Schlumberger Limited (NYSE: SLB) and Cameron International Corporation (NYSE: CAM) jointly announces that Chinese Ministry of Commerce (MOFCOM) has cleared their proposed merger without any conditions.

MOFCOM approval represents the last major closing condition to the proposed merger. As a result, the parties intend to close their transaction on April 1, 2016.

The closing of the proposed merger remains subject to the satisfaction or waiver of the remaining closing conditions contained in the merger agreement. Until that time, the companies will continue to operate as separate and independent entities and continue to serve their respective customers.

In recent years, fishing communities in North West Europe have reaped numerous benefits from the rise of offshore wind – fishing vessels and their crews have been regularly employed for the transfer of technicians and equipment to wind farms off the coast. As the industry has evolved, there has been rapid growth in the use of purpose-build Personnel Transfer Vessels (PTV) for the same purpose. This remains a viable and low-cost option for many projects, but developers are now exploring innovative logistics solutions for rapid access to wind farms – the industry is modernizing rapidly and looking to the sky.

In the UK, use of helicopters for offshore wind operations and maintenance (O&M) is still relatively rare – limited to the Greater Gabbard and Westermost Rough projects. However, for our North Sea neighbors, it is more commonplace. In Germany and Denmark, helicopters regularly service offshore wind farms – rapid response time and lack of dependence on sea conditions are both key motives for use. As such, helicopters are expected to feature in many future projects within the region, factored into a new style of O&M strategy.

The next phase of offshore wind farms in the UK are expected to drive increased use of helicopters offshore. Upcoming projects like Hornsea are both larger in scale and farther from shore, requiring a strategy beyond the use of personnel transfer vessels. There is no one-size fits all O&M approach for these giant windfarms, and risk-averse operators may see helicopters as a high risk alternative to vessels. However, the benefits are clear – time saving on turbine repair (i.e. minimizing downtime) is crucial and helicopters enable rapid access to turbines in harsher weather conditions.

DW expect helicopters to become an integral part of the offshore wind industry’s O&M mix. Consequently, we forecast steady growth in helicopter demand to 2025, primarily in Western European markets with experience in offshore aviation derived from a long history of oil and gas.

NYC-based PIRA Energy Group reports that Asia continues to drive global oil demand growth. In the U.S., product stocks drew. In Japan, crude runs are little changed; imports fell and stocks drew. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Asia Continues to Drive Global Oil Demand Growth

Oil markets remain structurally weak for the near term due to turnarounds and as Iranian crude oil exports increase and will take time to rebalance. Asia continues to drive global oil demand growth despite the economic slowdown in China. Asian refinery runs will increase this year with capacity expansions and higher runs in Chinese “tea kettle” refineries. Gasoline cracks will continue to outperform diesel cracks this year.

Gas Prices Collapse Underweight of Outsized Storage Inventories

After briefly breeching the former low set in late December, the NYMEX nearby contract went off the board at ~$1.71/MMBtu — setting the stage for a March Henry Hub Bidweek price that will be ~50¢ below February and also marking a low for the benchmark not seen since March 1999. Much is riding on the demand and supply response to such prices considering the fallout on U.S. and Canadian storage tied to the collapse in heating loads during February. The South Central will account for ~50% of this month’s overall expansion in the year-on-year U.S. storage surplus. The resulting end-February overhang is clearly an impediment standing in the way of a near-term price recovery, especially after considering the South’s increased exposure to Appalachia supply tied to pipeline capacity additions between the regions. Still, given the lack of any draw last March, that surplus is likely to start to contract. Moreover, the acute price weakness now in effect also stands to accelerate U.S. production weakness — even in Appalachian.

February Blows Warm and Is Gone with the Wind

German forward prices are no longer allowing the most efficient coal units to fully recover their fuel, transportation, and carbon costs. Hedging strategies are in part to blame, as power generators continue to sell to secure cash. French prices are more likely to firm, as France will see a heavier nuclear outage schedule this year, while draconian cost cutting measures will undermine nuclear output. Italian prices have been undermined by improving hydro (not only in Italy itself, but also Alpine region) and higher imports from both France and Switzerland. 3Q contract is trading with a €2-3/MWh risk premium.

Coal Pricing Mixed Despite Stronger Oil Market

A general increase in oil pricing helped give the coal market an uplift, although API#2 (Northwest Europe) prices actually lost ground last week. API#2 gave back some, but not all, of the sizeable gains made last week when the market surged on labor strike risk from Colombia. In the Pacific, some signs of stabilization in China’s buying activity along with the rise in oil prices allowed API#4 (South Africa) and FOB Newcastle (Australia) to rise modestly. PIRA continues to believe that API#4 prices remain too strong relative to FOB Newcastle, and we expect more downside for API#4 over the next 90 days, barring unforeseen supply disruptions.

California Carbon Auctions Undersubscribed

With CA/QC allowance prices having fallen below the auction floor in the secondary market, auction results released today indicate both the current and future vintage auctions were undersubscribed — a first for California. Demand was more than sufficient to allow for the sale of all allowances consigned to auction on behalf of CA entities. Unsold allowances will be offered at future auctions — generally when/if auction pricing exceeds the reserve price for two consecutive auctions.

Production Rises, But Stocks Fall

U.S. ethanol production has increased for three consecutive weeks, reaching 994 MB/D, the fifth highest level ever reported. Ethanol inventories dropped from a record high in the previous week, falling by 113 thousand barrels to 23.1 million barrels.

Pressure Continues

Late Friday afternoon saw the wheat short set a record in one COT category while Nidera registered 227 new certificates for delivery against the March soybean contract. No wonder that SRW made a new low last week while soybeans had five losing days in a row.

Currency Depreciation Offsetting Some, But Not All, of the Consumer Benefit of Low Crude Prices

PIRA’s analysis of retail fuel prices around the world shows that the decline in fuel prices is not keeping pace with that of Brent. On a demand-weighted average basis, we estimate that global gasoline and diesel prices are down 40% from July 2014 to January 2016 in U.S. dollar terms, compared to Brent’s 70% fall. Part of the discrepancy can be attributed to subsidy and pricing reforms, fixed taxes, relatively stable downstream margins, and tight gasoline supplies in some locations. But currency depreciation is also having a notable impact. Gasoline and diesel prices in local currency terms are down less than 30% over the period. We estimate that currency weakness versus the dollar is offsetting roughly a third of the price benefit of low crude prices for local consumers. Even so, realized fuel price declines are still substantial and, in our view, will continue to support global oil demand this year.

Financial Stress Eases

Financial stresses eased again this past week. For the second straight week, the S&P 500 rose Friday-to-Friday and on a weekly average basis. All of the other indicators, such as volatility, high yield debt and emerging market debt, also staged varying degrees of improvement. The U.S. dollar has been increasingly mixed. Debate on a U.K. withdrawal from the EU has fed weakness in sterling. Commodities ex-energy are looking significantly better the last several weeks.

Gasoline Cracks Will Strengthen, But Not as Strongly as in 2015

Growing crude stocks continue to weigh on Brent structure for next few months, but fundamentals are starting to improve. Gasoline strength will return and will outperform diesel, partially echoing 2015. Product stock levels grow, but not uniformly as refiners shift yields from middle distillates toward gasoline. Refining margins will recover from recent decline and stay generally healthy, and runs stay reasonably high through the summer before weakening.

North American Gas Forecast Monthly

North American gas market fundamentals have assumed a much less bullish posture, starting with an end-March storage carryout now expected to be within striking distance of 2.3 TCF, ~0.2 TCF above our month-earlier Reference Case. A collapse of February gas-weighted heating degree days relative to normal was the principal cause, but other factors have played a role. Production, led by Appalachian Basin, has made a strong recovery of late, fostering doubts about a near-term Lower 48 rollover. PIRA’s Reference Case sees limited marketing opportunities and capital spending, making the region’s growth prospects even more vulnerable. Sequentially stronger western Canadian gas production of late, coupled with unusually flush inventories, also poses a greater perceived supply side threat to tighter U.S. gas balances.

European LPG Prices Pulled Higher by Broader Markets

European LPG prices firmed, but mostly due to the strength in crude and naphtha prices and not as a result of a tightening supply and demand situation. The region remains well supplied, particularly as larger fully refrigerated cargoes are now loading in Marcus Hook, Pennsylvania, and will be increasingly pointed at the region due to proximity. March propane futures added $22/MT to $256/MT, while cash butane cargoes were called a somewhat narrow $20 higher.

Outlook Forum Mission Accomplished

On paper, the USDA was able to keep carry-outs below 2 billion, 500 million, and 1 billion, its goal going into the Outlook Forum. The questions remains, however, can it last? Without a major weather disruption during the upcoming growing season, prospects for a price recovery seem bleak.

U.S. Ethanol Prices Increase

Ethanol prices rose last week despite record inventories. Manufacturing margins were steady and sufficient for most plants to operate at high rates.

Global Equities Post Another Positive Week

Global equities posted a second straight week of gains, rising 1.1%. The Americas continue to outperform. In the U.S, almost all the tracking indices were higher on the week. Retail, housing and materials all outperformed, while utilities lagged and were neutral on the week. Internationally, the tracking indices were more mixed. Japan, Latin America, and BRICs all outperformed.

Dry Bulk Shipping Market in Crisis Mode

Last month, we discussed the unprecedented collapse in dry bulk freight rates highlighting the breadth, speed, and extent of the rate declines. It is much the same story this month. Hopes that the Chinese, on returning to work after their Lunar New Year holidays, would provide some market momentum have been all but dashed. While Chinese economic data have been delayed by the holidays, the dry bulk freight market has provided its own measure on China’s faltering physical demand for raw materials and it remains ugly. As hopes of a demand-led shipping recovery dwindle, the focus is shifting to supply-side responses. The sheer scale of the dry bulk shipping crisis is starting to have some significant consequences.

U.S. Commercial Stocks Draw

Strong product demand was reflected in a product stocks draw for the week of February 19, while lower crude runs contributed to a crude stock build. This build in crude stocks occurred in spite of mounting evidence that the pace of declines in domestic crude supply has quickened. Gasoline production has begun to transition to a lower RVP content, and this will be reflected by lower butane use and lower gasoline yield. Next week we expect flat crude runs to contribute to another crude stock build, but low runs also contribute to product stock draws.

The Tug of Oil and the Weight of Supply/Demand

Gas is continuing its search for demand as it sets to enter the last month of the winter. February has been another warm month across major gas-consuming markets in Europe. Temperatures are up significantly over last month and are quite high historically.

California Allowances Can Be a Source of Cash for Challenged Oil Producers

California carbon allowance prices dropped dramatically, crashing through the auction floor, indicating expectations that the current vintage auction was undersubscribed — a first for CA. Environmental commodity markets well beyond California have also been sliding over the past two months. For California carbon, financially challenged oil producers that receive free allowance allocations but do not face immediate allowance surrender requirements could sell allowances to raise cash, in turn boosting near-term supply — a phenomenon observed in the EU ETS in the past.

Japanese Crude Runs Little Changed; Imports Fell and Stocks Drew

Crude runs showed very little change for the second straight week. Imports fell back and stocks posted a draw. Finished product stocks drew due to declines in naphtha, fuel oil, and jet-kero more than offsetting lesser builds in gasoline and gasoil. Demands were broadly lower and considered soft. Margins continued to weaken, extending their decline from peak December levels.

The U.S. Is Better, but It Can’t Carry the World Economy Alone

U.S. economic growth is picking up pace, powered by strengthening consumer spending. GDP growth for the fourth quarter was revised up, and households significantly increased their spending during January. Manufacturing-related activity data (such as industrial production and durable goods orders) were constructive in January. But based on a historical pattern, the U.S. strength is probably not sufficient by itself to lift the slumping global manufacturing sector. Important economic events pack the calendar for the next few weeks.

U.S. Exports Debut Amid Unstable Arbitrage Outlook

The recent plunge in Henry Hub prices, combined with some support for NBP prices at current levels, has made this U.S.-Europe trade look quite appealing — so appealing that it is hard to make a case for the U.S. LNG to go anywhere else other than to South America, which is typically looking at paying the netback equivalent that would be captured by sending the cargos to Europe. Europe also has several buyers in the Mediterranean gauging the relative value of LNG versus oil-indexed prices.

Gulf of Mexico Production to Demonstrate Short-Term Resilience, Medium-Term Weakness

Gulf of Mexico crude production has grown at a 7% CAGR since 2012 and is expected to continue to grow at this pace until 2017. The resilience is the result of the ramp-up of recent projects and the start-up of new projects already under construction. However, low prices will have medium-term impacts as project sanctioning has slowed, causing few projects to come online in the 2018-2020 period. PIRA expects GOM crude production to grow from 1,550 MB/D in 2015 to 1,800 MB/D in 2017, then decline by 200 MB/D to 1,600 MB/D in 2020. Longer term, we expect production to breach its 2017 highs by 2023 as projects currently in the appraisal/definition stage come online.

Supply Growth Becomes Increasingly Unaffordable

While March signals the approaching official end of the heating season, the dearth of degree days in February has seemingly convinced the market that the winter has already concluded — given the improbability of clearing excess seasonal inventories. Thursday’s extraordinarily light 117 BCF draw, relative to expectations pinned ~20 BCF higher, likely represents the final triple-digit draw of the season. The fundamentals for the week-in-progress suggest that withdrawals have plummeted to a historically bearish seasonal level in the low-30s, with only three other sub-40 weekly readings ever recorded in February (1995, 2006 and 2009). Thereafter, milder weather and the transition to spring will significantly limit the call on storage through end March.

Oil Substitution Re-Enters the Debate as U.S. LNG Turns South Before East

PIRA sees every reason for the deterioration of bids in Asian spot markets to continue in the month ahead. Regional gas markets will be entering the lowest period of the year for seasonal gas demand and, additional LNG supply from Gladstone, APLNG, and Gorgon is scheduled to emerge from Australia alone. Buyers may not be in too much of a hurry to lock down spot volumes given the circumstances and the position of buyers to lift more contract LNG as the new trains emerge.

Russia and Turkey’s Gas Price Dispute Leaves Gas Flows Lower

Russian Gazprom reduced daily natural gas supplies to Turkey by around 50% from Feb. 10 along the western line. The company decided to reduce its natural gas flow after a price dispute with private buyers in Turkey. Earlier it was reported that Gazprom, which was in discussions with six Turkish private companies on Jan. 29, cancelled the 10.25% discount applied on natural gas supplies from Gazprom from Jan. 1 this year.

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. To read PIRA’s Market Recap first, subscribe to PIRA Perspectives here.

The new fund, Statoil Energy Ventures, will invest up to USD 200 million (around NOK 1.7 billion) over a period of four to seven years.

Potential investment themes include offshore and onshore wind, solar energy, energy storage, transportation, energy efficiency and smart grids.

Image Courtesy: Statoil

The team initially consists of six investment professionals operating with a global mandate, initially based out of Statoil’s offices in London and Oslo.

The fund will take direct positions primarily as a minority shareholder in growth companies, preferably as a co-investor with other venture firms. Investment in selected fund will also be considered to gain a wider footprint.

The Statoil Energy Ventures team, focusing on growth-phase investments in renewable energy, will operate alongside Statoil’s existing venture entity, Statoil Technology Invest (STI), which focuses on early-phase investments in upstream oil and gas.

Statoil has a strong track record of successful technology implementations and financial return through exits. STI has since 2000 invested around USD 135 million, achieving a multiple of invested capital on realized deals of 2.5.

“We are pleased to announce Statoil Energy Ventures: One of the world’s largest corporate venture funds dedicated to renewable energy. The transition to a low carbon society creates business opportunities, and Statoil aims to drive profitable growth within this space. Through the new fund, we look forward to investing in attractive and ambitious companies and contribute to shaping the future of energy,” says Irene Rummelhoff, Statoil’s executive vice president for New Energy Solutions.

The fund is established as part of Statoil’s new business area New Energy Solutions, reflecting the company’s aspirations to gradually complement its oil and gas portfolio with profitable renewable energy and low-carbon solutions. The investments are included in Statoil’s overall investment outlook as presented on 4 February.

“Statoil Energy Ventures aims to be an attractive partner for growth companies. We offer a strong financial muscle and are ready to invest in three strategic areas: Supporting our current operations in renewables, positioning in renewable growth opportunities, and exploring new high impact technologies and business models. We look forward to engaging with ambitious entrepreneurs as an active investor and to build great companies,” says Gareth Burns, vice president in Statoil and managing director of Statoil Energy Ventures.

NYC-based PIRA Energy Group believes that Asian product demand shows improved growth, due to the recent Chinese data. In the U.S., crude stocks were moderately higher. In Japan, crude runs increased, imports fell back and stocks built. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

U.S. Stocks Modestly Higher

Relatively strong major light product demand led to inventory declines in both gasoline and distillate while higher-than-expected crude runs narrowed the crude stock build. Overall commercial, crude and Cushing stocks made new highs. The year-on-year oil inventory surplus narrowed 5 million barrels to 156 million barrels. Some 64% of the surplus versus last year is in crude and distillate.

Storage Capacity Limits Loom in South Central Region

The official arrival of spring, as marked by the vernal equinox, occurred this weekend. Yet, seasonal repositioning appears to be well under way, with the recent ~30¢ rally likely the result of closing out winter short positions and/or early injection season buying. The next leg of higher in prices, however, could prove more difficult to achieve without a significant shift in fundamentals. With end-March inventories aligning with the 2012 record, options for managing the surplus are becoming increasingly scarce, underscoring the need for prices to remain discounted.

Are the Lows in, Despite Weak Loads?

Spot power prices experienced moderate month-on-month declines in February in New England, MISO, SPP and ERCOT but were relatively flat in NY, PJM and the Southeast despite mild weather and weaker gas markets. Average loads in the East (U.S.) fell by 43 aGW (11.4%) from the prior year, and ERCOT raw loads were down 10.4%. Gas-fired generation in the East was down slightly from January but up year-on-year despite falling loads as gas prices averaged below $2 at most Eastern hubs. PIRA remains bullish to NYMEX Henry Hub gas through winter 2016-17. Barring adverse weather, PIRA believes that excess inventories are priced in, but future gas production weakness is not. We are bullish summer power relative to the forward curve as well as Northeast winter, but neutral on shoulder months.

European Coal Pricing Rises Despite the End of Colombian Labor Strike Threat

Despite the agreement that forestalled a labor strike in Colombia, API#2 (Northwest Europe) coal pricing moved notably higher last week, while API#4 (South Africa) and FOB Newcastle (Australia) prices lost ground. The declines recorded by API#4 and FOB Newcastle are more in line with what occurred last week in that supply will not be pulled offline and the prompt market should be softer. Generally, the market continues to search for direction, with seasonal peak demand fading and the lack of a clear signal that the oversupply is near an end. We retain our general outlook that price weakness will continue though the next 90 days, but we believe that rising oil pricing in late-2016 and 2017 will lead to a strengthening in the coal market.

European Carbon Links to Oil, But Downside Risks Remain

The EU Allowance (EUA) price decline has halted for now, with Brent oil prices serving as an anchor. However, the currently strong relationship between EUAs and oil could weaken, as bearish ETS indicators outweigh a connection to increasing Brent prices. Downside price risks remain: higher incoming supply, warm weather, and low gas prices reducing coal-fired generation competitiveness. We expect some price support during the upcoming 2015 emissions compliance period, but prices should then decline through Summer 2016.

Fed’s Dovish Turn Is the Latest in String of Policy Surprises

Last week’s U.S. economic statistics were constructive: manufacturing indicators were better-than-expected, consumer spending data pointed to a modest acceleration, and housing starts registered improvements. Somewhat surprisingly, however, the latest CPI data showed a broad-based gain in prices. At this week’s meeting, the Federal Reserve stayed put, as expected. But the outcome of the meeting was clearly dovish, as policymakers penciled in fewer rate hikes during 2016 than before. The Fed’s new plan represented the latest in string of growth-friendly policy announcements.

Wait and See

With the Dollar Index below 95, having been pushed lower by the FOMC Minutes, there is some bullishness appearing in the markets. Option volatility, which had been hammered of late, is starting to show some life, especially in corn. The unrest in Brazil continues to take center stage as beans were the feature this week.

European LPG Prices Turn Lower

European propane prices fell in line with Mt Belvieu, and thus the premium over the U.S. benchmark remained around $41/MT, a level at which the arbitrage of volume into the region is economically unworkable. Large cargo butane prices managed a gain of $10 to $320/MT — buoyed higher by rising naphtha prices.

Ethanol Prices Rise

U.S. ethanol prices strengthened the week ending March 11, supported by advancing oil and corn values, which overshadowed the buildup of stocks to a record high. Manufacturing margins dropped slightly, partly due to the decline in DDG prices.

Japanese Crude Runs Increased, Imports fell Back and Stocks Built

Crude runs posted a second straight week of increase and have now recovered almost two-thirds of the end-February drop. Crude imports fell back but still produced a stock build of 2 MMBbls. Finished product stocks were slightly higher with increases in all the major product categories, other than naphtha. Gasoline demand was disappointing. Gasoil balances were little changed and kerosene moved into seasonal stock building mode. Margins were modestly higher and remain good.

The Return of Gas Demand in Europe Will Be an Uphill Battle

As we hunt for new demand to consume all the new LNG coming to Europe, we may be losing sight of the slow but steady and accumulating impact of efficiency gains across the Continent. While the focus these days is on natural gas trying to reclaim demand from coal in the power sector, that is not the only sector where gas demand has eroded. None of the five biggest industrial demand sectors have experienced growth in gas demand in the last 10 years. Overall, these sectors have lost over 16% of their demand. However, the story here is not necessarily the economic weakness of European industry, but the growth in its energy efficiency across all parts of the economy.

Weakening Power Sector Emissions in 2015 May Imply Sagging Role for Co-generation in Germany

German thermal demand has been relatively better supported so far this month, due to a lack of wind and solar relative to our assumptions built in our balances, leading to some price support in the day ahead markets. As for the fossil fuel units, the EEX data show an increase so far in coal-fired dispatching, with a 2 GW year-on-year increase. According to EEX, the role of gas remains relatively weak, with growth of only about 800 MWs year-on-year, even with efficient spot gas units more in the money at current spot prices. Early data on 2015 German emissions hint at some interesting dynamics in the power sector, with some signs of decreasing fossil fuel CHP generation. This is an extremely relevant point, as CHP generation (or the lack of it) typically is more influential in price formation at this time of the year.

2015 EU ETS Emissions Expected Higher, With Short Term Price Bump

The 2015 EU ETS emissions data will be released on April 1st; PIRA expects them to be up 1% year-on-year, driven by increases in grid-connected power and refining. An EUA price bump on the bullish data is likely, with a potential rise coming in the days before the release. Higher emissions could impact potential ETS reform efforts by diverting attention from fundamental market oversupply, with emissions declines resuming in 2016.

Global Equities Post Another Positive Week

Global equities posted a fifth straight week of gains. Many of the tracking indices continue to display significantly better looking trends. In the U.S. almost all the tracking indices were higher on the week. The “growth” indicator, industrials, and housing did the best, while banking again lagged. Internationally, the tracking indices were a bit more mixed. Other than Japan and Europe, all the tracking indices posted gains to varying degrees.

U.S. Ethanol Scorecard and Supply Report

U.S. ethanol production rose for the first time in three weeks, advancing to 999 MB/D from 978 MB/D during the previous week. Inventories declined by 454 thousand barrels to 22.9 million barrels, though they remain 2.0 million barrels higher than at this time last year.

Weekend Wheat Freeze

Going into the weekend forecasts were cold for some sections of Kansas and Oklahoma, but not as cold as materialized. Even with this overnight freeze event opinions vary widely on the ultimate effect on this year’s HRW crop. Current HRW production estimates range from the mid-800’s to 925 million bushels. According to local sources, maybe 8-10% of this year’s crop has been affected by weekend temperatures.

PIRA’s Crude Oil Arbitrage Calculator Provides Insight into Changing PADD I Crude Fundamentals

PIRA’s new Crude Oil Arbitrage Calculator is a useful tool for evaluating more than 30 key crude arbitrage incentives. This report shows that the incentive to ship Bakken to PADD I turned negative versus Bonny Light. As a result of changing economic incentives, rail movements of crude to PADD I fell sharply, even as waterborne imports picked up.

East Wing Asia-Pacific Projects Crash and Burn as Australia Takes Flight

The proposed liquefaction projects that were once popping up all along the northeastern rim of the Pacific from Kitimat to Coos Bay in Oregon now appear to be dropping off in rapid succession as both market forces and regulatory barriers converge to create insurmountable hurdles.

March Weather: U.S. Warm, Europe Cold and Japan Normal

At midmonth, March looks to be 1% warmer than the 10-year normal for the three major OECD markets, with +45 MB/D as the net effect on oil-heat demand since Europe has a larger contribution. The markets are 9% warmer than the 30-year normal.

Polish Gas Users to Get Price Cut

Polish energy market regulator URE approved price cuts for natural gas sold by the country's dominant gas company, state-controlled PGNiG, the regulator. The new price tariff, which reduces prices of natural gas by 8.3-9.5% percent from current levels, will be binding from the second quarter of 2016, URE said. The price cut, which URE said is the result of lower prices of natural gas on European markets, is the second this year and the fifth since the start of 2015.

Spring 2016 Nuclear Outages: Fewer but Possibly Longer

This spring, nuclear outages in the U.S. are significantly fewer in number as compared to spring of 2015. However, it is likely that some of these outages could be longer given the weak gas price environment. Operators may be more willing to address non-critical repair issues, even if doing so would extend an outage, due to the low opportunity cost of lost generation.

Asian Update: Stronger Demand Growth, Led by China

PIRA's latest update of Asian product demand shows improved growth, mostly due to the recent Chinese data. PIRA’s February update of Asian demand had shown growth of 294 MB/D, a slowing down from over 1 MMB/D seen in the December update. The latest average three-month data indicate growth has risen to 643 MB/D. China and India both showed faster growth and incorporate the latest three-month actuals through February. China posted growth of 394 MB/D (vs. 48 MB/D in last update), while India grew 358 MB/D (vs. 335 MB/D, previously). The Chinese improvement is not necessarily actual consumption, as it is based on apparent demand calculations and reflects a very strong crude import figure of 7.8 MMB/D in December and record imports of 8.0 MMB/D for February. Looking at individual products, gasoline accounts for 219 MB/D of the Asian growth, but is down marginally from our last assessment.

Financial Stress Continues to Ease

For the fifth straight week the S&P 500 rose Friday-to-Friday and on a weekly average basis. All the other key indicators improved, including volatility, high yield debt and emerging market debt. The U.S. dollar lost ground on the week against a host of currencies. Commodities continue to gain, both overall and ex-energy. The Cleveland Fed released its inflation expectations for March, which showed a decline across all time frames.

U.S. Federal Regulatory Calendar

The biggest development impacting the regulatory agenda came from the Supreme Court, which decided to put EPA's Clean Power Plan on hold. We have also seen a renewed regulatory focus on methane emissions. Proposed regulation of methane in oil and gas operations on federal lands was published in February and final rules impacting oil and gas production on private and state lands are still expected this summer. As part of a joint announcement with Canada, President Obama directed the EPA to put forward new methane regulations targeting existing oil and gas wells, starting with an Information Collection Request. The next federal Regulatory Agenda is expected in May, offering clarity on timelines for regs such as the next PM NAAQS review and Secondary NAAQS for SO2/NOx. An initial draft of EPA’s midterm review of current CAFE standards for vehicles (for model years 2022-25) is expected this summer.

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.

Douglas-Westwood (DW) forecasts deepwater expenditure to total $137 billion (bn) between 2016 and 2020. This represents a 35% decline compared to DW’s previous edition of the deepwater forecast issued March 2015.

The prolonged low oil price has impacted the deepwater market, with operators considering alternative development options and delaying the sanctioning of new projects, whilst trying to protect returns on their existing investments in the sector. However, projects already under construction are unlikely to be affected. The largest proportion (38%) of the total spend will be attributed to drilling and completion. Subsea production equipment, SURF (subsea umbilicals, risers and flowlines), pipelines and trunklines will represent 34% of total expenditure combined; whilst floating production units will account for 28% of spend over the forecast period.

Expenditure will predominantly be driven by Africa and the Americas, which will account for a combined 87% of total deepwater Capex. Though all regions will be adversely affected by low oil prices, projects that were sanctioned before the oil price downturn will help sustain activity levels in these regions and in addition we expect to see the development of East African gas basins towards the end of the forecast period.

Record levels of backlog established over the 2011-2014 period have somewhat insulated subsea hardware manufacturers from the oil price downturn. However, DW expects a further decline in subsea hardware installations in 2017 and 2018 with backlog falling rapidly and new orders trickling in at very low levels. We expect that the subsea OEM’s will feel the full impact of the downturn in 2016/2017 and will face strong competition for the lower volume of projects. In total, it is forecast that the number of deepwater wells to be drilled over the next five years will decline by 3% compared to the preceding five-year period.

From a supply-chain perspective, this point in the cycle is an opportunity to bring through new approaches and technology for deepwater developments to improve efficiency and lower cost. In the long run, we remain of the view that deepwater will be a cost competitive source of world-class hydrocarbon reserves.

DW’s 14^th edition of the World Deepwater Market Forecast covers all key commercial themes relevant to players across the value chain in the deepwater sector:

Key drivers – discussion of factors affecting deepwater activity, including: sustained low oil & gas prices; deepwater production to offset declining production from onshore and shallow water basins; E&P spend of international operators; and Petrobras’ activity in Brazil.

Supply chain – detailing the financing of deepwater developments and local content issues. Includes analysis of contracting strategies (e.g. frame agreements), the deepwater drilling rig fleet and day rates, key players and capabilities of each sector within the deepwater market (drilling, FPS and subsea hardware).

Procurement – factors affecting the decisions facing FPS operators, whether to lease or own vessels and details of major leasing contractors.

Regional forecasts – forecast Capex within each region, including examples of notable projects and operators within the region and countries with most activity.

Component forecasts – drilling and completion (subsea and surface completed wells), subsea production hardware, SURF, pipelines and trunklines and floating production.

List of deepwater prospects – includes information on all identified prospects coming onstream from 2016 to 2020 by operator, location, water depth, number of trees, status category and onstream year.

Saudi Arabia and Russia agreed to freeze production at January levels on February 16th in the first coordinated effort to stabilize prices for 15 years. Expectations of an output cut were rife in the days leading up to the meeting in Doha, with Brent gaining 10.9% on February 12th. However, traders were left disappointed, given January’s near-record production levels and any output freeze contingent on other producers following suit. Consequently, there has been little change in day-to-day commodity price volatility.

Production has continued to soar in recent months. January saw a post-Soviet record high of 10.9 million barrels per day (mmbbl/d) pumped from Russian oil fields and both Saudi Arabia and Iraq broke output records in mid-2015. Despite high breakeven prices, other OPEC members such as Venezuela, Nigeria and Angola have been forced to maintain output to sustain cash flows.

The chances of a sanctions free Iran freezing production are slim. Recent reports from the Islamic Republic indicate production capacity has already grown by some 400 thousand barrels per day (kbbl/d), with a further 300 kbbl/d to be added in the near future. DW’s Iranian oil production forecast (inclusive of condensate and NGLs) shows a 2016 average production rate of 3.9 mbbl/d, with output rising above pre-sanction levels in 2017. Consequently, any production freeze is likely to thaw – and quickly – as Saudi Arabia continues to priorities market share. Conversely, production cuts from non-OPEC countries are likely to determine the direction of the market through 2016. According to the IEA, Non-OPEC supply contracted by 0.5 mmbbl/d in January 2016.

Given demand growth expectations of only 1.2 mmbbl/d this year and an output freeze which is unlikely to stick, any potential oil price recovery in late 2016 continues to rest on the US’s shoulders.

Matt Adams, Douglas-Westwood Faversham

Despite current low oil prices, the oil and gas industry in the Falkland Islands is continuing to go from strength to strength as its first project, Premier Oil’s Sea Lion, moves closer to commercialization, according to an analyst with research and consulting firm GlobalData.

Adrian Lara, GlobalData’s Senior Upstream Analyst covering the Americas, says that governmental changes in Argentina add to the favorable conditions supporting the Falkland Islands’ industry’s advance towards its first oil.

Lara comments: “During the previous Kirchner administration, the government discourse was one of sovereignty dispute. Companies operating in the territory were denied access to participating in Argentina. International oil companies with significant operating assets in Argentina, such as Total or Chevron, avoided damaging their working relationship with the government.

“In April 2015, a federal judge ordered the seizure of assets of companies drilling in the territory including Premier Oil, Rockhopper Exploration, Falkland Oil and Gas Ltd, Noble Energy and Edison International Spa. The new Argentinian government has indicated a clear position of enacting market-friendly reforms including rolling back regulations, re-accessing international financial markets and encouraging foreign direct investment.”

While only 15% of the total available blocks in the Falkland Islands have been awarded, farming into existing licenses has been the primary strategy for participation in the basin. With an extensive list of prospects identified in licensed blocks, farm-ins will continue to be the main entry tactic for new companies.

The analyst adds that the current landscape supports maturing existing prospects rather than developing new opportunities, with Sea Lion the most successful discovery in the region maturing towards commercial viability to date.

Lara continues: “The development strategy presented for Sea Lion is through use of a Floating Production Storage and Offloading vessel (FPSO), which adds flexibility and for which leasing costs have halved. The front-end engineering and design for the FPSO has been awarded to SBM Offshore.

“GlobalData estimates a rate of return of 8% under a flat US$40 oil price, and a breakeven price of US$36.85. Under the assumption of an escalating oil price, returning to US$60 in 10 years, the rate of return improves to 15%.”

The analyst concludes that while development in the Falklands will not carry the publicity of the recent Liza discovery in Guyana by ExxonMobil, the sector is moving forward at a steady pace and first oil is expected at Sea Lion within the decade.

As the main driver of global energy demand growth, China accounted for 23% of world energy use in 2014. BP expects this share to rise to 25% by 2035. According to National Bureau of Statistics of China, despite a decline of 3.7% in coal consumption in 2015, the energy source still supplied 64% of primary energy use, with China accounting for half of global coal consumption.

Without doubt, a fossil fuel-intensive strategy has helped the world’s largest economy achieve years of astronomical growth. However, this has resulted in major environmental pollution. Late last year, Beijing issued two environmental red alerts – the highest level in a four-tier warning scale – due to high levels of air pollution. The concentration of PM2.5 particles reached levels 30 times the WHO’s recommendation of 25 micrograms per cubic meter – spurring traffic restrictions and closures of factories and schools in the country’s capital. To tackle environmental problems, China has tightened its air pollution and environmental protection laws over the past few years. On March 5th, Chinese Premier Li Keqiang announced that the government will “deal with industrial pollution at the source and conduct online monitoring of all polluting enterprises”. While the government has yet to unveil detailed actions, by strictly enforcing revised laws, China may begin to reduce levels of pollution.

Li’s speech set the tone for the country’s 13th Five-Year Plan – due to be passed without major amendment this week. Under the new economic, social and environmental blueprint, China plans to reduce its energy intensity (energy consumption per unit of GDP) and carbon intensity by 15% and 18% by 2020 respectively. This change will require rapid growth in non-fossil energy sources such as renewables and nuclear. Integrating renewable energy into the energy mix is still at an early stage, however, the new plan makes clear China intends to strengthen efforts to move from coal to non-fossil energy sources over the next five years.

Non-fossil energy accounted for 12% of primary energy consumption in 2015 up from 9.4% in 2010 – passing the 11.4% target under the previous Five-Year Plan. With the updated blueprint, the nation has set new targets of 15% by 2020 and 20% by 2030. DW’s World Offshore Wind Market Forecast suggests continued growth in renewable energy installations – China is expected to be a key offshore market, installing over 10GW of offshore wind capacity to 2025.

Wang Yunjiao, Douglas-Westwood Singapore

NYC-based PIRA Energy Group reports that oil market rebalancing has begun, price lows are in. In the U.S., there was a flat profile for stocks of four major oils. In Japan, crude runs declined, imports plunged and stocks drew. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

With Oil Market Rebalancing Begun, Price Lows Are in

Oil market rebalancing has indeed begun with the stock surplus about to level off. OPEC/non-OPEC freeze is a change in strategy and positive for prices. Expect a new price anchor of $50/Bbl to be talked about. Prices will move higher like a step ladder, as required supply creation becomes more evident. Refinery margins and runs will generally be healthy through the summer before weakening. Political risks to supply are growing.

How Important Are LNG Price Levels to NBP Price Potential

The last time that storage came out of February at this high of the level was in 2014, which led to all-time storage highs by the end of October of that year. While high storage did not automatically translate into a collapse in spot prices, it is somewhat interesting that spot prices have been on a consistent decline from November 2014 to yesterday (except for February 2015).

U.K. Spark Spreads Remain Weak in Spite of Extremely Tight Market

With the market conditions changing considerably since the Capacity Market was established, the U.K. DECC has launched this week a new consultation with the aim of reforming the Capacity Market design. The proposed changes do not come totally as a surprise, but from a trading standpoint, the proposals do not change the big picture in the electricity market until at least the winter 2017-18, basically leaving the U.K. market still extremely vulnerable, with razor-thin spare capacities through the upcoming winter.

Litigation Around CA Cap and Trade Auction

Auctions have been a key feature of the California’s cap and trade program, with the auction reserve price offering guidance for a price floor in the secondary market. The ability of the state to sell allowances via auction has been under legal attack with news on developments expected soon. PIRA believes that in the event of an adverse decision, eventual market impacts may be limited — particularly if the auction of consigned allowances is allowed to continue. We also expect the California legislature would act to explicitly authorize auctions for all allowances. Quebec’s auction would be unaffected by this court ruling and Ontario will be offering a significant part of its cap at auctions when its program is slated to start — though both have significantly lower reserve prices.

Freight Market Outlook

Coming off their best year since 2008, tanker markets in 2016 have turned sharply lower over the first two months. VLCC markets led the slide with rates in the benchmark Mideast/Asia trade plunging by 50% as China reduced crude imports substantially in January from record levels in December and market sentiment turned negative. Rates in the other vessel groups have also registered significant declines since the start of the year. Furthermore, PIRA expects the rise in global stocks will reverse and start to decline in second half 2016, putting additional pressure on tanker rates as volumes contained via slowdown and floating storage start to shrink.

Thermal Coal Market Beginning to Show Signs of Moving Back into Balance

Physical coal pricing was mixed in February, with coal prices continuing to follow the lead of oil, although coal price movements remained relatively muted compared to oil. On top of the upward momentum in oil prices, the potential for a labor strike in Colombia gave pricing some tailwinds at the front of the curve, particularly in the Atlantic Basin, while the balance of the curve shifted lower, likely due to the announcement of the additional U.K. coal-fired capacity closures. In the Pacific Basin, Chinese thermal coal imports declined only marginally in January, a notable departure from the sizeable drops that occurred in every month in 2015. PIRA has long held the belief that it will be nearly impossible for coal pricing to recover appreciably in 2016 or 2017 if China's imports continue to fall.

Ethanol Production and Stocks Decline

U.S. ethanol production declined for the first time in four weeks, dropping to 987 MB/D from 994 MB/D during the preceding week. Ethanol inventories continued to sink from the record high set earlier in February, falling by 481 thousand barrels to 22.6 million barrels.

Dollar Weakness

All three grain and oilseed price reversals last week coincided with a double top formation Tuesday/Wednesday around 98.60 in the dollar index. The markets remain both starving for any new information and devoid of any spring weather risk premium. Option volatility is low and should remain that way this coming week despite a WASDE release.

Global Equities Post Another Positive Week

Global equities posted a third straight week of gains, rising 3.5%. Many of the tracking indices are now displaying significantly better looking trends. In the U.S., all the tracking indices were again higher on the week. Banking and energy outperformed, while consumer staples lagged. Internationally, the tracking indices also moved higher. The best performer was Latin America, specifically, Brazil, which posted an 18% gain in local currency and 21% gain in dollar terms.

Midcontinent Production Falls as Crude Stocks Rise

Crude prices bottomed out in early February, before recovering in the second half of the month. U.S. crude stocks continued to build, including a 2 million barrel build at Cushing. Brent and LLS both rebounded relative to WTI, and Canadian differentials rose sharply on upcoming oil sands maintenance. An open export arb for much of February should lead to record crude exports in March.

Japan EG Deregulation Looms Large Over Plummeting EG Demand

With Japan not operating a country-wide gas grid, it is the electricity grid and its future that will play a key role in determining the position of gas in a deregulated market. From the government on down, Japanese gas demand (and LNG imports) appears to be headed for a long, steady decline, one that is well under way and already applying downward pressure to spot prices in Asia.

Bearish Fundamentals, but LT Support From Program Review

RGGI pricing has recovered somewhat since the mid-February sell-off, but prices are still lower than they were going into last December’s auction. PIRA expects the March 9th auction to clear in line with the secondary market - without triggering CCR allowances available at $8/ton. We anticipate a weaker than usual coverage ratio – as a portion of demand was satisfied by sales from the price plunge. RGGI emissions fell 4% in 2015 and are expected to be down this year as well. While compliance players are not challenged by near-term allowance surrender requirements, a bank draw is required each year. PIRA expects prices will climb over the course of the year, particularly with forthcoming details from the 2016 Program Review.

Western Grid Market Forecast

Spot on-peak power prices saw significant declines at major Western hubs in February as temperatures rose well above normal and gas prices tumbled. Mid-Columbia prices averaged below $17/MWh, down $6 from January. Palo Verde fell by ~$2.50/MWh to average $19 while the California hubs averaged in the mid $20s. Above-normal temperatures also contributed to strong runoff in the Northwest despite below-normal precipitation. Continued above-normal temperatures will depress heating loads and boost runoff and hydro output in March, but we do not expect hydro generation to approach prior-year levels. Meanwhile, weak gas prices will sustain high gas-fired generation and implied heat rates. However, beginning in June several factors will converge to drive implied heat rates below prior-year levels including rising gas prices, stronger hydro and solar generation, higher imports from the Northwest, and weaker cooling loads in California.

Shortage Risks in Colombia Add Upward Pressure on Coal Pricing

Coal prices moved notable higher last week, on news that union members at the Cerrejón mine in Colombia voted overwhelmingly to strike. On top of this shortage risk, coal producers in China increased their prices this week to 10 yuan/mt ($1.54/mt) on some prompt tightness in supply. While a potential labor strike in Colombia would certainly be a phenomenon, PIRA is skeptical that the tightness in Chinese coal supply and the related rise in pricing is sustainable either. Outside of the potential shortage risk in Colombia, there is not much bullish support for pricing over the next 90 days.

U.S. Biofuels Manufacturing Margins Improve in February

U.S. ethanol prices were range-bound in February, with Chicago values varying between a ceiling of $1.42 and a floor of $1.35 per gallon. Recovering gasoline values and robust gasoline demand provided support, but record stocks kept a lid on the upside.

BRL Rally Helps Soybeans

A noticeable rally in the Brazilian real Friday was followed up by a Commitment of Traders report that saw some large additions to the already bearish positioning held by Non-Commercials. Soybeans had the largest reaction to the real move, in conjunction with a more muted peso rally, while corn and wheat failed to garner much upside enthusiasm on their own.

Belt-Tightening Continues in Latin America

The low oil price environment has continued to inflict pain to players in Latin America, triggering budget cuts and affecting oil production plans. Output from Mexico, Colombia and Venezuela remains on a downward trend while Brazil’s production is still going up thanks to ongoing projects (namely, sub-salt production). 2016 Latin America GDP is now projected to be negative 0.26%. This is impacting consumption of the four major refined products, which collectively, are expected to decrease in 2016. With expected sluggish demand, the region’s imports are also anticipated to shrink. In Brazil, higher crude runs and lower demand will reduce diesel and gasoline imports to 40 MB/D and zero, respectively. Budget cuts increase the risk of operational issues in refineries across the region.

Flat Profile for U.S. Stocks of Four Major Oils

The highest crude imports since mid-December drove a 10.4 MMBbl crude stock build. A sharp decline in reported product demand was reflected by a reduction in the rate of product draw from -8.5 MMBbls last week, to -0.5 MMBbls this week. Recent average demand growth is still strong, with the notable exception of distillate demand, whose decline is much beyond anything that warmer weather can explain.

Japanese Crude Runs Declined, Imports Plunged and Stocks Drew

Crude runs declined 113 MB/D on the week and crude imports plunged such that stocks drew 5.3 MMBbls. Finished products also drew strongly, by 3.4 MMBbls, with sizable draws on all the major products other than naphtha. Product demands were strongly higher. The indicative refining margin remains good. This week saw higher gasoline and naphtha cracks, more than offsetting weaker middle distillate and fuel oil cracks.

Awaiting Producers Response to Storage Glut/Price Collapse

Despite Thursday’s surprisingly “hefty” EIA-reported 48 BCF stock draw, fundamentals of late, weather in particular, have given gas bears lots to cheer about. Following a now “official” 12% milder-than-normal February, the latest guidance for March points to a stunning 20-25% shortfall versus the 10-year normal. Consequently, PIRA’s latest end-March storage is now projected to reach 2.42 TCF, aligning closely to the end of the 2011-12 “winter that wasn’t” heating season. If verified, post-March 2016 balances will require continued strength in gas-fired electric generation (EG) as well as weaker domestic production to keep the industry operating within system limits.

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

February’s heating degree days came in below the 10-year normal by 7% for the three major OECD markets with a composite net oil-heat demand loss of 347 MB/D. On a 30-year-normal basis, the markets were roughly 13% warmer than normal.

Global LPG Weekly Scorecard

April propane futures at Mt Belvieu gained 8.4% to settle at 45.2¢/gal. Butane at the market center underperformed, gaining only 2.4% week-on-week as winter gasoline blending demand diminished.

U.S. Light Product Exports Continued to Grow in 2015

U.S. exports of both distillate and gasoline increased by 8.2% (90 MB/D) and 12.6% (70 MB/D), respectively, in 2015 compared to the year earlier. Volumes of distillate shipped were about twice the size of gasoline shipments in both years. As in the past, Latin America continues to be the most common destination for both products.

Ukrainian Fertilizer Plant Signs New Gas Deals

Ukrainian Public joint-stock company Odesa Port-Side Plant has contracted gas supply in March from Slovakia. The conditions of shipment is DAP – Budince (Slovakia), 20 MMCM. Odesa Port-Side Plant will have to pay an additional charge for entering the Ukrainian gas transport system. In previous weeks the plant operators agreed a new loan facility and had gas agreements laid out with Gaz de France.

Decline in December 2015 Lower-48 Onshore Crude Production Leads Way in Falling Domestic Crude Supply

What is noteworthy in the December 2015 Petroleum Supply Monthly (PSM) is confirmation of declines in domestic crude supply seen in the weekly data. Lower 48 onshore production is leading the way, falling 154 MB/D during December, to 7.11 MMB/D, a production rate 350 MB/D lower than December 2014. The monthly decline in U.S. production was partially offset by a 110 MB/D increase in Offshore Gulf of Mexico production, which at 1.63 MMB/D stands at 180 MB/D over last year. The December 2015 crude balance item turned negative for only the second time in the last 15 months and, at -200 MB/D, stands -575 MB/D lower than December 2014. Domestic crude supply (production + balance item) for December of 9.06 MMB/D was 740 MB/D lower than December 2014, perhaps indicating that more declines are occurring, even if production data have not fully caught up.

Aramco Pricing Adjustments for April — Minor Tuning

Saudi Arabia's formula prices for April were just released. The changes made to differentials against its key regional benchmarks were all relatively small and do not suggest any change in Saudi export pricing policy, which has been to maintain competiveness with regards to volumes and pricing in key markets.

U.S. Coal Stockpile Estimates

While power sector coal stocks have fallen by as much as 20 MMst year-to-date due to falling production levels, milder shoulder season weather and cheap natural gas are limiting coal burn, thereby elevating days cover. PIRA estimates U.S. electric power sector coal stocks stand at 176 MMst as of the end of this month.

U.S. December 2015 DOE Monthly Revisions: Demand and Stocks

The primary light products of gasoline and distillate had strong upward demand revisions in the December 2015 PSM versus the preliminary weekly data, but all other products were revised down strongly. Most of the downward revision to other product demand was due to higher-than-assumed exports. While December 2015 commercial stocks were revised up 8.1 MMBbls, this was a significantly smaller upward revision than last month, and the year/year surplus commercial inventory narrowed from last month.

Global Data Are Mixed, but Key Areas Remain Supportive

In the U.S., healthy job growth during February was the latest in string of positive economic releases. But data on wages and the number of hours worked showed unexpected declines. The latest ISM manufacturing confidence index told a mixed story. China is apparently attempting to increase positive sentiments in financial markets on the heels of the successful G20 meeting in Shanghai last week. India’s 2016 government budget apparently managed to reconcile two conflicting goals. Activity data in Brazil remained weak.

Negative Cash Flows for U.S. Shale and Canadian Oil Sands in 2016

Globally, oil remains cash flow positive, with low cost regions like OPEC and non-OPEC conventional offsetting the cash burn in U.S. shale and Canadian oil sands. In 2016, shale and oil sands are expected to be cash flow negative despite significant capex reductions. Shale would be cash flow positive on further reduced capex, but oil sands cannot even cover operating expenses at PIRA's projected 2016 prices. Based on current spending plans, $50 Brent would be needed for shale to be cash flow neutral and $55 is required by Canadian oil sands.

Financial Stresses Continue to Ease

For the third straight week, the S&P 500 rose Friday to Friday and on a weekly average basis. All of the other indicators such as volatility, high yield debt and emerging market debt posted solid gains. The U.S. dollar has been increasingly mixed. It has strengthened against the euro and eastern European currencies, but has weakened against some of the commodity and precious metals producers. Commodities ex-energy are looking significantly better the past several weeks (a seven-week uptrend). Energy has also moved modestly higher the last few weeks.

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NYC-based PIRA Energy Group reports that U.S. consumer spending share on energy will hit record low. In the U.S., stocks make a new high. In Japan, crude imports fell back and stocks moved up fractionally. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

U.S. Stocks Make New High

This past week’s inventory build pushed stocks to a new all-time high. The crude surplus to last year has been narrowing as more of it is converted into products. The overall surplus to last year is about flat versus the beginning of the year, but the crude surplus is down 21 million barrels while the products surplus is up by a similar amount. Within products, the gasoline surplus versus the start of the year is up 21 million barrels, the distillate surplus is up 12 million barrels, while year-on-year surplus in the rest of the products is down 11 million barrels.

Low Oil Prices Strain PEMEX; Budget Likely to Come Under Fire

U.S. gas exports into Mexico remain impressive early in 2016. Indeed, February exports are projected to again be near 3.4 BCF/D, ~1 BCF/D more than the prior year. These stout gains have been primarily facilitated by weaker domestic production and increased gas-fired electric generation — a trend that should continue well into this year. PIRA’s Reference Case calls for exports to average ~3.6 BCF/D in 2016, which would mark yet another record-breaking year.

Takes from E-world in Essen: "For they will drink and forget what is decreed."

This issue of plant retirements was brought up in several of PIRA's discussions during E-world, with concerns that even some lignite units may be shut down. We have noted in our prior EES scorecard that daily average lignite output declined substantially over the past 30 days, as day-ahead prices moved lower. So far, with average daily data from Jan. 1, 2016, we want to note that lignite output moved down to about 11.2 GWs, as day-ahead prices settled at €12/MWh on Jan. 30, equivalent to a loss of 7.5 GWs.

Colombian Labor Strike Risk Buoys Coal Pricing

The coal market rebounded notably last week, with API#2 (Northwest Europe) and API#4 (South Africa) prices recording similarly strong gains at the front of the curve, while FOB Newcastle (Australia) price increases were more subdued. A modest rebound in oil/gas pricing provided some of the updrafts for coal pricing, although a growing likelihood of a labor strike at the Cerrejón mine in Colombia gave Atlantic Basin pricing the extra amount of stimulus. In the Pacific Basin, a reduction in Australia’s thermal coal exports in December/January, coupled with news that Anglo American is looking to divest its coal assets globally, is showing that pressures to curtail coal supply are becoming more binding.

Indian LPG Imports Set to Drop in 2016

India’s domestic LPG production is jumping a step change higher as the Indian Oil Corporation inaugurates its eighth refinery in Paradip on the east coast. The refinery includes a one-of-a-kind heavy oil-to-LPG conversion unit that is ramping to a production capacity of 1 million MT of LPG/year. Indian LPG production is climbing 11% higher this year as a result of Paradip’s startup, effectively backing out 24 VLGC cargo imports/year.

Global Equities Stage a Broad and Strong Rebound

Global equities posted solid and broad gains on the week. In the U.S., all of the tracking indices gained ground, with the retail, consumer discretionary, housing, and technology indices outperforming. Internationally, all the tracking indices also gained. The best performers were China, the other BRICs, Emerging Asia, and Japan.

Ethanol Stocks Soar

U.S. ethanol inventories set another record last week, building by 262 thousand barrels to 23.2 million barrels. Ethanol production increased for the second consecutive week, rising to a four-week high 975 MB/D.

Annual Outlook Forum this Week

Focus this week will be on the USDA’s Outlook Forum generally and how government analysts keep the corn carry out below 2 billion bushels and soybeans below 500 million specifically. All this in preparation for the Prospective Plantings report at the end of March, which last year showed a combined 173.8 million acres intended to be planted with either corn or soybeans, a fact that seems lost on many estimating the 2016 acreage mix.

Justice Scalia’s Passing Improves Prospects for Clean Power Plan’s Survival

With the recent unexpected passing of Supreme Court Justice Antonin Scalia, the chances that EPA's Clean Power Plan will survive legal review have improved. The 5-4 decision to stay the CPP last week indicated the Court would likely strike down the rule. With the current court split 4-4, the identity of that last justice is critical to the prospects of the CPP and may not be determined until after the 2016 elections. In the event the CPP is ultimately upheld by the Supreme Court, we would expect EPA to toll the CPP's deadlines for both filing SIPs and compliance by roughly two to three years.

Japanese Crude Imports Fell Back and Stocks Moved Up Fractionally

Crude runs showed very little change on the week. Crude imports fell back, and on balance crude stocks moved up fractionally. Finished products drew 2.4 MMBbls with almost half the decline in kerosene. Gasoline, gasoil, jet-kero, and fuel oil demands all fell back, but stocks still drew to varying degrees. Major product demand was lower on the week, but it continued rising slightly on a trend basis. Margins have softened in January and into February, but on the week were slightly higher.

How Will the European Gas Market Cope with the Ever Lengthening LNG Market?

With winter nearing an end, is it still worth staying short? The answer looks to be yes. Even though spot prices have come down by 8% M/M and by 16% quarter-on-quarter, prices can still go lower. As always, significant risks remain in place, especially as we enter the summer period, when injection account for over 20% of what happens to supply.

Stress Eases this Week

Financial stress appears to have eased up a bit this week. The S&P 500 rose Friday to Friday and on a weekly average basis. All of the other indicators, such as volatility, high-yield debt and emerging market debt, also staged varying degrees of improvement. The U.S. dollar has been increasingly mixed. Commodities ex-energy are looking marginally better. The Cleveland Fed released its inflation expectations for February, which showed a ratcheting down across all time frames.

U.S. Ethanol Prices Fall; Margins Trending Downward

Record-high inventories and lower oil values drove ethanol prices to a three-week low last week. High demand on the export market prevented sharper declines, though prices are expected to fall further in upcoming weeks. Manufacturing margins were up slightly last week, but they were trending downward by the weekend.

U.S. Consumer Spending Share on Energy Will Hit Record Low

U.S. consumer spending on energy will soon hit a record low as a share of total consumer expenditures. Variations in the consumer energy spending share have been largely driven by oil prices, and the decline in retail gasoline prices should push the share below 3.5% this quarter. As consumers have spent less of their budget on energy goods and services, they have spent more on healthcare goods and services and in restaurants. As oil prices start to recover later in 2016, as PIRA projects, these industries may well face headwinds as the share of consumer spending on energy increases.

End to 2015-16 Heating Season Already in Sight

The mild-weather forecasts weighing on gas prices are reinforcing perceptions of an “early end” to the heating season. As it now stands, the next EIA weekly storage report is likely to feature the last triple-digit withdrawal of this heating season. While the books have not yet closed on February, PIRA’s balances are coalescing around an end-month storage position of ~2.48 TCF, which would yield a year-on-year surplus of ~840 BCF. Consequently, March, largely viewed as a bookend to the season with its seasonally dwindling degree days, is front and center.

The Good, the Bad, and the Potentially Ugly of the U.S. Economy

Recent U.S. data releases on manufacturing, jobs, consumer spending, and housing have been encouraging and pointed to an acceleration in economic activity during the first quarter. Business investment, on the other hand, may experience a contraction in the near term. A firmer-than-expected inflation reading for January is likely to embolden hawkish members of the Federal Reserve policy committee.

Japan’s SPR Will Be Drawn Down Under a New Proposal

The Japanese government released a new proposal about the management of its strategic petroleum reserve. A government stock sale of at least 20 MB/D on average over the next four years is in store, since the current official reserve level is elevated according to the new rule. Separately, the draft recommended an expansion of government storage for LPG by 4.2 MMB in the next two years, based on the positive demand outlook for the fuel.

UK Businesses Will See Lower Gas Prices Later this Year

British firms can expect to see their energy bills fall by between 10-20% this summer as turmoil in the oil market pays dividends for customers. The wholesale cost of gas on the UK market has plummeted by more than 40% in the last year due to a global oversupply and depressed oil prices. The weaker gas price has also caused wholesale electricity prices to slump by more than 30%, because a large amount of the UK's power network is gas fired.

Asian Demand Update: Growth Continues to Slow

PIRA's latest update of Asian product demand shows continued slowing. PIRA's January update had shown growth of 741 MB/D, down from over 1 MMB/D in the December update. The latest average three-month data indicate growth of only 294 MB/D. Looking at the upside, India and Korean growth is still good at 335 MB/D and 179 MB/D (vs. 396 MB/D and 154 MB/D last month). A weak performance was registered by China with growth of only 48 MB/D (255 MB/D last month), while Japan now posts a decline of -274 MB/D (-98 MB/D last month). The current growth assessment for Asia picks up preliminary January data on China and India and full 4Q15 data for all the other countries other than Thailand. Looking at individual products, gasoline accounts for 223 MB/D of the growth, but down from growth of 308 MB/D in our last assessment. Weakness continues in middle distillate demand performance, both gasoil and jet-kero. Asian gasoil demand growth is now 77 MB/D, down from 149 MB/D last month, while Asian jet-kero demand growth has also slowed.

Tighter Europe-Asia Spreads Feed AB Supply Glut Concerns

The specter of JKM dipping below NBP in the coming months looms large, particularly as Japan appears to be contemplating the restart of Tepco’s Kashiwazaki-Kariwa (KK) nuclear facility. It is highly unlikely that such a thing would happen this year; in fact, any restart at KK is not built into the PIRA nuclear forecast in Japan at all at this point, owing to the very high political hurdles that are in place for Tepco in particular. But the fact that it is now on the table is worrisome for Asian gas consumption.

Rising U.S. VMT Growth Supports Strong Gasoline Demand

Since mid-2013, growth in U.S. vehicle miles traveled has displayed accelerating growth. Even with that growth, the pace has been below what traditionally has occurred out of a deep recession and compared to what PIRA’s modeling efforts would indicate. In the most recent VMT data, year-on-year gains remain robust, up over 4% in November. The good year-on-year growth in VMT, seen in the most recent data for 2015, helps explain the strong gasoline demand that has been witnessed. For 2015, PIRA estimates gasoline demand grew 2.5%, or 227 MB/D, the strongest since 2002, when year-on-year growth was 2.8%, or 238 MB/D.

Competition Is Heating Up for Product Exports to Australia

Australia has emerged as a major importer of refined products in the Asia-Pacific region over the past few years due to refinery closures there. Net imports more than doubled from some 233 MB/D in 2010 to about 506 MB/D last year, led by diesel, gasoline and jet fuel. Competition is heating up among exporters to supply Australia, with China and India entering the market Down Under. But Australia’s imports of refined products are expected to only increase slowly from here due to relatively slow demand growth, unless there are more refinery closures, and none are currently expected. Australia alone will not correct the surplus of refined product production capacity in Asia-Pacific.

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

NYC-based PIRA Energy Group reports that oil prices have continued declining under the weight of growing oversupply. In the U.S., a sharp decline in crude imports minimizes commercial stock build. In Japan, crude runs rose while imports rebounded such that stocks built. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Asia-Pacific Oil Market Forecast

Oil prices have continued declining under the weight of growing oversupply. In addition to the physical surplus, the macroeconomic environment has become more unsettled with increased downside risks now being factored into the pricing of "risk assets". Refining margins, which had been healthy, have now come under pressure, thus ultimately pushing back on crude demand which compounds the growing pressure to find a home for crude supply. Containing the surplus will require filling up the least economic onshore storage and using floating storage which will deepen contango structure, weighing on prompt prices.

Atlantic Coal-Gas Switching: Temporary or Structural?

Gas and power markets on both sides of the Atlantic are headed down similar paths in 2016. Storage surpluses are building, gas supply cuts are slow to emerge, and the development of greater gas use in the power sector will offer concrete stages of growth in the weeks and quarters ahead. While European spot and contract prices are still roughly twice the level of Henry Hub prices, both gas markets are competing for coal demand in a manner that suggests more than just a temporary emergence of substitution. Given the price difference, the U.S. market is much farther down the road, but a more structural change is under way within the power sectors of both North America and Europe that will be increasingly linked once LNG exports begin to add to gas demand in the U.S. and gas supply in Europe.

Load Weakness Continues, Renewable Build Grows

Eastern Interconnect weather-adjusted daily average peak loads fell by 1.3% in January. Load growth continued in ERCOT and several Southeast balancing authorities. Spot on-peak power prices increased m/m in most markets with the strongest gains in the Northeast (greater than 60%) as gas basis widened seasonally. On-peak energy prices increase year-on-year in most markets during 2H16 as gas prices move higher. Growth in wind, new TVA nuclear unit and modest forced coal burn limit gas burn gains during 1H16. Eastern coal generation falls by 1.2% in CY16 with a strong second half recovery.

Friday Rally Not Enough to Prevent Week-on-Week Slide for Coal

Despite a notable rally on Friday, coal prices again finished the week down from the end of the prior week. For most of last week, downward pressure on coal pricing came from a variety of sources, including steep declines inequity markets, weaker oil/gas pricing, and lower dry bulk freight rates. Looking forward, coal pricing generally, and FOB Newcastle (Australia) prices specifically, will heavily depend on China’s domestic consumption and import demand. This situation will be cloudy over the next 30-60 days due to the impacts of the Chinese Lunar New Year, and the corresponding lack of clarity in energy data.

Weak Asian LPG Prices Squeeze Global Export Economics

Cash propane cargoes arriving in the Far East in late March were assessed 3% lower near $320/MT. With Saudi Aramco propane CP futures currently expecting a contract price reduction of $5-$10 in March, and spot VLGC freight to Asia near $45, next month’s arbitrage economics look questionable at best. This winter’s milder conditions continue to hamper regional demand, just as the world’s LPG exporters increasingly look to the region to absorb higher flows. Cash butane prices were called 3.6% lower near $345/MT.

Global Equities Again Move Lower

Global equities again broadly fell back on the week. In the U.S., most of the tracking indices lost ground, though the defensive indicator, along with retail and consumer staples managed to post gains. The weakest performer was banking. Internationally, all the tracking indices lost ground. China was closed for their New Year, but Japan, India, and Hong Kong posted significant losses, along with Latin America.

U.S. Ethanol Assessments Strengthened to the Highest Level in about Seven Weeks

U.S. ethanol assessments strengthened to the highest level in about seven weeks. Assessments were boosted by prospects for higher exports, and prices gained despite rising stocks and lower oil and corn values. Production has dropped during the last few weeks, tightening the supply/demand balance. Manufacturing margins were sharply higher, surging as the weekend approached.

Major Contraction

Agri-giant Bunge confirmed this week what ADM said a few weeks ago; 2016 will be challenging. Other agri-related companies like The Anderson’s from Ohio, and Green Plains Energy from Nebraska had their equities decimated this week as earnings sank and major layoffs ensued. Processors of agricultural products are now starting to feel the pain that farmers are all too familiar with after 2015.

California Carbon Declines; Awaits Auction Court Decision

Going into this month’s allowance auction, benchmark contract prices declined again, reflecting oversupply and a lack of concrete long term cap and trade policy signals. Clarity on potential market drivers will begin to emerge in 2016, including the Scoping Plan Update and a verdict on the allowance auction lawsuit, expected any day. PIRA believes auctions would continue, even with an adverse decision, pending appeal to the CA Supreme Court. Otherwise, transportation sector emissions are expected to grow this year, while large declines anticipated for the power sector.

Sharp Decline in Crude Imports Minimizes U.S. Commercial Stock Build

Total commercial stocks built this week to a new record high stock level. With a larger stock build last year, the surplus narrowed to 160 million barrels. A decline in crude imports and another sharply lower domestic crude supply reading were reflected in the first crude stock draw since January 1, narrowing the crude surplus.

New Supply Regime Less Concerned with Adjusting to Weather Deviations

No reason can be seen in the fundamental outlook to expect anything but a further deterioration in spot prices for the balance of the quarter. A few colder than normal days next week and heavy snowfall across portions of the Alps are not going to be enough to turn around prices, which continue their slow deterioration in the face weaker gas demand outside the power sector. Residential/commercial use is clearly the dominant demand center for gas at this time of the year. On average, this week should be the coldest of the year, but nothing could be further from the truth at this point. Storage withdrawals remain well below normal and point toward an upcoming entrance to injection season where stocks will be above the five year average on April 1 despite showing significant deficits going into the previous winter.

No Bottom in Sight for Carbon, but Floor for German Power Approaching

EUA prices continued to fall through early February, and, in spite of Friday's rebound, they are at their lowest level since mid-2013. PIRA believes that downside risks for carbon prices remain: greater supply, a lack of policy action in 2017-2018, reduced demand from forward hedging, and lower gas prices that encourage fuel switching away from coal. There is no doubt that lower carbon compliance costs are a relief for high-emitting units, but in January and February thus far, German lignite units have been ramping down heavily in response of lower prices, suggesting some supply discipline has been emerging.

U.S. Supreme Court Stays Clean Power Plan

The Supreme Court voted 5-4 to stay implementation of the Clean Power Plan (CPP). No compliance efforts need be undertaken until legal review is completed. Efforts to develop CPP compliance approaches have now lost urgency. PIRA had not expected the CPP would survive as written and it was not in our reference case forecast. This decision is unlikely to change California's GHG approach, but it may make RGGI less ambitious in its current program review. Without a replacement for the CPP, prospects for another extension of the renewable tax credits improve.

Japanese Crude Runs Rose, Imports Rebounded Such that Stocks Built

Crude runs rose 103 MB/D on the week, while crude imports rebounded such that crude stocks built 4.4 MMBbls. Finished products drew 1.35 MMBbls, largely on a draw in kerosene stocks and supported by smaller draws for gasoline, gasoil, and fuel oil. Major product demand was higher with gains primarily in gasoil and gasoline. Refining margins continue to weaken from peak levels with gasoline and naphtha cracks falling sharply from lofty levels and fuel oil also easing. Margins, on balance, are still deemed acceptable but off significantly from earlier levels.

High Winter Stocks Warrant Low Prices — for Now

Following a price “correction” from a high north of $2.30 to a dip below $2.00, traders established a tighter range with the front-month contract retracing Monday’s rally on subsequent warmer forecast changes and an anemic inventory release.

Stay of Clean Power Plan Bearish for RGGI

With weakened prospects for carbon pricing for RGGI’s neighbors, the Supreme Court’s stay of the Clean Power Plan is bearish for RGGI pricing expectations, and RGGI allowance prices have declined in response. However, the RGGI program review, to be completed this year, will ultimately set post-2020 caps for the program, determining its stringency.

Negative Interest Rates Are Driving Market Nervousness

The Bank of Japan introduced a negative interest rate on bank reserves two weeks ago. While this move was intended as economic stimulus, it has instead turned out to be a destabilizing influence for financial markets. The prospect of competitive monetary easing by central banks has become more real, as different countries will begin to test how negative policy interest rates can feasibly go. Further, the BOJ action has highlighted the possibility that Japan is nearing the limit of quantitative easing. Key data releases for the U.S. were encouraging, but manufacturing data from Europe and India disappointed.

U.S. Ethanol Stocks Reach All-Time High

U.S. ethanol inventories spiked to a record 22.96 million barrels last week, surpassing the previous peak set in March 2012 by 243 thousand barrels. Stocks are 1.8 million barrels higher than they were at this time last year. Ethanol production increased to 969 MB/D from 959 MB/D during the preceding week, breaking a string of three consecutive weekly declines. The manufacture of ethanol-blended gasoline soared to 8,632 MB/D after having plummeted to 8,155 MB/D in the prior week because of higher overall gasoline output.

China Rally?

Global equity and commodity rallies (ex-gold) are being attributed to Chinese Central Bank currency support which continued after the conclusion of their New Year’s celebrations. A fundamental grain/oilseed problem continues to exist in China however, which could make this most recent “risk on” opinion in ags short-lived.

Financial Stress Remains Elevated

The S&P 500 fell Friday to Friday and on a weekly average basis, though Friday produced a large short covering rally ahead of the holiday weekend. All of the other indicators, such as volatility, high yield debt and emerging market debt, also worsened on the week. The U.S. dollar generally fell in value, particularly against the euro, yen, eastern European currencies and some of the Asian currencies. Commodities had a mixed week with some downward bias still remaining.

U.S. and Brazil Total Fuel Ethanol Exports Up in 2015

The U.S. shipped 799 million gallons of fuel ethanol in 2015, down 1.3% from 809 million gallons in 2014.Brazil exported 493 million gallons of ethanol in 2015, up 33.6% from 369 million in the preceding year.

Proposed Increase in Russian Taxes Would Significantly Reduce Operator’s Margins

PIRA estimates that a recent proposal to increase Mineral Extraction Tax (MET) in 2016 would cut operator’s margins by 40% and reduce drilling activity. The proposal would reduce by half the current $15/Bbl MET tax free allowance and would bring an additional $12 Billion in revenue to the government. On a yearly average, PIRA estimates Russian production to be slightly up in 2016 (140 MB/D decline January to December 2016) and decrease by 170 MB/D in 2017. Our forecast already anticipates a more burdensome tax regime in 2016 but we will continue to monitor the situation and revise our forecast as needed.

Plainly Spain: Europe's Number 1 Gets Knocked out of Position by UK

Having been nudged out of its place as the number one buyer of LNG in Europe, Spain will still play a critical role in balancing Atlantic Basin supply due to the considerable amount of contracted LNG in its portfolio (see chart below); contracted LNG that it has underlifted for many years. With limited pipeline access to the rest of Europe, Spain has quickly re-invented its role in the LNG market by re-exporting, diverting, or reselling to the wider spot market, in essence providing a key connection between the Atlantic Basin and Asian markets in a way that no pure portfolio player has been able to do thus far. It has been a lucrative business as well, but its role is fading now that both LNG producers and many buyers have taken to tendering unwanted volumes. The fact that LNG deliveries to the U.K. have surged past Spain is indicative of a supply push to Europe that is just beginning on the part of other Atlantic Basin and Mideast suppliers.

UK Gas Prices Set to be Reduced

British Gas and EDF Energy have announced they are cutting their gas prices, the last of the big six energy suppliers to do so. British Gas unveiled a 5.1% price reduction, followed swiftly by EDF's announcement of a 5% cut. British Gas's price change takes effect on 16 March, while EDF's kicks in eight days later. The moves benefit customers on a standard domestic gas tariff. Britain's big six energy suppliers have been under pressure to pass on savings to customers after a 57% drop in wholesale gas prices since this time last year. E.On was the first to announce a cut this year of 5.1%, followed by similar reductions by SSE, Scottish Power and Npower.

Euro Carbon Sensitive to Natural Gas Prices; Subject to Downward Price Triggers

EU ETS oversupply conditions have not changed: higher auction volumes, upcoming 2016 free allocations, and incentives for industrial sales. Weak structural demand is accompanied by low gas prices, reducing coal-fired generation competitiveness. EUAs are nearing parity with implied carbon values and will more closely track natural gas price movements. We do not currently expect near-term policy support for prices. A downward price trigger, like a cancelled auction, could have a sustained negative market impact.

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

At midmonth, February looks to be 6% warmer than the 10-year normal for the three major OECD markets with oil-heat demand weaker than normal by 279 MB/D. However, the three major regions are roughly 12% warmer on a 30-year-normal basis.

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.

Click here for additional information on PIRA’s global energy commodity market research services.

NYC-based PIRA Energy Group reports that recent Oklahoma wastewater directives not likely to have material impact on crude production. In the U.S., hefty crude imports propelled U.S. crude stocks higher. In Japan, crude runs recovered, imports rose and stocks built. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Hefty Crude Imports Propel U.S. Crude Stocks Higher

Recent crude import have averaged about 0.88 MMB/D higher than last year, roughly the same magnitude as the decline in domestic crude supply. Crude runs being about 550 MB/D higher have restrained the increase in crude stocks. Gasoline and jet demand have been growing, but distillate has been very weak. The gasoline balance sheet cleaning up relative to the distillate balance sheet is reflected in distillate prices weakening versus gasoline. Looking forward, a strong increase in CDU maintenance should reduce crude runs and contribute to another crude stock build. Gasoline demand and seasonally declining yields should drive a steeper-than-average draw, as distillate demand results in an average draw.

Potential Producing Region High Storage Alarm Bells

Though the books have only just opened for March, the month already may have seen its final double-digit withdrawal of the heating season. Preliminary balances suggest next week’s report will feature at best a minor withdrawal, followed by a sizable 30-40 BCF injection for the week ending March 18th. Consequently, U.S. balances are on pace to end the month with a storage position near ~2.5 TCF, a remarkably similar tally to end-February and the record set in 2012. Thursday’s reported draw also resulted in a steep expansion to 911 BCF in the year-on-year storage surplus. With additional gains looming, the overhang will soon top the 1 TCF threshold.

German Lignite Is Now Cash-Flow Negative

The latest earning calls by major power generators confirm PIRA's view that the Continental markets continue to be on an unsustainable path, with utilities now feeling increasing pressure from rating agencies (a sign of growing credit concerns). More specifically for Germany, the slump in commodity prices is keeping wholesale prices at historically lower levels, with current prices unable to cover large portions of the baseload fleet — lignite and nuclear. Going forward, while power prices may be stabilizing as a result of gains in oil and coal prices, the lack of retirements will continue to squeeze margins.

Coal Price Rebound Continues on Strike Risks and Higher Oil

Seaborne coal pricing generally moved higher last week, with a looming strike at the Cerrejón mine in Colombia and rising oil pricing providing some upward momentum to coal pricing. There is a fundamental rebalancing that is (slowly) going on, with some discipline on the supply side and strengthening on the demand side. This is expected to lead to a more structural recovery in pricing in late-2016 into 2017. Additionally, we believe that the coal market is underestimating the impact that a recovery in oil prices will have on coal production costs and pricing. PIRA retains a bullish outlook relative to the market starting in 4Q16.

RGGI Carbon Auction Reflects Lower Pricing

RGGI’s carbon allowance auction saw strong demand with compliance-oriented buying, but it cleared below the secondary market. PIRA continues to expect that this year’s Program Review process will result in a tightening of caps post-2020. Price volatility may also lead to consideration of a more robust price floor. The prospect of continued operation of Maryland coal units could mean higher-than-expected emissions.

The U.S. Exports First Ethane Cargo

The first ever long-range ethane cargo loaded last week at Sunoco’s Marcus Hook, PA, terminal in the Northeast United States. The cargo loaded and departed midweek (March 9th) and headed for its destination in Rafnes, Norway, where it is expected to arrive on March 29th. The JS Ineos Intrepid has a 172 MB (27.5 thousand cubic meter) cargo capacity. The ethane cargo will be used as feedstock for Ineos’s Norwegian petrochemical facility.

U.S. Output Declines

Despite a drop in U.S. ethanol production for the second consecutive week, stocks built by 683 thousand barrels to a record 23.3 million barrels. Total inventories are up a remarkable 2.1 million barrels from 21.2 million at this time last year.

Way Ahead of Schedule

Pictures of heading wheat the second week of March caused more than a little concern for many. The HRW crop was pushed way ahead of schedule with the recent warm snap and is now at risk of damage due to cold or wet conditions over the next month or so. The already massive short position obviously didn’t help either, and while we’re bearish flat price, it’s best to sit this one out.

Financial Stress Continues to Ease

For the fourth straight week, the S&P 500 rose Friday-to-Friday and on a weekly average basis. While volatility was little changed, all of the other indicators, such as high yield debt and emerging market debt, again posted solid gains. The U.S. dollar lost ground on the week against a host of currencies. Commodities ex-energy are looking significantly better the past several weeks (an eight-week uptrend). Energy has also moved higher the last few weeks.

Japanese Crude Runs Recovered, Imports Rose and Stocks Built

Crude runs recovered about one third of the decline posted the previous week. Crude imports rose sufficiently to build crude stocks 6.7 MMBbls. Finished product stocks drew, largely due to end-of-season kerosene stock declines and lesser draws in naphtha, gasoil, and gasoline. This was despite across-the-board demand declines in all the major products. The indicative refining margin remains good. This week saw higher gasoline and kero-jet cracks, while naphtha and fuel oil cracks eased.

Why Is TTF So Weak and What Does That Mean for Spreads Going Forward?

Gas price spreads around Europe are a series of levers. You push down on one side, spreads will open up. Push down on another, spreads will close. We are seeing this levering already at play on the TTF relative to other Continental European hubs and expect more, as increasing volumes of LNG dock on European shores. TTF is looking weak so far this March vs. nearly all N.W. European Hubs despite Groningen production dropping to historically low levels (for this time of year) and low LNG deliveries into the Dutch pipeline system. Storage, namely the 4 BCM Bergermeer facility, has really stepped up to fill the void created by lost production volumes. While these extra volumes don’t fully replace Groningen, between the historically low demand, extra storage volumes, more Norwegian volumes, and extra Russian volumes this difference has been made up.

Coal Supply Cuts Increase

While underlying demand conditions for coal — and natural gas prices — have weakened further, production cuts have accelerated. In addition, generators are turning more to “forced coal burn” in order to assist in trimming burgeoning inventories. This is setting the stage for an expected normalization of market balances in 2017.

California Carbon Slipped Below Floor; Auction Decision Looms

Sharp declines observed in the CA ETS have seen secondary market prices dipping below the auction floor price, particularly for prompt delivery. More information regarding the validity of allowance auctions could come any day — even in the event of a negative decision, consigned allowance auctions could continue.

U.S. Refiners Paid over $1 Billion in RIN Costs in 2015

U.S. refiners paid 1.27 billion to comply with RFS2 last year.

Funds Keep Selling Corn

In a week when grains and oilseeds enjoyed noticeable price appreciation, corn participation was limited and one look at last week’s Commitment of Traders showed the reason as Funds just keep selling, seemingly oblivious to any possible planting disruption.

The Expanded Panama Canal Set to Open for Trade in 3Q16

The expanded Panama Canal will benefit U.S. exports of LPG and help support U.S. LPG prices. But for crude/condensate exports, VLCC exports around the Cape of Good Hope are still generally more attractive than Canal voyages.

LNG's Generation X Comes to Life

The specter of production shut-ins remains a constant whisper throughout the industry unless demand growth surges in the short term. Lower prices do suggest a lift in the demand curve is possible, but it is still difficult to place all of the world’s emerging LNG supply without an extremely low price that cracks open more coal-to-gas switching.

Global Equities Post Another Positive Week

Global equities posted a fourth straight week of gains. Many of the tracking indices continue to display significantly better looking trends. In the U.S., almost all the tracking indices were higher on the week. Energy, materials utilities, and retail did the best, while banking lagged. Internationally, the tracking indices were a bit more mixed. The best performers were Europe and Latin America. Japan, emerging Asia, and China lagged.

Ethanol Prices Slide

U.S. ethanol prices tumbled last week as inventories were near record highs. Manufacturing margins were stable as corn costs also declined.

What Ails U.S. Distillate Demand?

Weekly distillate demand has been running about 700 MB/D below forecast. PIRA has pointed to the adverse impact of a strong dollar on U.S. industry as well as the crippling impact of low commodity prices on mining as likely causes for this demand weakness. We estimate their combined negative impact on diesel demand is roughly 320 MB/D, leaving the remaining 380 MB/D to be explained by other factors such as bad weekly demand data. The recent 278 MB/D upward revision in the December PSM of the DOE weekly demand data is testimony to the kind of upward revisions that are possible. There will be more upward revisions to the weekly numbers when the PSM monthly data for January and February are released.

Will the Rio Olympics Help Brazil’s Economy and Oil Demand?

Historically, the summer Olympic games have tended to support economic activity in host countries, and there has also been a positive historical pattern between hosting the Olympics and oil consumption. This year, Rio de Janeiro will host the first Olympics in South America, but the typical Olympic effects on the economy and oil demand have not evident in Brazilian data. Recent encouraging signals from financial markets, however, suggest that the Olympic lift may materialize after all.

Egypt Reduce Gas Prices for Industrial Users

Egypt will reduce the price it offers natural gas to steel and iron factories, Minister of Industry Tarek Kabil told a news conference last Wednesday. The reduction brings gas prices for the industries back to their 2014 levels, before prices were hiked as part of a broader government plan to cut subsidies, including those to heavy industry. At the time, the government increased gas prices by 30-75%. Egypt in December relaxed a commitment made by the previous government to abolish subsidies on gasoline, diesel and natural gas, and said lower global oil prices and the discovery of a massive offshore gas field meant it could move more slowly on the pledge.

Recent Oklahoma Wastewater Directives Not Likely to Have Material Impact on Crude Production

On March 7th Oklahoma’s oil and gas regulatory body issued a directive to reduce the wastewater injected into disposal wells in an area covering 5,000 square miles and over 400 disposal wells. This follows on the heels of a directive issued on February 16th impacting over 200 wells. Both the February and March actions represent an expansion in scope from directives issued in the state over the past year. However, PIRA does not see a material impact on oil production. The directives are largely voluntary and aim to reduce water disposal, not production. At most, we estimate a potential impact of 30 MB/D of crude. But the actual impact will likely be much less as operators come up with other ways to dispose of produced water.

Iraq Oil Monitor, 1Q16

Rising insecurity and worsening regional tensions resulted in multiple attacks and a 25-day shutdown of the ~600 MB/D Iraq-Ceyhan pipeline from mid-February. In the south, rising tribal violence and organized crime could deter investment and slow oil development. Southern exports averaged nearly 3.3 MMB/D from November to February, but further gains will likely be difficult as 2016 investment plans were reportedly reduced from $23 to $9 billion. The KRG-Baghdad oil export deal remains effectively dead, and PM Abadi’s plans for a major cabinet reshuffle has the potential to alleviate months of political paralysis or intensify a power struggle within the government.

Growth-Friendly Policy Announcements from China and Europe

Economic targets announced at this week’s Chinese National People’s Congress pointed to a growth-friendly policy stance. But policymakers also paid attention to structural issues, such as reforming state-owned enterprises. Chinese economic data for January/February were mixed, and a slowing in industrial production growth is likely to alarm policymakers. Easing measures that the European Central Bank introduced this week went beyond markets’ expectations. Positive manufacturing data from Germany and the U.K. suggested that industrial activity in the developed world may be starting to turn around.

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.

Douglas-Westwood (DW) held their inaugural Business Breakfast event in London last week at Southwark Cathedral. The purpose of the event was to showcase DW’s latest research and to offer a network opportunity for their financial sector and energy industry clients.

DW founder John Westwood chaired the proceedings and also gave an introductory talk focusing on macro challenges and opportunities in the current cycle including skills transfer, geographic and sector diversity and cost-effective technical innovation. John also highlighted the significant drive towards the use of natural gas and the potential for the supply/demand gap for oil to narrow later this year.

Research Director Steve Robertson provided a summary of trends in a number of key offshore sectors including floating production, LNG, subsea, offshore logistics and compared the outlook for the onshore and offshore production, noting that we should expect significant extra oil production from long-lead time projects that were committed to prior to the downturn. A comparison was also made between the previous outlook for Deepwater expenditure one year ago and the current view now, with some 92 projects having been delayed/deferred or cancelled. It was also suggested that 2016 and 2017 could be very difficult years for subsea equipment providers that to-date have been partially-insulated from the downturn by significant backlogs – these backlogs are now rapidly declining and order levels remain low.

Ben Wilby provided an in-depth review of DW’s North Sea Decommissioning report, explaining the underlying data, methodology and outputs by country. Ben illustrated how the UK will provide the bulk of decommissioning opportunity overall and the vast majority of North Sea removal work that will occur in the next decade, as Norway (a less-mature producing province with significantly less installed infrastructure) sees most of its respective activity post-2030. The various approaches to decommissioning (including offshore and onshore ‘deconstruction’ and single-lift & transport to shore) were discussed along with potential cost savings from single-lift operations – providing they become commonplace.

Katy Smith finished the session by sharing DW’s latest views on Iran, including an update on sanctions, the outlook for oil and gas production, specific projects that are known to be moving ahead and the expectations for rig requirements, both offshore and onshore. It was explained how DW has taken a conservative view of the potential activity, given a number of evident challenges in working in Iran not least the bilateral US sanctions that remain in place, the caution amongst foreign banks regarding the processing of Iranian payments and the uncertainty surrounding the structure of the Iranian Petroleum Contract.

DW would like to thank everyone that attended – this will be the first of a series of such events throughout the year. If you are interested in attending, please register your interest with Ellie Pickering.

Steve Robertson, Douglas-Westwood Faversham

The protracted low price environment is pushing the offshore marine supply chain to breaking point. Rig managers, OSV contractors and subsea vessel owners are trading at 60-70% discounts to 2013 highs and every week seems to usher in a new wave of profit warnings, impairments or defaults. Although E&P customers are also taking a beating, they are firmly in the driving seat when it comes to bargaining power.

Taking the jack-up market as a microcosm of the wider offshore marine industry, DW estimate that average jack-up fixtures have fallen by 50% whereas average O&M costs per rig have seen reductions of just 25-35. In short, buyers have shown far greater efficiency in cutting their supply chain costs. Whilst E&P companies are able to take advantage of major oversupply throughout the entire offshore marine segment, contractors are left footing the labor bill. Since 2014, labor costs have fallen just 10% as compared to R&M or SG&A associated costs at 35% and 30% respectively. Despite lower demand, there is still a limited number of competent crews (particularly highly trained personnel for DP operations and subsea work) and contractors are loathe to cut ties with capable people for fear of losing out in the (inevitable) upturn or jeopardizing LTI and HSE performance, which in turn reduces the marketability of their assets.

With dayrate growth unlikely over the next 12-18 months and the supply/demand situation expected to only get worse, offshore marine players need to optimize their bottom line strategies and breakaway from prevalent operating models. Mid-sized owners may be evaluating the potential of greater outsourcing and the scale players may see merit in vertical integration. The answers will be unique for everyone but when the market does rebound from current depths, we can expect those that adapted to be the ones still standing.

Iran’s position in the international O&G market was expectedly one of the highlight topics of IP Week. Approximately one month after the lifting of EU and US nuclear sanctions on Iran, the country’s Energy Minister has announced Tehran needs to attract a huge $200 billion in international investment to modernize its existing oil infrastructure.

Unwinding of sanctions, coupled with discussions over a new Iranian Petroleum Contract offering more flexible terms and conditions, serve as direct incentives for international investors. Oil majors and former business partners of Iran including Total, ENI and Repsol have already expressed clearly their interest to resume business in the country. A sustained return of 500,000 barrels per day to the crude markets from Iran would create significant downside risk on Douglas-Westwood’s (DW’s) expectation of a slow-paced 2H2016 price recovery. The importance of Iran was confirmed recently by the US EIA’s Short-Term Energy Outlook: “most of the increase in global surplus crude oil production is attributed to Iran”.

DW holds a conservative view on the sustainability with which Iran can return significant additional crude volumes to the market. A degree of uncertainty on the timing, structure and implementation of the new oil contract model remains. Given the level of required investment, significant involvement will be required from international parties who will need clarity on the new Iranian operating environment before committing capital and resource. Given the remaining uncertainties and the enduring risk attached to operating in Iran, the sector will take time to attract required investment.

Nevertheless, as outlined in the recently published “Iran Oil & Gas Market Forecast 2015-2019”, DW anticipates a meaningful upside potential for drilling and production over the next five years from projects that were stalled, delayed or under-invested during the sanction period. Notably, the North Pars, Goldham and Ferdowsi gas fields, as well as the South Pars oil layer are likely to tender for international investment. Any immediate growth in Iranian petroleum exports, however, is likely to originate from existing storage capacity, whereas more significant rises in production will be coming to the market after depletion of storage oil reserves.

Marina Ivanova, Douglas-Westwood London