democrat-appointed judges on the D.C. Circuit — Merrick Garland, and Nina Pillard — will recuse themselves from considering the merits of the case, impacting the balance of power on the Court.

Saudi Arabia's Financial Cushion Remains Substantial

Saudi Arabia's ability to weather lower oil prices remains substantial. Foreign exchange reserves have been liquidated by $159 billion, or 21%, since peaking in August 2014. Even so, reserves of foreign exchange are $587 billion at end-March, still a substantial cushion. As oil prices have recovered from January lows, the rate of FX liquidation has slowed with the decline for March being $5.6 billion. However, if Saudi Arabia were forced to continue drawing down reserves, it would at some point put increased pressure to re-adjust (devalue) its currency, which has been pegged to the dollar at 3.75 SAR/USD since 1986.

Fed Inflation Expectations Rise

The Cleveland Fed released its assessment of inflation expectations for May, which showed a second straight rise in inflation across all the key timeframes. The S&P 500 eased slightly on a weekly average basis, but it was modestly higher Friday-to-Friday. High yield debt (HYG) and emerging market debt (EMB) rose slightly. The U.S. dollar was generally higher, and commodities continued their uptrend.

EPA Proposes Biofuels Requirements Higher Than this Year’s Mandates

The proposed total renewable fuel mandate for 2017 is 18.8 billion gallons, up from 18.11 billion in 2016. It is much less than the 26.0 billion gallons in RFS2. The proposal will be open to public comment through 2011.

Coal Pricing Moves Sideways Along with Oil

Prompt seaborne coal prices mirrored those of oil last week, with a modest rally on Monday largely negated by a downshift over the balance of the week. 3Q16 API#4 (South Africa) and FOB Newcastle (Australia) prices ticked up modestly, while API#2 (Northwest Europe) lost some ground. Coal fundamentals, specifically in the Atlantic Basin, offer minimal support to pricing currently, given weak demand from Europe and strong supply from Russia. The most bullish factor for coal pricing is the continued strengthening in the oil market.

Asian Demand Update: China Again Boosts Regional Growth

PIRA's latest update of Asian oil demand again shows improved growth due to further gains in Chinese apparent demand. The most recent demand growth assessment is 1.16 MMB/D. PIRA's April update of Asian demand had shown growth of 909 MB/D. China's most recent growth assessment, covering Feb.-Apr., is showing growth of 850 MB/D, an improvement from the 525 MB/D seen last month (Jan.-Mar.). It still needs to be emphasized that the Chinese improvement is not necessarily actual consumption, but is based on apparent demand calculations and reflects a crude import figure for April of 7.9 MMB/D.

RIN Balances to Tighten; Prices to Rise

The EPA’s proposed renewable fuel standards for 2017 is expected to tighten the RIN market and drive up prices. The volume of banked RINs is plummeting and is anticipated to be practically exhausted by the end of 2017. RIN prices are expected to surpass $1 by the beginning of next year.

Canadian Oil Sands Restart Plans Halted

The situation in and around Fort McMurray has degraded significantly. Fires are now moving north of Fort McMurray towards oil sands sites. On May 16 a mandatory evacuation was issued for the area north of Fort McMurray, affecting Syncrude and Suncor’s main operations. The Enbridge system has also been affected with fires encroaching within 1 km of the crucial Cheecham terminal. Given the deteriorating situation, PIRA now estimates the cumulative loss will be around 25 million barrels in a most optimistic scenario and 30 million barrels in a most likely scenario.

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.

Canadian Wildfires Tighten Onshore Markets in May

Crude prices surged in April on market expectations of tightening fundamentals in the second half of the year. Dangerous wildfires in the oil sands town of Fort McMurray, Alberta, have caused substantial volumes of production to be shut in which will support Canadian differentials.

Seasonal Rally Stalls on Restocking Concerns

A “business as usual” approach to rebuilding inventories is simply not achievable in light of the record end-winter storage level. Moreover, a sustainable recovery in prices will simply not occur unless the weekly injections significantly trail the average. Toward that end, PIRA foresees the acceleration in production declines playing a key role to seasonal rebalancing — eventually moving prices back in line with levels that justify the lifting costs for producers.

Coal Demand Hammered in Europe, ex Germany; Bullish Policy Risks Surface

2016 is looking to be a difficult year for European coal-fired generation, with increasing hydro and renewable generation and more competitive gas pricing slashing coal burn and pushing coal generation to new multi-year lows. In contrast to the rest of Europe, German coal-fired dispatching is holding up quite well. While German gas units are up year-on-year, the bulk of German coal is finding support in a variety of factors, ranging from lower nuclear and inflexible lignite generation or even resilient power exports. In this context, it’s interesting German policymakers appear once again to be shifting toward an even tougher stance against carbon-intensive generation.

Oil Drags Coal Lower; Prompt API#2 Finds Some Support

Prompt seaborne thermal coal pricing was mixed last week, with API#2 (Northwest Europe) finding some support from the rise in NBP gas pricing and evidence of Colombian supply shifting into the Pacific Basin (discussed below), while FOB Newcastle (Australian) prices weakened marginally. Beyond the prompt market, all three pricing curves moved decidedly lower, with the decline in the oil market pulling coal prices lower. Looking ahead, much will depend on the strength of Pacific Basin coal demand and whether or not demand growth there will be strong enough to offset weakness in the Atlantic Basin and absorb excess supply moving east.

CA Carbon Burdened by Auction Lawsuit

Benchmark California Carbon Allowance contract prices have rebounded from April lows below the floor price, likely related to the auction lawsuit. PIRA expects the May auction to be undersubscribed, but ongoing buying works to push secondary market prices in line with the auction reserve. PIRA believes the auctions will be ultimately be upheld; in any case, they would not be halted until the CA Supreme Court rules in 2017. The market will continue to react to legal developments.

Military Progress in Yemen Could Lead to a Partial Resumption of Oil Production

Reports indicate that Yemen could export a crude cargo from its southeastern Ash Shihr terminal as soon as the end of May. Exports from Ash Shihr have been shut for over a year, but a restart became possible in late April when the Saudi-led coalition retook control of the facility from Al Qaeda. Ash Shihr handles all of the oil exports from Yemen’s Hadramawt province, where production reportedly totaled ~50 MB/D before port closures in April 2015. The cargo in question will most likely come from storage, but a production restart could potentially follow.

S&P 500 Eases

The S&P 500 eased again this past week. It was its second straight decline after a nice leg higher over the better part of two months. Despite the drop, high yield debt (HYG) improved, while emerging market debt (EMB) was flat. Volatility increased and the Russell 2000 eased. The yield on the BAA-rated corporate bond has continued to decline. The U.S. dollar was generally lower, and commodities were mixed on the week.

U.S. Ethanol Output Falls

Inventories built, rebounding from a three-month low the week ending April 29. Ethanol-blended gasoline manufacture fell from a 2016-high.

Uncertainty Rules

May and June WASDE’s rely on acreage from the Prospective Plantings (PP) report at the end of March and trend line yields established by the USDA at its annual Outlook Forum in February. With that history, plugging in the numbers should be pretty straight forward in estimating this week’s WASDE and June for that matter. That said, there seems to be a lot of consternation this month as far as estimates are concerned.

Refining Healthy, But Carefully Balanced

Tightening balances will push crude prices higher with fundamentals now passing their weakest point. The global stock surplus will start to decline in 2Q16, with a larger drop in 2H16. European refining margins will stay generally healthy and runs reasonably high through the summer before weakening. But product markets are carefully balanced, with strong demand growth offsetting high refinery production/stock levels. Gasoline cracks will stay seasonally strong, but lower than in 2015. Diesel cracks will only gradually recover, weighed down by high stocks.

Focus on the Gas Flows, Not Carbon Floors

The recent jump in spot gas prices reflects trader jumpiness more than a change in underlying fundamentals. Spikes in recent weeks have been assigned to proposed carbon floors, initially in France and potentially across the European Union. In first looking at the French proposal, PIRA outlined in our European Electricity Service that the impact of gas demand on the Continent may not look the same as the experience of the carbon floor in the United Kingdom. For the gas market to move up and remain up on these policy changes, asset players, like utilities, need to be buying these volumes for their hedging portfolios. Given that no policy has officially changed, PIRA sees most of this move up as speculative and not possessing strong legs.

Global Equities Ease Again

Global equities generally fell back again on the week. Defensive sectors did the best, with consumer staples and utilities posting gains and the defensive indicator being marginally changed. In the U.S., energy was down 3.3% and banking down 3.8%. Internationally, all the indices, other than Japan, which posted a gain, did worse than the U.S. Latin America and emerging markets were the weakest performers.

U.S. Ethanol Prices Advance

Ethanol prices rose during the week ending April 29. Prices were driven by a plunge in output, strong demand and declining stocks. Higher corn and petroleum values were supportive.

Wheat Tour Impresses

Tour findings suggest a Kansas wheat harvest of an amazing 382 million bushels, 19% higher than USDA estimates. Timely rains, not genetics, were the main catalyst. The Kansas crop is now considered by many to have the potential of “best ever.” The average field yield estimate was almost 49 bpa, up 13 bpa from last year. With yields like that, the “loss” of 7.6% of planted acreage just doesn’t matter.

Perhaps the Market Will Get a Little Short-Term Help It Needs Nows?

Unlike April, May is not a good seasonal month for crude oil prices going up. While fundamental data continues to point to ongoing rebalancing of oil markets, with for example U.S. oil inventories increasing at roughly half the typical rate in April, stocks are still increasing from an already high level. Prices have not surprisingly moved up faster than the improvement in supply/demand, but this is the way our market works and this will continue to be the case. But this does indeed pose risks to the front of the market with time spreads particularly exposed. Europe looks dodgy with prompt cargoes backing up, despite a healthy North Sea maintenance program in June and with especially strong futures time spreads. On our side of the Atlantic we have a big build coming up in next week’s EIA data in Cushing, partly related to Marketlink maintenance, but now the market is receiving help from the Canadian wildfires. While this is indeed cruel help because of the concerns about loved ones and the savagery of lost homes, there will be lost oil output. So far, it could be perhaps as much as 500 MB/D that is shut in and there are risks to much greater supply.

Global LPG Weekly Scorecard

U.S. Mont. Belvieu LPG prices faired marginally better than the broader energy markets: propane prices declined last week by only 1.5% to near 49 ¢/gal, while butane dropped 0.5%to near 63¢/gal.

U.S. LNG Storage Will Emerge as a Trading Asset

In the unchartered terrain of U.S. Gulf LNG production, with its unprecedented potential for massive gas demand swings, the relatively quiet realm of LNG storage is set to become a hotter commodity off which to trade. If Henry Hub prices are already being affected in some part by the on-again, off-again nature of 700-800 MMCF/D (19.8-22.7 MMCM/D) of gas flows to Sabine Pass, what kind of volatility can we expect a few years down the road when 8-10 BCF/D (227-283 MMCM/D) of gas flows are tied to U.S. LNG production?

February 2016 U.S. Domestic Production Decline Accelerates, Still Trails PIRA Estimates

DOE recently released its February oil balances. Domestic crude supply, which is domestic crude production plus the balancing item, fell 266 MB/D, month-on-month, and shows a year-on-year decline of 646 MB/D. In contrast, the weekly data posted a monthly equivalent decline of 195 MB/D, Feb. vs. Jan. This implies domestic crude supply was reduced 71 MB/D from what the weekly data had been showing. As PIRA has pointed out 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. This was referred to in a PIRA Spotlight, posted March 3rd, titled, "Negative Balancing Item Points to Lower than Reported U.S. Crude Production."

Business Customers Gas Prices Under Review in France

France’s antitrust regulator has ordered power utility Engie SA to change its natural gas prices for non-residential customers to better reflect its costs. Acting on a complaint filed in October by rival Direct Energie, the regulator, Autorité de la Concurrence, said Engie, formerly known as GDF Suez, didn’t reflect all its costs in some of the individual offers made to large companies. The company’s price policy could threaten to push rivals out of the market, it said. Even though the probe isn’t complete, the regulator said it found enough evidence to force Engie to change its pricing policy immediately.

U.S. Labor Market Is Still Solid, But What About the Equity Market?

In April U.S. job growth came in below expectations, and the household labor market survey showed sluggishness. Meanwhile, the ISM business surveys and vehicle sales were constructive. Overall, the U.S. economy’s momentum has stayed intact in all likelihood, while the chance of the Fed staying put at the next policy meeting has become even greater. Other topics discussed in this report: the relationship between gasoline prices and U.S. consumer spending; the price-income ratio for U.S. housing; and a recent significant rise in the price-earnings ratio for the S&P 500 index.

Aramco Pricing Adjustments for June Suggest Willingness to Sell Less Oil

Saudi Arabia's formula prices for June were just released. The biggest change was a tightening in pricing into Asia. The changes to Asia suggest that Saudi is willing to see its liftings drop if customers so choose. In Northwest Europe, pricing was also tightened on all grades except for Arab Extra Light. The adjustments were in alignment with PIRA's European pricing model. Pricing for U.S. destinations was reduced $0.20/Bbl on all grades except for Arab Light, which was left unchanged.

Canadian Wildfires Hit Oil Sands Production

Wildfires continue to ravage the Fort McMurray area, compelling oil sands operators to shut facilities or curtail volumes to allow workers to evacuate. PIRA estimates current production losses to be around 1.0 MMB/D and expects the cumulative loss to be between 10 to 15 million barrels in our Reference Case scenario. No oil sands facilities have so far been damaged, but the situation is obviously unpredictable. Production losses are expected to result in strengthened western Canadian differentials, with Syncrude-WTI expected to rise from $1.45/Bbl in April to $3.50/Bbl in May and WCS-WTI expected to strengthen from a discount of $12.40/Bbl in April to $11.75 in May.

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 Johan Castberg development has faced numerous challenges since inception. If production in the Barents Sea wasn’t difficult enough, Statoil has had to contend with changes to Norwegian Tax laws as well as disappointing drilling results. In May 2014, it was confirmed that of five exploration wells drilled in the area, only two yielded oil reserves: the Skavl and Drivis fields. This initially challenged the viability of commercial development, however, it now appears Statoil may have found a solution.

Low oil prices have pushed back Johan Castberg’s onstream year considerably. In the current climate, development of such a technically challenging field – in the hostile waters of the Barents Sea – might seem an impossible proposition. However, against the odds, it appears the project could go ahead with first oil in 2022. Statoil’s Chief Executive recently stated production costs at the field have been nearly halved since the oil slump, which raised the question - how?

Construction costs have dropped considerably since the downturn, with EPC providers bidding aggressively on the few contracts available. Yet with oil prices remaining low, reduced contractor rates are not enough to ensure the viability of complex projects. Put simply, a pragmatic approach to developments is needed. Costs at Johan Castberg have been cut by reducing the number of planned production wells and choosing a single FPSO rather than an FPSS and pipeline – reducing the break-even price for the field from ~$80 a barrel to ~$45.

The story is remarkably similar to that of Mad Dog Phase 2 – another field that has arguably suffered from over-engineering and has endured numerous development plans: A spar, TLP and an FPSS were all considered by BP, before committing to an FPSS – later cancelled due to inflated costs. With lower supplier costs and a company focus on re-engineering BP have managed to make the project commercial, bringing the break-even price down from ~$110 a barrel to ~$50.

Both fields demonstrate that even in a low oil price environment, complex fields can still be developed by utilising a pragmatic approach. Keeping costs at a manageable level over the next cycle will be the challenge - when the oil price recovers will the industry revert to its old ways?

Mike Green, Douglas-Westwood London

Crude Prices Rise in March, Led by Syncrude and Bakken

Crude prices rebounded strongly in March, despite a large U.S. stock build, but the rebound may be short-lived. Syncrude and Bakken differentials surged, as oil sands upgrader maintenance approached a seasonal peak, but all northern grades should weaken in April — in part, the result of uncertainty surrounding the recent shutdown of Keystone pipeline. Following a minimal draw in March, Cushing crude stocks could see a small build in April, before stock draws begin in May and continue for most of the rest of the year.

Injection Season Coal-to-Gas Sensitivities

In light of elevated natural gas storage, U.S. gas demand in the power sector during the injection season will be of the utmost importance if physical constraints on storage facilities are to be avoided. To this end, PIRA undertook a series of simulations to illustrate the sensitivity of gas demand to different price levels. Flexing injection season NYMEX prices downwards by 25% results in an incremental ~3.0 BCF/D pick-up in gas-fired EG demand, or ~3.5 BCF/D more than PIRA’s current Reference Case, while flexing injection season NYMEX prices upwards by 25% results in a ~2.5 BCF/D decline in gas-fired EG demand (~27.0 BCF/D), or 2 BCF/D less than PIRA’s current Reference Case.

French-Italian Spreads Narrowing, but Largely Driven by Italian Weakness

Two fundamental factors are looking spooky for French price developments in the upcoming months: the sizeable increase in gas-fired dispatching and the gain in French imports from the Germany-Belgium. Under these conditions, the spread between summer and winter prices could further widen. The spreads between French and Italian prices have been narrowing, mostly because of a downward move on the Italian side. Terna has announced that the Sorgente-Rizziconi will be commissioned by June 2016, although we believe that the market may be too pessimistic regarding the impact of this interconnector on prices.

India Demand Growth Strong, But Is It Strong Enough?

Seaborne coal pricing mirrored global energy and equity markets last week, pushing lower early in the week, followed by a strong rally on Friday capping off the week. Despite the end of week rebound, coal prices finished the week in the red vis-à-vis the prior week ending April 1, with API#4 (South Africa) and FOB Newcastle (Australia) prices notably losing the most amount of ground. Demand growth globally remains somewhat soft, particularly as Chinese imports continue to pull back relative to prior-year levels. India’s electricity generation surged in March, but even a 15.3% year-on-year increase in coal-fired generation during the month did little to chip away at the historic high coal stocks at power plants.

CA Court Order Clarifies Timeline in CCA Auction Litigation, Narrows Issues

The California Court of Appeals has issued an order narrowing the issues that the Court is still considering and offering an updated timeline in which we can expect a decision. PIRA’s sense is that the Court’s request for supplemental briefing is generally a bullish factor for the auction’s validation. Final word is now expected from the CA Supreme Court in 2H 2017.

Underlying U.S. Economic Condition Is Solid; Japan Is Worrisome

A tracking estimate of the first quarter U.S. GDP growth has increasingly turned weaker. But concerns about a recession remain implausible. For one thing, the U.S. does not face the threat from broad-based economic imbalances. Traditional drivers of growth, such as housing and consumer purchases of durable goods, are also likely to supply sufficient momentum in the coming periods. The U.S. dollar’s recent weakness has generally been constructive for market confidence. The Japanese yen’s recent strength may reflect the market’s concern that the Bank of Japan may be running out of ways to ease policy.

Expanded Panama Canal to Change LPG Trade Flows

Spot VLGC tanker freight rates continue to decrease with prices on the benchmark Ras Tanura to Chiba route easing an additional 4.5% last week to under $27/MT. Spot freight from Houston to Japan fell to near $65/MT. These next months will likely see the last series of cargoes being fixed on the longer Horn of Africa route to Asia. The opening of the expanded Panama Canal in June should lead to the elimination of the longer route, as PIRA calculates that the canal voyage will save an estimated $1 million per round trip under current spot freight and fuel price conditions.

U.S. Prices and Margins Rise

The week ending April 1, U.S. ethanol prices rallied to the highest levels of the year. Production margins jumped as corn costs plunged.

Indiana

Friday’s route through west central and northwest Indiana saw much of the same as Ohio. Spring weather, if you can call it that, consisted of snow, sleet, rain, some sun, and more snow. Farmers were left looking at the sky and wondering if spring would ever arrive. Then again it was only the first week of April, but crop prices have every producer on edge and poor planting weather is just one more thing to worry about.

Healthy Seasonal Gasoline Cracks Will Outperform Diesel

Refining margins will stay generally healthy and runs reasonably high through the summer, propelled by firm gasoline cracks, before weakening in the autumn. Refiners are shifting yields from middle distillates toward gasoline. Product stock levels are high, but not uniformly, with Atlantic Basin gasoline stock coverage relative to local/export demand tracking on the low side, but distillate staying much higher than normal. Diesel cracks will only gradually recover.

Gorgon Sneezes; China Breathes a Sigh of Relief

The LNG market may not be flinching at this exact moment at the news of a Gorgon commissioning phase shutdown. After all, such issues are commonplace, as systems are tweaked and glitches sorted out. But what happens if the loss is sustained for a longer period of time?

PJM 2019/2020 Capacity Auction: The Party's Over … For Now?

Driven by large downward revisions to load forecasts, combined with continuation of the 80% Capacity Performance (CP) construct for the forthcoming 2019/2020 capacity auction, PIRA expects the RTO auction to clear at $130-$140/MW-day for the CP product (significantly weaker year-on-year). The EMAAC and ComEd LDAs should continue to clear higher, though not as strong as last year. These weaker results could be a temporary blip, however, as the subsequent auction (2020/2021) should again see stronger clearing prices with implementation of 100% CP.

Maryland GHG and Renewables Bills Advance

The Maryland legislature has passed a GHG bill (already signed into law) and a bill strengthening the state’s Renewable Portfolio Standards (RPS). Increases in the solar and Tier 1 RPS requirements will have direct impacts on the MD Solar REC market and MD and wider PJM REC markets as well.

Global Equities Retrench

Global equities fell back slightly on the week. In the U.S., all the tracking indices lost ground, other than energy, which gained 2.2%. Retail and banking were the weakest performers. Internationally, the tracking indices were mostly lower, though Japan posted a decent gain. Among specific markets, the Argentinian market posted a steep drop.

Production and Stocks Decline

About 808 thousand barrels were drawn from U.S. ethanol inventories the week ending April 1, lowering them to 22.2 million barrels. PADD I stocks plummeted from a four-year high, while PADD V inventories built for the first time in five weeks.

Western Ohio

40F with rain, sleet, and snow are not exactly conducive to planting, but those were the conditions that greeted us Thursday in central and southwest Ohio. Needless to say there wasn’t a lot of activity, but locals told us that a fair amount of anhydrous has already been applied this spring, so once the weather breaks, which looks like it’s about a week away, it will be all systems go.

Bullish U.S. Crude Stats

An increase in crude runs and a drop-off in crude imports drove an unexpectedly large crude stock draw. Total products had a net build, for an overall commercial stock build, to a new record high commercial stock level. With a larger total build this week last year, the surplus did narrow. Also of note, the week-to-week increase in total demand which was a function of the EIA using a sharply lower total assumed product exports estimate. Next week a decline in crude runs and an increase in crude imports should return the U.S. crude balance to a small build, while that same decline in crude runs and increase in real product exports drive draws for the three major light products.

Promising Signs of Supply-Side Balancing

Thursday’s EIA storage report revealed a new record end-March inventory level of 2,480 BCF, besting the previous record of 2,477 BCF set in 2012. Yet, the market’s foray back to ~$2/MMBtu suggests attention is shifting beyond the massive year-on-year surpluses in place — for the U.S. as a whole or for the even more ominous situation in the Gulf producing region, where inventories are at nearly ~80% of useable working gas capacity. Other considerations have apparently attracted the market’s attention, including late-breaking weather demand and early signs of a slowdown in domestic production.

Japanese Crude Runs Declines, Imports Rose and Stocks Built

Crude runs were lower and crude imports rose, which produced a small crude stock build of 0.5 MMBbls. Finished product stocks drew moderately, with all the major products, other than kerosene, seeing lower levels. Gasoline demand increased strongly with much higher yield such that stocks drew only slightly. Gasoil demand was also modestly higher, with lower yield and a big surge in exports, thus stocks drew moderately. Kerosene demand declined seasonally and the stocks reverted back to building. Refining margins remain good. Naphtha and gasoline cracks remain strong, while heavier product cracks eased.

China Looks at Simplifying End-to-End Gas Prices

China may harmonize wholesale natural gas prices for residential and industrial users as early as this year in an effort to make pricing of the fuel more market based. The National Development and Reform Commission is discussing a plan to set a single wholesale gas price for all users in 2016 and let suppliers and customers negotiate rates around the benchmark. Industrial and commercial users in most regions pay a premium for gas compared to residential consumers.

Market Eases Back

After seven straight weekly gains, the market eased back slightly. High yield debt and emerging market debt both posted slight gains, while volatility (VIX) increased a bit. The yield of the BAA-rated corporate bond has continued to decline. The U.S. dollar has been generally weaker lately. Commodities, including total, energy, and ex-energy, again eased slightly this past week after having posted solid gains.

California Carbon Below Auction Floor

California carbon allowances are trading below the auction floor price. Although balances are not tight in the near term, the allowance bank is not particularly large. PIRA expects ongoing buying needs to bring secondary market prices in line with the auction reserve by the May auction. Regulatory actions later this year will provide clarity for post-2020. PIRA believes the auction is ultimately likely to be upheld by the courts.

January 2016 U.S. Crude Production Declined, Even as Domestic Crude Supply Increased vs. Last Month

The January 2016 Petroleum Supply Monthly showed another decline in U.S. crude production, although a revised swing positive in the balance item resulted in domestic crude supply being up 250 MB/D versus December 2015. Rail movements of crude continue to have substantial ongoing revisions, and those revisions flow through to PADD-level crude balances, going back to the start of 2014 in the latest release. EIA Crude production data reported using Form 914 have significantly fewer revisions than prior methods, but large and volatile balance items still imply uncertainty in the production data.

Italy Will Take More LNG, But at What Cost?

As the global LNG market looks for a home to park its growing oversupply, marketers and traders will need to compete hard for Italy’s burn. Despite being surrounded by illiquid markets like southern France, Switzerland, and Slovenia, Italy has developed a diverse supply mix. The country’s LNG suppliers include Algeria and Qatar, while the contracted pricing includes Norway, Russia, Libya, and Algeria. Between 2011and 2015, delivered LNG prices linked more closely to higher priced Italian contracted pipeline supply. However, since then LNG has been forced to link closer to Italian market prices (PSV) to move all its volume to Italy. We certainly expect this flow to continue into the future and to force down Italian premiums.

EIA Begins Reporting Rail Movements of Ethanol and Biodiesel, Driving Revisions to PADD Gasoline Demand

The EIA has begun publishing ethanol and biodiesel movements by rail, with the release of the January 2016 Petroleum Supply Monthly. The data extend back to January 2014. The data provide insight into the importance of rail transportation to biofuels, and it now drives PADD-level ethanol and biodiesel net receipts. Net-net, these changes to regional ethanol balance drive revisions to PADD gasoline demand, some significant. The revisions to PADD distillate demand are smaller.

U.S. January 2016 DOE Monthly Revisions: Demand and Stocks

DOE released its final monthly January 2016 (PSM) U.S. oil supply/demand data last week. January 2016 demand came in at 19.06 MMB/D, which was 150 MB/D lower than what PIRA had carried in its monthly balances. Compared to the DOE weeklies, total demand was lowered 550 MB/D. Distillate was revised higher by 344 MB/D. Year-on-year demand declined in January 2016 by 194 MB/D, or -1% led by weak distillate demand, declining almost 10%, or 419 MB/D. End-January total commercial stocks stood at 1,345.4 MMBbls, which was very close to what PIRA had assumed. Relative to the final January 2015 data, total commercial stocks are higher than year-ago by 162.1 MMBbls.

Aramco Pricing Adjustments for May — Remaining Market Competitive

Saudi Arabia's formula prices for May were just released. U.S. differentials were raised across the board. The move was consistent with the trend currently being seen and expected in the refining margins on competing domestic grades in PADD III. In Asia, the two lightest grades were raised, while Arab Light was cut $0.10/Bbl, Arab Medium was left unchanged, and Arab Heavy cut $0.35/Bbl. Here too, it was consistent with key pricing drivers. In Asia there has been strength in gasoline and naphtha cracks, along with weaker fuel oil cracks. In Europe, extra-light was raised $0.60/Bbl, while both of the heaviest grades were cut. Arab Light was left unchanged, which was very close to what our pricing model had forecast.

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.

Markets React Positively to Just Modest Stock Declines as Concerns Grow of System Failure

U.S. commercial oil inventories fell just this past week, but markets reacted very positively to the data. First, crude and the four major products had an inventory decline, the largest this year. Also, the crude stock decline came before any impact from the Canadian wildfires. Furthermore, product demand put in another strong performance. Finally, oil markets are beginning to get the sense of a growing problem of system failure. Oil prices are just too low and circumstances are unraveling in places like Venezuela and Nigeria, while Libya is in chaos and Iraq may be there any day. Very low oil prices are not just undermining supply and encouraging stronger oil demand, they are eating away at the social fabric in many oil exporting countries.

Cause for Pause

Although the first round of hot weather has arrived in some markets last week, as per recent temperatures readings in Houston and Dallas, conditions in many other areas have been relatively benign as underscored by near equal national cooling degree day (CDD) and heating degree day (HDD) counts. The lack of a more material assist from weather explains in part the ongoing tug of war between the nearby NYMEX futures contract and cash Henry Hub (HH) prices, with the latter struggling to hold above $2/MMBtu so far, as was the case for May Bidweek.

Renewable Surge and Lower Exports Undermine German Spot Prices, but Bearish Risks Already Factored in the German Curve

The price crash in the German day-ahead auctions recently are not changing our price outlook for 2017, which remains constructive for German power, as a result of a more supported fuel pricing complex, led by the gains in the oil market.

Oil Moves Coal Higher; Limited Fundamentals Support for Now

Taking a cue from the oil market, coal prices largely moved higher last week, although prices did not move higher across the board, with deferred prices mostly losing ground (except for South African prices) compared to the end of the prior week. Looking forward, PIRA believes that aside from the linkage with oil pricing, there will be little support for coal pricing over the next several months, particularly as demand is moving toward seasonal lows. We do retain a bullish outlook for 2017 prices, however, as fundamentals will be more balanced next year.

EPA Regulates Oil and Gas Sector Methane

On May 12th the EPA issued a suite of rules directly regulating methane for the first time and expanding 2012’s NSPS for fracked gas to oil wells as well as other parts of the supply chain. A number of changes from proposal to final were made, in many cases strengthening the rule in response to concerns from environmental groups. EPA estimates 11 MT CO2e of methane emissions reductions in 2025 mostly from fugitive emissions and oil well completions. The annualized compliance cost is estimated between $530 MM and $800 MM.

U.S. Ethanol Prices Slide the Week Ending May 6

A main driver was a lower output of ethanol blended gasoline. Lower corn values also put downside pressure on prices.

Global Equities Post Another Decline

Global equities generally fell back again on the week. Defensive sectors again did the best with utilities posting a gain, while consumer staples and technology were flat. Energy performed in line the overall market, down about 0.4%. Retail was the worst performer. Internationally, all the indices, other than Japan, posted a decline. China and emerging Asia were the weakest performers.

LPG Price Gains in Asia Lag Other Markets

Asian markets, while easily besting broader crude’s gains, increased by less than those in the West. Cash propane cargoes arriving in the Far East during June were called 6% higher near $350 and butane improved to $380/MT. Smaller gains in Asia vs. the U.S. translate to a further narrowing of the physical arbitrage, which has become increasingly uneconomic — posing significant challenges for long-term U.S. export contract holders.

Japanese Crude and Product Stocks Rose

Two weeks of data were reported due to the string of Japanese holidays. Broadly speaking, both crude and product stocks rose. Gasoline demand was helped by the holiday and then fell back. Gasoil demand fell slightly pre-holiday, but then dropped sharply, as would be expected. Gasoil stocks rose both weeks with an average build rate of 148 MB/D. Kerosene stocks continued to build at an average rate of 73 MB/D. Refining margins continue under pressure with little support within the barrel.

NBP Has Breached Contract Pricing: Has Anything Changed?

While Russian gas pricing is far from monolithic, data indicate that NBP breached Russian delivered prices to Germany for March and April of this year. This inversion is unusual territory for the gas market, as we’ve traditionally seen a reversal for only a month at a time, either sparked by weather or supply disruption. This time seems to be different and is certainly a warning call that raises the broader question of whether contract gas can still be considered a sustainable ceiling for spot gas down the road.

Power Prices Catching Up on the Rally

Spot on-peak power prices increased from March levels in nearly all Eastern markets, supported by higher gas prices and maintenance outages. Colder weather in the Northeast and Midwest nearly offset the impact of weaker cooling demand across the South. Given lackluster March heating loads, demand was only slightly weaker in April, and the loss was countered by lower hydro generation and imports. Gas prices are projected to increase for the balance of 2016, with Henry Hub spot moving above $3/MMBtu in December. Seasonal basis strength in the Northeast lift New England and NY prices above $5/MMBtu in December with further increases in Jan.-Feb. 2017. As a result, we look for a significant improvement in coal unit competitiveness during the 2016-17 winter.

EUA Prices See Volatility, Correlation to Nat Gas Emerges

The supply picture has not changed, and power sector EUA demand remains very weak. The market may be looking for price support in the form of policy developments, but this is overly optimistic. The recent lack of clear EU ETS fundamental indicators resulted in high volatility, but a high correlation with natural gas prices has also emerged. As such, we maintain a EUA price forecast in sympathy with natural gas prices that fall through summer 2016.

Ethanol Production Rebounds from 51-Week Low

U.S. ethanol stock draw was the largest this year. Output rebounded as plants returned to normal operation after spring maintenance.

State of the Global Economy in Early Second Quarter

In PIRA’s economic outlook for 2016, global activity is expected to pick up steam after a sluggish start to the year. For this forecast to track, data for the second quarter will need to register meaningful improvements from the first quarter. It is too early to determine whether the expected lift is taking place — key global statistical releases currently extend only through April. But available information has been generally encouraging for the U.S., Europe, India, and Brazil, while growth in China will probably stay similar to the pace observed during the first quarter. In Japan, economic uncertainty is elevated.

Canadian Oil Sands Production to Resume

Oil sands operators have begun to resume production following the devastating Fort McMurray wildfires that started early last week. The fires continue to burn but have moved eastward away from Fort McMurray and oil companies are allowing workers to return to sites. The pace at which production returns will depend on pipeline restarts, power availability, and labor availability. PIRA expects most production will return by the end of this week, putting the cumulative loss around 15 MMB.

Asian LNG Buyers Shrug off Late-June Opening of Panama Canal

The Panama Canal Authority finally set a target date of June 27 for a first plus-sized cargo to transit the newly expanded locks. After years of anticipation and much hand wringing on the part of global LNG suppliers, particularly Trinidad and the U.S., both of which had long eyed the much more attractively priced Asia-Pacific market, including Chile in South America, the reality is that at this point Asian markets have lost all of their allure for Atlantic Basin suppliers.

Financial Stress Stable

The S&P 500 was modestly higher on a weekly average basis but declined Friday-to-Friday. Many of the other indicators were fractionally changed. High yield debt (HYG) was slightly lower, while emerging market debt (EMB) was slightly higher. The yield on the BAA-rated corporate bond was also slightly lower, extending its trend towards lower rates and narrower credit spreads. The U.S. dollar was generally higher, particularly against the euro, pound and yen.

OPEC Supply Reductions Providing Support for Oil Prices

OPEC supply disruptions surged in early May and show no sign of abating. In Venezuela, delinquent payments to service providers have caused companies to curtail activity in the country, reducing crude production to ~2 MMB/D in May. Similarly, economic problems in Nigeria have reduced amnesty payments to Niger Delta militants. This is the likely driver of a recent spike in oil infrastructure attacks, which have reduced output by upwards of 100 MB/D. In Libya, ongoing political disintegration is shutting in even greater export volumes, resulting in a ~100 MB/D output cut versus the April average. The situations in all three countries appear to be worsening, which will be constructive for oil prices amid the ongoing supply rebalancing.

Thailand’s Natural Gas Supplier Wants to Up Industrial Prices

PTT Plc is in talks with Thailand’s Energy Regulatory Commission (ERC) to restructure the price of natural gas sold to the industrial sector after the company suffered huge losses from current pricing, says a senior PTT official. Noppadol Pinsupa, senior executive vice-president for gas business, said the oil and gas conglomerate suffered a loss of about 3 billion baht ($85 million) in 2015 from selling gas at a price below market level. The price of gas sold to the industrial sector is pegged to the bunker oil price, which moves in line with the oil price, depressing the gas price 7% below the market price.

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 end of March saw a resolution reached between Kuwait and Saudi Arabia for the resumption of production from the Khafji field – located in the Arabian Gulf. The project was shut-in by the Saudis in October 2014 due to environmental regulation breaches, March’s initial agreement was backed by senior Riyadh officials. However, Deputy Crown Prince Mohammed bin Salman recently brought an abrupt halt to proceedings, moving to block the addition of oil from Khafji to global markets – highlighting potential discordance in Saudi Arabia’s oil policy.

Salman’s opposition to Khafji is arguably in direct conflict with the country’s expansion at Khurais and Safaniya and the establishment of the Public Investment Fund (PIF). Saudi Aramco plans to complete a 200 kbbl/d expansion of the onshore Khurais oilfield by 2018 after initially delaying project commissioning until 2019 due to spending cuts. Similarly, a tender is also being offered for new facilities on Safaniya – one of the world’s largest offshore oilfields with a current production capacity of 1.2 mmbbl/d. These expansions are likely to add significant volumes to Saudi Arabia’s production capacity, a tactic that may spook traders and suppress prices – contradicting any notion of halting Khafji in order to support the oil price.

January’s surprise announcement of the floating of Saudi Aramco initially appeared to be a short-term means of funding a fiscal deficit. However, recent developments suggest the idea has shifted to weaning Saudi Arabia off its reliance on crude oil export revenues. This is to be accomplished through shifting cash raised from the Aramco offering to the PIF – a multi-sector, $2 trillion fund channelled into a range of industries. The ultimate aim is to safeguard Saudi Arabia from future oil market downturns. However, the expansion of the two aforementioned oilfields will likely compromise this initiative if oil prices are driven down by trader sentiment – reducing the ultimate value of Saudi Aramco’s public offering.

Without an alignment of Saudi’s oil policies, the effectiveness of the country’s output strategy, the Aramco offering and the PIF is likely be severely eroded. Though the PIF is designed to help the Kingdom diversify its governmental revenues, its success hinges on healthy crude oil export revenues – something that is simply not possible in a world of low oil prices.

Matt Cook, Douglas-Westwood London

Scanning the newspapers, social media and analyst coverage this year, there is consensus that a recovery in oil prices is coming, as a function of a reduction in over-supply, and that we should expect upward movement in prices later this year.

The extent to which this view is built upon analysis of data or gut feel is unknown (and in all likelihood there is a bit of both) but our analysis of Douglas-Westwood’s own drilling & production (D&P) data supports this view. We expect to see a fall in US production this year of nearly 900,000 bpd, the largest drop in output for a country since Libya in 2011 (civil war) and Saudi Arabia in 2009 (OPEC cuts). There will be production growth in a number of countries, the most-significant being Iran and Iraq, with the result that overall global production will increase by 460k bpd. With demand growth forecast at 1.2 million bpd this year, the overall net position is a reduction in net over-supply of some ¾ million bpd. This reduction in over-supply should put upward pressure on oil prices as it develops over the course of the year.

So can we expect the same trend to continue into 2017? Analysis of the data (which is built-up on a project-by-project basis) suggests not. Whilst there will be further demand growth, this will be offset by significant production. We anticipate net increases in production both onshore and offshore. Most of the additional volumes are from offshore (net 1.1 million bpd increase) with an overall impact (taking into account demand growth) of a slight increase in over supply in 2017. In the years that follow, we expect reduction in over-supply every year to 2020.

Why the blip in 2017? Put simply, we are not over the hangover from several years of record levels of industry spend (2011-2014). Major projects were committed to at that time and the lead times for some of these projects are long. But this dynamic works both ways. The current hiatus in spend is brewing a major supply problem towards the end of the decade – if nothing changes, the data suggests under-supply of oil by 2020.

Steve Robertson & Matt Cook, Douglas-Westwood London

Whilst 2016 has so far seen much discussion surrounding the oil price, oversupply and the almost daily mini-rallies that appear as fickle as my two-year old’s breakfast selection, not a great deal of attention has been paid to the gas outlook.

From 2016 production levels, Douglas-Westwood currently forecast a 16.2% increase in global gas production to 2020 compared with just a 3.3% increase for oil during the same period. Is this simply a case of stronger demand or is there more to it?

As a geographic spread we see 95% more countries increasing YoY gas production during 2017 as those reducing, this compares to just 44% for oil. The production spread (difference between the largest increase and the largest decrease) between the 59-61 countries covered within the DW D&P report shows a spread of 703 kboe/d for oil and 826 kboe/d for gas during 2017 decreasing to 383 kboe/d for oil and 443 kboe/d for gas in 2020.

So not only will gas see a more rapid relative production increase but it will also experience a slower decrease in YoY production post-2017. However, DW expects to see YoY gas production continuing to increase to the end of our current forecast period in 2022, whereas oil is expected to start showing negative production growth from 2021.

The oil supply glut will return in 2017 thanks in large part to the ramping up of Iranian production and already committed Canadian oil sands projects coming online, offsetting large drops from the likes of the USA –207 kboe/d and Nigeria –121 kboe/d. The South Pars field in the Arabian Gulf along with new shallow water gas projects in Australia supported by the demand for LNG/CBM feedstocks are significant, although demand-based, contributors to the gas outlook.

With the recent lifting of sanctions on Iran and the growth of South Pars there will almost certainly be opportunities for well-placed and well-informed Western OFS providers.

So 2017 really is the wildcard year, or perhaps more appropriately, the production Twin Peaks. The question is surely not if, but how high.

Gareth Hector, Douglas-Westwood London