Following the announcement of Douglas-Westwood joining the ESIA Group on 7th December, we were delighted to be able to exhibit with our new colleagues at PROSPEX 2015 in London on 9th and 10th December. Together with ESIA members Hannon Westwood, Novas Consulting and Richmond Energy Partners, we looked to showcase the group’s well-established E&P consulting and analytics offering alongside DW’s respected oilfield service-focused capabilities.

PROSPEX 2015 commenced with the OGA’s Gunther Newcombe providing an overview of the current state-of-play in the North Sea and information on the upcoming 29th and 30th licensing rounds. The 29th round will feature acreage in the frontier Rockall basin, an area opened up considerably by a government-sponsored 3D seismic shot earlier this year. Additionally, Mr. Newcombe outlined the OGA’s strategy for the coming years – looking to encourage exploration in both mature and frontier areas as well as greater collaboration between operators.

Ireland proved to be a key theme over the two days of PROSPEX following the country’s most successful licensing round this year with 43 applications submitted – mostly for acreage on the Atlantic Margin. This is nearly three times the number of applications received in the 2011 offering.

As is the usual focus for PROSPEX, a host of independents exhibited oil & gas prospects from around the world. Many companies were advertising promising opportunities around the British Isles, whilst some players chose to introduce prospects from unexplored international regions. Tullow Oil demonstrated the potential of a number of blocks from either side of the Atlantic whilst Envoi showed-off finds from all corners of Africa.

With a mere four orders so far this year the Floating Production System (FPS) sector is suffering. However, things are anticipated to be better next year, with the US Gulf of Mexico (GoM) in particular, having a surprisingly bright future. The area is expected to have as many orders next year as there were globally in 2015 and this positive upturn has already started with the Appomattox Floating Production Semi-Submersible (FPSS) being awarded in Q3, the most expensive unit ordered all year.

A few years ago this would have been unthinkable, with interest in the deepwater GoM waning as numerous companies gave up their offshore acreage to focus on the shale market onshore. Yet the declining oil price has, if anything, bolstered interest in the region. An employee of a major engineering company recently told Douglas-Westwood (DW) of their surprise at how many tenders they were invited for in the GoM.

This demonstrates the fact that the US GoM is an attractive investment area at a time of low oil prices, with field development approvals despite the low oil price. This highlights the appeal to operators of a well-established, politically stable investment climate and until the oil price improves, most frontier areas are likely to be ignored.

A crucial point found in DW’s new World Floating Production Market Forecast 2015-2019, Q4 update, however, was that units ordered next year will be significantly cheaper than those ordered before the downturn. For the US, cheaper developments were already the norm due to smaller reserves, leading to a preference for ‘mini-FPS’ developments. The downturn has seen even these costs slashed with the Mad Dog Phase 2 development that was uneconomical at $110 a barrel being ready for a final investment decision next year, after numerous front end engineering design revisions, despite the bleak oil price forecast.

Regardless, any upturn after a dismal 2015 will be greeted gratefully from the array of shipyards and suppliers who are hurting badly in the current environment.

Marathon Oil Corporation (NYSE: MRO) announces that the Company has signed an agreement for the sale of its operated producing properties in the greater Ewing Bank area and non-operated producing interests in the Petronius and Neptune fields in the Gulf of Mexico for $205 million. The buyer will assume all future abandonment obligations for the acquired assets. These assets represent a majority of the Company's operated and non-operated producing properties in the Gulf of Mexico. The effective date of the transaction is Jan. 1, 2015. Closing is expected before year end.

Marathon Oil will retain its interests in certain other producing assets and acreage in the Gulf of Mexico, as well as its interests in the Gunflint development and Shenandoah discovery.

Marathon Oil Corporation is a global exploration and production company. Based in Houston, Texas, the Company had net proved reserves at the end of 2014 of 2.2 billion barrels of oil equivalent in North America, Europe and Africa. For more information, please visit the website here.

NYC-based PIRA Energy Group reports that Brent crude prices staged a modest recovery from late August through mid-October, but then prices ran into strong headwinds. In the U.S., commercial oil inventories fell this past week. In Japan, crude stocks posted a strong draw. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

European Oil Market Forecast

Brent crude prices staged a modest recovery from late August through mid-October, but then prices ran into strong headwinds. However, the price increase of over $2/Bbl on October 28 could be an early taste of a rally that PIRA expects once the January contract is the front-month price and December inventory declines become evident. Refinery margins will hold up better than generally expected.

More Intensive Price Weakness at Henry Hub Overshadows Broader Market Weakness

The broader market downturn has gathered momentum despite many prices decoupling from Henry Hub in late October. While the dust has not settled, all upstream markers are now floundering near the $2 mark, closing this year’s longstanding gap between Dominion South and Westcoast St. 2 prices. The stepped-up assault against HH due to storage congestion in the Producing Region will end sooner rather than later, specifically when withdrawals commence. However, that is not likely until mid-November, and the timing and sustainability of a price recovery is murky given bearish weather risks.

Exports/Renewables Push Germany Up; France Bearish

PIRA’s price forecasts for Germany have been moved up on the back of a less bearish demand outlook, resilient exports, and a downgraded renewable generation outlook. The timing of the lignite stand-by reserve is slightly more bullish than expected, but the interaction between this stand-by reserve and market prices will depend on details of the dispatching. However, hedging of these units is no longer needed, which is bullish for the back of the forward curve.

Asian LPG Prices Push Higher

Asian LPG prices jumped higher on stronger crude and as speculators expected Saudi contract prices for November to increase by as much as $40/MT from current levels. The propane FEI gained 7.8% to $471 by Friday’s settle. Butane gained to widen its premium over propane to over $20/MT. With both LPG components trading at a premium to naphtha, the feedstock is priced out of petrochemical usage.

Near-Term Coal Pricing Outlook Remains Soft; 4Q16 Pricing Turns Somewhat Bullish

Despite some strengthening currencies vs. USD, Pacific Basin physical prices moved slightly lower in October due to a weaker oil market, Chinese coal pricing cuts, and insufficient supply discipline from Australia. With no clear evidence that China’s thermal coal imports will soon stabilize, PIRA maintains a bearish outlook for the Pacific Basin. Atlantic Basin prices moved somewhat higher in October, with stronger European coal burn giving CIF ARA (Northwest Europe) and FOB Richards Bay (South Africa) prices a boost. Similar to the Pacific, we have lowered our previously bearish forecast again, although we are now above forward for 4Q16.

Ethanol Prices Exhibited a “V-shaped” Pattern in October

U.S ethanol prices fell early in the month, but they rebounded during the second half as the market tightened. D6 RIN prices soared.

Wheat Shorts Cover

Friday’s Commitment of Traders report confirmed one worst kept secret in the markets while the heavily-watched wheat short declined enough to give the Chicago market a bit of a breather, though Kansas City saw the addition of more shorts.

Climate Policy in Flux in Canada

The victorious Liberals had the least specific climate platform and we do not expect changes to Canada’s GHG targets for global negotiations. Provincial premiers will join the talks. A broader climate policy discussion will follow. Ontario and Quebec announced aggressive 2030 goals, and Ontario continues planning for a carbon market link with California and Quebec. Alberta’s new government tightened the large emitter carbon program, impacting oil sector and pressuring coal. British Columbia began working to limit carbon intensity of LNG.

Canadian Elections: Liberal Victory Does Not Materially Change Oil Pipeline Outlook

The surprisingly decisive majority win of the centrist Liberal Party in Canada’s October 19 federal election does not materially change PIRA’s long-term outlook on new Canadian oil pipelines. PIRA still believes that at least one new Canadian pipeline project will come online at some point after 2020. This is in line with our view that crude price weakness and a slowdown in western Canadian production growth have delayed the urgency for new pipeline capacity until post-2020. That said, the Liberals’ support for a carbon price and promise to strengthen the environmental review process for oil projects have the potential to increase costs or contribute to delays for the oil industry.

Global Equities Slightly Lower

Overall global equities were down slightly on the week, though the U.S. S&P 500 gained a bit. For the U.S., retail and consumer discretionary were the best performers. Energy was little changed. Internationally, all the tracking indices lost ground with emerging markets, emerging Asia, and BRICs putting in the worst performances. With regard to individual markets, Argentina did the best for the week, posting a nearly 10% gain, and holds a 33% year-to-date gain, in dollar terms.

Asia-Pacific Oil Market Forecast

High stocks, both crude and product, along with October crude stock building because of refinery maintenance were enough to force prices to retrace earlier gains. Another short-term negative for price is the desire by some companies to reduce inventories for end-year accounting purposes (LIFO). Longer term, the market will increasingly need additional barrels, even after accounting for the return of Iranian barrels in spring 2016. By 2Q16, the market will have to begin signaling that more oil will be required and prices should begin a more sustained recovery.

Strong Supply Undermines Focus on Improving Demand

Buyers of Russian contract gas are not wasting any time in pursuing the minimum annual total even if they believe that oil-indexed prices will move lower. With LNG supply building on the water, pressure on spot prices will increase over the Gas Year and contract gas buyers want to be in a flexible place to take advantage of the price weakness.

Western Grid Market Forecast

Compared with September, spot on-peak power prices were down across the board in October, led by a $3/MWh drop at Mid-Columbia. Palo Verde prices fell by ~$2/MWh and the California hubs saw only slight declines. Warmer than normal weather and generation/transmission maintenance lent support to California electricity prices. Changes to the forecast include downward revisions to gas prices through the first half of 2016 and a lower hydro generation forecast based on early runoff projections. As a result, we remain bullish on Mid-Columbia heat rates through 1Q16. Southwest implied gas heat rates should also benefit from lower gas prices, with CCGTs again displacing higher cost coal units in the Southwest. However, all markets look weak during 3Q barring sustained hotter than normal conditions.

Dry Bulk Freight Market Struggles to Find Upward Momentum

Cape freight rates weakened during October with the 5TC average falling from just under $15,000/day to close to $9,000/day. Bunker fuel prices remain low, providing little support for rates. Australian iron ore exports dipped slightly month-on-month from strong September levels, with Brazilian iron ore loadings showing a similar trend. New Cape deliveries have started to outstrip Cape demolition, leading to a return to Cape fleet expansion. PIRA has taken a more bearish outlook for Cape freight rates through 2016, largely due to a notable drop in Cape port delays and low bunker prices capping rate increases.

U.S. Ethanol Demand Up; Stocks and Production Decline

U.S. ethanol-blended gasoline manufacture has risen for three consecutive weeks, reaching a near-record 9,162 MB/D the week ending October 23. Ethanol inventories declined by 599 thousand barrels to 18.3 million barrels, the lowest level of the year.

Constructive Tone of Economic Data Is Resulting in Improved Market Sentiments

The mood in global financial markets brightened considerably during October, as major market indices climbed back to levels last seen in mid-August. Recent dovish actions by developed world central banks likely played a role in boosting market confidence. But encouraging data from developed and emerging economies were much more important influences in all likelihood. This report also discusses U.S. GDP and other recently released third quarter data.

U.S. Commercial Stocks Draw

For the first time in several weeks, overall U.S. commercial oil inventories fell this past week. Strong reported demand, up 830 MB/D on the week, at the same time as refinery operations are still being impacted by large scale plant maintenance, caused product stocks to decline. The crude stock build moderated as runs increased and crude imports declined. The year-on-year stock surplus still managed to increase almost 5 million barrels to 170 million barrels as this week last year had an even larger stock decline.

Production Anemic, Demand Strong Implies More Upside Risk to U.S. Exports

Year-on-year net shipments of U.S gas into Mexico remains stout. For October, exports are projected to average ~2.9 BCF/D, a whopping gain of ~0.9 BCF/D year-on-year. Growth is being driven by both rising demand and dwindling supply. Notably, domestic natural gas production is running ~0.5 BCF/D lower year-on-year, a development that will likely persist as PEMEX budgets remain constrained and gas rig counts remain at record lows. But higher demand reflects a trend with staying power as new gas EG capacity and industrial projects come online. PIRA’s Reference Case exports to Mexico appear increasingly subject to upside risks if new pipeline interconnectivity comes online next year in a timely fashion.

Biofuels Programs Move Forward in Over 60 Countries

The market for ethanol in China has opened up. The country plans to resume building corn-based ethanol plants after a decade-long ban.

S&P 500 Continues to Gain

The S&P 500 posted a fourth week of gains. Also, all of the related indicators improved again (Russell 2000, volatility, high yield credit and emerging market credit). Overall, commodities eased, as did ex-energy. Oil was also lower. Palladium, which had posted six straight weeks of gains, was modestly lower for the third straight week, while aluminum fell again. With regard to currencies, the U.S. dollar was mostly stronger, most notably against the euro and key eastern European currencies.

Japan Crude Runs Soon to Rise, Crude Stocks Post a Strong Draw

Crude runs eased again and should be reaching a seasonal bottom as turnarounds begin to wind down. Crude imports were very low and stocks drew 5.5 MMBbls. Finished product stocks built slightly due to higher naphtha and kerosene stocks. Product demand, while lower for the single week, has begun to rise on a trend basis. The indicative refining margin was modestly higher on the week as all the cracks other than gasoline improved.

Bangladesh Revises Gas Rates in Preparation for LNG

The government of Bangladesh decided to combine the rate for locally extracted natural gas with re-gasified imported LNG as recommended by a six-member expert committee. Meanwhile, the government is set to prepare the final draft in consultation with Excelerate Energy (EE) for installing the LNG terminal at Moheshkhali. As per the deal, the company will implement the project on build-own-operate-transfer (BOOT) basis to meet the growing demand of the gas and it would be transferred to the government after the 15 years.

Lower Refinery Maintenance, Higher Crude Runs Drive Expected November and December Crude Stock Draw

The latest view of the October U.S. crude balance indicates that monthly end-October crude stocks will set a new U.S. record, surpassing the previous April 2015 peak by 1.3 million barrels, to 485.1 million barrels. We believe that stock levels will fall quickly from that level, however, as refinery CDU outages rapidly decline and crude runs pick up. We also expect domestic crude supply — crude production plus balance item — will continue to erode, while crude net imports should be largely unchanged from October levels. For the first quarter of 2016, higher crude runs, lower domestic crude supply, and somewhat lower crude oil net imports result in a significantly lower stock builds, compared to the first quarter of 2015.

Henry Hub Free Fall in the Face of New U.S. Supplies Implies Weakness for NBP

Extremely strong gas exports out of Norway and Russia are playing a role in cooling off NBP prices, but it is more LNG supply that would accelerate a decline in November and December assuming normal weather. Confidence levels regarding the speedy availability of attractively priced Atlantic Basin cargos are justifiably high given weak demand in Asia, combined with an ongoing surge in supply there.

Slow Capital Formation Has Inhibited Oil Demand

The decline in oil prices has not led to the promised increase in GDP. In fact, labor productivity growth, the presumptive engine of increased GDP growth, has actually slowed in the developed countries. Slower labor productivity growth is attributable to slower rates of capital formation. Because oil and capital are complementary factors of production, oil demand growth has also been adversely affected. We believe that capital formation has been delayed. The factors that pull the economy out of recession are out of sequence. Instead of residential and non-residential fixed investment being the prime movers for GDP growth, as has been the case in past recoveries, the current recovery in the U.S. was led by the household sector. Expansionary monetary policy repaired household balance sheets, which led to increased household consumption. We believe that in the next two years there will be a substantial pick-up in business fixed investment. Following the Keynesian paradigm, this will be followed by a new bout of consumer spending. Both the increase in capital formation and the subsequent increase in consumer spending will lead to increased oil demand growth.

North American GHG Quarterly Update: Canada

The victorious Liberal party had the least specific climate platform of the three major parties in the election, and we do not expect changes to Canada’s GHG targets for the global UNFCCC climate negotiations. Provincial premiers will join the Paris talks, highlighting the new focus on provinces. A broader climate policy framework will be discussed after Paris, as additional policies will be needed for Canada to meet 2020 and 2030 targets. Ontario in May announced an aggressive 2030 emissions target of a 37% reduction vs. 1990; Quebec followed in September with a 2030 target of a 37.5% reduction. Both provinces will likely need to address the transport sector to meet targets. Ontario continues planning for a carbon market link with California and Quebec, with the program start as early as 2017. Alberta’s new NDP government has set up a Climate Change Advisory Panel to drive discussions and advise the Minister. Alberta also tightened its large emitter carbon program, with greater intensity reductions and higher compliance fees impacting the oil sector and pressuring coal generation. British Columbia began work on regulations designed to limit the carbon intensity of LNG projects.

U.S. August 2015 DOE Monthly Revisions

DOE released its final monthly August 2015 (PSM) U.S. oil supply/demand data last week. August 2015 demand came in at 19.81 MMB/D, which is 50 MB/D lower than what PIRA had carried in its monthly balances. Compared to the DOE weeklies, total demand was lowered 429 MB/D, largely a function of the 704 MB/D reduction in “other.” Distillate was revised higher by 201 MB/D and resid demand raised 82 MB/D. Total demand for August 2015 versus August 2014 grew 414 MB/D, or 2.1%, a slowdown from the 700 MB/D growth versus year-ago seen in June and July 2015. Kero-jet demand again outperformed the barrel average, higher by 4.9%, similar to what was seen in July. Distillate lagged the barrel average, up only 0.3%, while gasoline and “other” also underperformed slightly, but each still up about 1.7% versus year-ago.

North American Gas Forecast Monthly

For many months, PIRA has warned of an impending Producing Region (PR) “storage crisis” unfolding in the early stages of the heating season due to the capacity constraints and record high seasonal storage carries throughout the summer. With threadbare margin available to avoid extreme congestion and a related meltdown of Henry Hub (HH) prices, the past month’s mild weather, and more of the same expected for November have been more than the market could handle. Consequently, the past week’s HH cash price crash from the mid-$2.50s toward $2/MMBtu should not be perceived as an “out of the blue” shock.

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

October weather for the three major OECD markets turned out to be 3% colder than the 10-year normal and the resulting oil-heat demand effects were 64 MB/D above normal. On a 30-year-normal basis, the markets were 7% warmer.

Gas Flash Weekly

For some time, PIRA has emphasized downside Henry Hub (HH) prices risks as the heating season looms and available Producing Region storage capacity dwindles. The more than 40¢ plunge in the November contract in its last six days took it to its lowest level in more than three years. Together with this week’s acute weakness in the HH cash market, these issues have highlighted a transition of storage congestion from a near-term threat to a very real factor impacting both injections and HH prices.

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

NYC-based PIRA Energy Group believes that Brent crude prices will continue to struggle due to a large global commercial oil stock surplus. In the U.S., the commercial stock surplus increased. In Japan, crude runs resume rising and product demands improve. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

European Oil Market Forecast

Brent crude prices will continue to struggle due to a large global commercial oil stock surplus which PIRA estimates will total 500 million barrels above normal levels by end 2015. Oil markets are likely to run out of onshore crude storage in 1Q16. Brent will perform better than WTI over the very short term. Gasoline cracks will stay reasonably firm this winter due to relatively tight inventory coverage which will underpin a strong 2016 gasoline season. For middle distillates, stocks are very high and will stay well above average next year, capping distillate cracks. Europe has effectively assumed a larger role as swing regional refiner supplying gasoline to the Atlantic Basin as required but limited by oversupply and softer pricing for middle distillates.

Nearly All Prices Struggling Under Weight of High Storage, Especially Henry Hub (HH)

The debut of Jan-2016 futures as the NYMEX nearby contract was greeted with a wave of selling that resulted in new contract lows, albeit amidst light volume. Even so, it is still nearly 10% above cash Henry Hub (HH) prices, as well as many all other regional prices that are also near the $2 mark. More material heating loads would help HH cash reconnect with the NYMEX contract, but the benchmark may continue to exhibit weakness relative to other markers to promote gas burn that would absorbs residual supply surpluses in the region abetted by bloated South Central storage. While the MW was at the heart of the regional flow changes that unfolded this month, the South has been impacted as well — directly and indirectly. And more changes loom.

Western Grid Market Forecast

Spot energy prices fell at all hubs in November with on-peak price declines from October ranging from ~$3/MWh at Mid-Columbia to ~$4/MWh at Palo Verde and NP15 and $5/MWh at SP15. Off-peak markets saw smaller price declines with the largest drop about $2 at Mid-Columbia. Weaker gas prices and a sharp seasonal decline in the call on gas-fired generation were the major factors. In the Northwest, near term forecasts indicate above normal temperatures which will limit seasonal increases in heating loads and may lead to stronger runoff (i.e., rain vs. snow). As a result we have revised down near term heat rate projections. In the Southwest, the call on gas through the winter months is expected to increase year-on-year due to lower net imports from the Northwest and some gains from coal. Heat rate projections remain up year-on-year (by ~10%), but we have revised them down relative to last month.

Asian LPG Prices Roll Over Despite Higher CPs

Cash LPG prices cratered in Asia as the trading window transitioned to January arrivals. Propane cargoes were called an astonishing $66/MT lower at $457/MT while butane was felled by $61 to $481/MT. Such was the response to a hard to understand increase in Saudi contract prices, which were increased by $65 (to $460/MT) for propane cargoes loading in December. With spot VLGC tanker freight from the Middle East gulf to Japan around $70 currently, and the Asian propane premium to CP’s negative, contract holders can’t be too happy about these latest developments.

California Carbon: Reserve Price Guiding Prices

CA set the minimum auction reserve price for 2016, which was also the level at which the Nov. auction cleared. With 13 MT of offsets used for compliance, an allowance bank after CP1 of 50 MT will likely double after 2015 year results. The role of the cap and trade price signal post-2020 will depend on the Scoping Plan update and cost containment is a key issue. Linkage potential has been prominently discussed, with plans for Ontario coming into focus, and with WA state, Manitoba, and Northeastern U.S. states on the horizon.

OPEC Breakevens Flat at $100/Bbl in 2016, But Still No Impact On Oil Price

PIRA estimates OPEC budgetary breakeven prices will remain flat to slightly down at $100/Bbl in 2016. Breakevens are down $10/Bbl from 2014 levels, mostly due to currency depreciation and government spending cuts. Many OPEC countries still face significant budget deficits. Yet the widening gap to Brent oil prices (PIRA forecasts $49/Bbl in 2016) highlights the limitations of budgetary breakeven analysis in general. Breakevens provide interesting insight into countries’ budgetary pressures. However, we have long argued that breakevens are not a useful predictor of oil prices, or a price level (or floor) that OPEC will support. Countries are more likely to adjust to the reality of low oil prices by cutting spending or drawing on reserves, just as we’ve seen over the past year.

Biofuels Weekly Update

U.S. ethanol prices rose Monday and Tuesday November 23 and 24 boosted by higher corn and petroleum values. Assessments then declined before the Thanksgiving holiday, pressured by record production that led to the highest inventory in 16 weeks.

U.S. Job Growth Is Solid; the Euro Is Stronger After ECB Easing

U.S. job growth in November exceeded market expectations, though details were somewhat mixed. Latest data on the good-producing sector (the ISM index and exports) were disappointing, though the current U.S. industrial slump is not yet particularly severe from a historical perspective. The European Central Bank expanded its quantitative easing programs, yet the value of the euro area currency strengthened – apparently, some speculative financial positions for a weaker euro had to be unwound quickly after the action fell short of expectations. India’s economic growth was faster than China’s during the third quarter. Brazil’s recession deepened.

North American Midcontinent Oil Forecast

Crude stocks rose in November in Cushing, as well as in West Texas and Western Canada. Differentials vs. WTI were stronger for northern grades from Alberta to Clearbrook, in advance of two new pipeline start-ups. Differentials weakened in Midland and Guernsey – two locations where prices had been well above pipeline parity for several months.

Will Switching Economic Be Broad Enough to Offset Weather-Related Losses?

Coal-to-gas switching will remain the hot topic in Europe, as temperatures continue to cool. The problem for sellers is that temperatures are not cooling fast enough, so what is being gained in terms of demand growth from the power sector is being handed right back in terms of losses in the R/C sector. The dynamic is well under way in the U.K. and continues to spread to other markets. November was even warmer than normal than the previous year and the 10-day outlook is serving up more of the same in the early part of the month.

Exports to Southern Markets Underpin French Prices

While weather conditions have been milder than normal over the Continent, pockets of price strength have emerged. In France, nuclear output is now recovering, but stronger flows toward Switzerland and the Southern markets, in part due to drier weather and lower plant availabilities, are preventing French prices from moving lower.

Are RGGI Allowances Like “Forever Stamps”?

The December RGGI auction exceeded secondary market pricing on the day of the auction, with bullish implications for the market. Price increases are not tied to current program balances - PIRA projects RGGI to be oversupplied through 2020. Rather, they are tied to this year's Program Review to result in stricter post-2020 caps. RGGI representatives confirmed at the November Stakeholder Meeting that currently-traded RGGI allowances will carry forward at full value – potentially more similar to U.S. Post Office "forever stamps."

U.S. Commercial Stock Surplus Increases

Another overall U.S. inventory increase this past week pushed the stock surplus to last year up by 3 million barrels. The crude stock surplus hit a new 2015 high as inventories quickly approach last April’s all-time weekly high. The gasoline inventory surplus narrowed to just 8 million barrels (4%), as it remains the one standout in a rather glutted market.

Production Lags, Export Opportunities Narrow

Canadian dry gas production declined sequentially in 3Q15, a likely sign of things to come. The quarter-on-quarter loss was symptomatic of a shrinking export market, as gas from Appalachia displaces traditional TransCanada (TCPL) markets in eastern Canada and the northeastern U.S. These conditions are exacerbated as storage in eastern Canada is near capacity, leaving less appetite for new gas from Alberta or B.C. Consequently, production in Canada is expected to decline through 4Q15 and into next year.

Japanese Crude Runs Resume Rising, Product Demands Improve

Japanese crude runs rose in broad agreement with our turnaround schedules. Crude imports increased from very low levels, but crude stocks still posted a modest draw. Finished product stocks declined with all the products other than kerosene posting draws. Refining margins remain strong with gasoline, naphtha, and fuel oil cracks posting gains.

Chennai Refinery Flooded

Flooding has closed the Indian Oil Corporation’s Chennai refinery in southeast India. It is too early to determine the duration of the outage. Production lost is roughly 50 MB/D of naphtha/gasoline and 120 MB/D of middle distillates. However, with the new Paradip refinery (300 MB/D) now in the process of starting up, its production should cover some of the Chennai shortfall, particularly if it were to last into 2016.

What Will Paris Talks Mean for Gas Demand?

In the near term, Chinese gas growth has slowed significantly and LNG imports remain down YTD by around 3% or 2-mmcm/d. It’s not a large amount, but does help explain many of the supply tenders popping up around Asia for 2016. Since so much LNG demand growth hinges on new supply dedicated to the Chinese market, this lack of buying does not bode well for sellers. China, being the largest producers of solar panels in the world, also undermines the use of gas as a power generation fuel in the future, as the largest incremental buyer of LNG in the world is also trying to solve environmental problems at multiple levels. Gas will play a role in solving these issues, but it has moved from a starring role to being more of a supporting cast member.

Aramco Pricing Adjustments for January – Europe Tightened, Asia and U.S. More Generous

Saudi Arabia's formula prices for January were just released. The adjustments made to differentials against their key regional benchmarks suggests Saudi Arabia is striving to maintain volumes and liftings. European pricing was tightened, but terms for Asia and the U.S. were generally made more generous.

More Bearish Momentum

Weather is proving to be the prime driver in fundamentals as the market waited past the traditional start of the heating season for the first reported weekly withdrawal. Now, the latest mild turn in forecasts has rocked the prompt contract, bringing it to new lows. In line with these recent forecasts, PIRA has adjusted its GWHDD assumption for December to 12% milder than the 10-year normal.

EPA Finalizes Renewable Fuel Standards Through 2016

After long delay and under court order, the EPA on November 30th issued a regulatory announcement finalizing the overall renewable fuel requirements for 2014, 2015 and 2016 as well as the 2017 mandate for biomass-based diesel (BBD). Those looking for the EPA to match its earlier May 15th proposal, were disappointed. The mandates are significantly higher than proposed in May.

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

NYC-based PIRA Energy Group believes that oil sands and other high cost developments will be required to balance the market. In the U.S., the total commercial stock surplus widened to the largest of the year. In Japan, crude runs began rising and the stock bulge corrected back downward. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Longer-Term Oil Price Outlook Marked Down vs. August

We have brought the post-2020 price outlook down and are now limiting the upside. We still believe that oil sands and other high cost developments will be required to balance the market. However, price responsive US and global shale should limit the upside central tendency.

Growing Concern over Medium Term Downside Price Risk

We have not changed our longer-term Reference case for US natural gas prices vs. August. However, we have boosted the probability of the low case to reflect both demand side concerns and the potential for lower supply cost. If cost reductions in Haynesville are widely confirmed, we will reconsider the Reference case outlook.

As Gas Is Being Repriced along the Curve, European Power Is at a Turning Point

With spot and forward gas prices continuing to look for a bottom, European power appears to be moving toward a new dispatching equilibrium. While the recent years have seen plummeting spark spreads and large losses in gas-fired generation, the current fuel pricing dynamics suggest that gas will be moving back into the stack, displacing more efficient coal units. In other words, we expect a structural recovery in the spark spreads both in the U.K and the Continent.

European Carbon: Stronger Fundamentals Needed to Maintain Price Gains

Eastern European countries have started their 2015 power sector free allocations. Looking ahead, EUA auction volumes/supply will increase from 2016-2018 with the easing of backloading. Longer term emissions growth is expected to be weak, especially with the announced German lignite plan. Implied carbon prices from fuel switching have been moving strongly lower as well. Substantial Phase IV ETS reform discussions are not expected until next year.

Coal Pricing falls again Amid Wider Energy Market Weakness

Seaborne coal pricing faded yet again last week, with weaker oil and gas prices driving the market lower. API#2 (Northwest Europe) prices lost the most amount of ground as heavy European imports of LNG drove NBP gas prices down considerably from the prior week. With a lack of support from the oil market, and persistently weak coal fundamentals, it is difficult to envision a scenario where coal prices rise appreciably over the balance of the year, and into 2016. However, PIRA’s expectation of a rebound in 2H16 oil prices should give coal prices some uplift, if only from higher production cuts and technical trading factors.

Weaker Asian LPG Markets Search For Direction

Asian LPG prices were pulled lower with Crude oil last week. Cash and futures propane prices continue to look disconnected with physical cargoes arriving in December called near $465 while futures for the same month traded $30 lower. The front futures spread is now steeply backwardated at +$40/MT – the most since the end of last winter, indicating weaker demand lies behind the prompt needs. Butane prices were crushed more than 10% lower to be called near $475, just $10 above cash propane.

Ethanol Prices Tumble

U.S. ethanol prices plummeted the week ending November 6, as demand for ethanol-blended gasoline decreased the prior week, while plant output and inventories increased. Margins only dropped slightly as corn prices also fell.

New Data on Chinese Growth, Emerging Market Industrial Output, and European GDP

October Chinese data showed different sectors continuing to expand at different paces. Data on manufacturing remained disappointing, but vehicle sales experienced a major upturn as the government’s latest stimulus program kicked in. Emerging market industrial production data improved broadly in recent months, though there were some exceptions (most notably, Brazil). A modest pace of GDP growth continued in Europe during the third quarter.

Lows Not Safe

The November WASDE has made it even more difficult to be constructive across the board. While new lows were made this week in major contracts with the exception of SRW, those lows are very vulnerable in our opinion.

U.S. Stock Surplus Widens

The total commercial stock build for the week of November 6, compared to a draw last year, widened the total commercial stock surplus to the largest of the year. Crude stocks built in spite of crude runs increasing sharply, and we expect crude runs to continue to increase as refinery turnarounds rapidly decline in the next few weeks. Overall export-adjusted and HDD-normalized product demand growth has been struggling of late, down 1.1% over the most recent four weeks. Year-to-date adjusted product demand is up 0.46 MMB/D, or 2.5%. The most recent employment news is positive, even as the industrial sector lags.

Tighter Balances, But Still Anxious for More Seasonal Heating Loads

With November at nearly the halfway point, the market is being driven not only by weather that is on track to average ~15% milder than the 10-year normal, but also by a supply trajectory that for now appears aware of the market’s limitations with 4.0 TCF in stocks and its heavy reliance on price-induced gains from coal-to-gas substitution.

Eastern Grid/ERCOT Market Forecast: November 2015

On-peak prices fell month-on-month in most markets as cooling loads and gas prices both faded. Price increases were observed only in New England (the only market to see stronger gas prices) and at MISO's TX hub. Despite a strong October employment report suggesting a healthy economy, weather-adjusted loads declined across the East. Unadjusted loads fell by 2.8 aGW from the prior year. Gas prices have been revised down with larger adjustments at the front end of the forward curve, particularly in the Northeast markets. As a result, power price forecasts have also been reduced with the exception of the Ontario market (up about $2/MWh). Implied heat rate projections are mostly higher than in last month's report.

Ethanol Values Decrease Again

U.S. ethanol prices followed corn futures lower. In its World Agricultural Supply and Demand Estimate the USDA projected higher corn production and lower consumption, a bearish signal.

Nervous Markets

While the world rightfully focused on the horrific Paris attacks over the weekend, traders wondered what it would mean to U.S. equity markets, oil prices, and the dollar. Grain traders spent the weekend lamenting what Friday’s new low closes for corn and soybeans would mean come Sunday night.

Japanese Runs Begin Rising, Crude Stock Bulge Corrects Back Downward

Crude runs increased as turnarounds wind down. Crude imports moved sharply lower allowing crude stocks to correct back downward after the large build seen the previous week. Finished product stocks drew again due to declines in naphtha and kerosene stocks. Gasoline and gasoil stocks changed only slightly. Margins remain good and strengthened on the week due to higher cracks for middle distillates and naphtha.

It Will Take Time For U.S. Shale Oil Activity To Pick Up Once Crude Prices Recover

Massive industry layoffs and the reduction in inventory of working drilling rigs will contribute to a slow recovery in activity once oil prices start to rebound in 2016. Several sources estimate that the industry has so far lost around 200,000 jobs worldwide and many drilling rigs have been scrapped. In addition, banks and operators will want to see improved prices for a sustained period of time (i.e. several months) before increasing lending and drilling activity respectively. The high activity levels experienced in 2014, when WTI was close to $100/Bbl, will probably not be seen for many years.

Record Norwegian Exports for November Hint at Aggressive Defense against LNG

But this is not just a story of the traditional pas de deux between spot and oil-indexed gas prices, as plenty of fundamental evidence for weakness is also in plain sight. Let’s start on the supply side with Norwegian gas exports, which are not just well above normal for November; they are approaching an all-time high for any month on record. Why Norway would be exporting record amounts of gas when we are experiencing a year-on-year decrease in weather-based demand is a root issue here.

European Oil Demand Growth Finally Turns Positive in 2015

After a decade of negative oil demand growth, demand turned higher this year. Demand growth was centered in Mediterranean Europe and got a significant boost from oil demand in Turkey. While lower oil prices were clearly helpful in boosting demand, economic growth is still too anemic to account for all the positive growth. Our demand model includes only the key drivers of oil demand like price and GDP; other unspecified factors are implicitly included in our forecast error. Evidence points to the positive role these unspecified, non-traditional factors played in oil demand growth this year.

Asian Stock Levels Lend Support to Winter Spot Price Run-Up

Storage availability for Asia’s key utility buyers has played a role in the recent uptick in imports, though it is nowhere near as big as current estimates of available capacity might suggest. PIRA estimates for end Sept. storage levels across Asia show storage levels between 55% to 70% of capacity for the top buyers.

Key Indicators, Commodities Fall

The S&P 500 moved lower for the week, having its worst week in three months. Most of the related indicators deteriorated (Russell 2000, volatility, and U.S. high yield credit, emerging market bond credit). Overall, commodities declined rather sharply, both energy and ex-energy. With regard to currencies, the U.S. dollar was again mostly stronger. U.S. government bond yields have continued to inch higher on short and longer term maturities as markets continue to contemplate the Fed raising short-term rates at their next meeting which will conclude December 16th.

U.S. Shale Oil Operators Point Towards Continued Declining Activity & Production

Capex spending has fallen dramatically through the course of 2015, resulting in a lower rig count, and for the first time quarter-on-quarter (Q/Q) production decline of shale oil in the U.S. In 3Q15, PIRA estimates that U.S. shale crude and condensate production declined by about 3.2% Q/Q to 4,200 MB/D. Shale operators that have reported guidance (about a third of total shale oil production) point to a further 3.8% Q/Q decline in 4Q15.

Iran and Iraq Come to Deal on Natural Gas

Iran has signed a new contract with Iraq to export natural gas to the country’s southern port city of Basra. Based on the contract, Iran will pipe 20-25-mmcm/d of gas to Basra for a period of six years. The supply – that will increase to 45-60-mmcm/d in a later stage – will be used to feed the main power plant of the city. Exports will start with an initial supply of 7-mmcm/d for three years and will then increase to the target volume.

Global Equities Decline Broadly

On the week most of the tracking indices lost ground, with some falling back sharply. In the U.S, only “utilities” managed a small gain. The worst performers were retail, consumer discretionary, and energy. Most of the international indices also posted losses with only the Japanese tracking index able to post a largely neutral performance.

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

At midmonth, November looks to be 14% warmer than normal on the 10-year-normal basis for the three major OECD markets. On a 30-year-normal basis the markets are 21% warmer. The November forecast takes into account first half actual weather and the current forecast for the rest of the month.



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.

Anadarko Petroleum Corporation (NYSE: APC) has announced the following statement from Chairman, President and CEO Al Walker:

"We constantly strive to make Anadarko a better company. As part of these efforts to enhance value, and after extensive analysis of public information, we recently sent Apache Corporation a non-binding offer to acquire the company. The proposed all-stock transaction, which included a modest premium, would have been highly accretive to Anadarko on a cash flow per-share basis, even before synergies. Further, based on public information and Apache's historic financial and operating underperformance, the proposed transaction offered shareholders of both companies numerous value-creation opportunities given Anadarko's demonstrated success at building value through operational excellence, proven capital allocation, and active portfolio management.

"Our efforts to enter into a mutually acceptable confidentiality agreement for the purpose of exploring the merits of a potential transaction were summarily rejected and no discussions of substance occurred. We are unwilling to pursue the transaction without access to detailed non-public information, and based on our analysis, which shows that Apache appears to trade at or near full value currently, the offer was withdrawn."

Last week DW celebrated its 25-year anniversary with their DW25 Conference in London. Through the course of the afternoon, speakers offered insight into oil & gas business challenges and opportunities, spanning a multitude of industry sectors. The keynote speaker James West, Senior MD and Partner at Evercore, was joined by panelists Graham Bennett, Vice President at DNV GL, Bob Drummond, CEO at Hydrasun Group, Neil Hartley, Managing Director at First Reserve and Tony Hodgkins, Commercial Director at ORCAS. DW speakers were Chairman John Westwood, Research Director Steve Robertson, with Andrew Reid, CEO as moderator.

1.Saudi Arabia was noted as having major challenges including a huge budget deficit which can only be addressed by a significant rise in the oil price. Without this, its demographic situation holds potential for social unrest. Some other oil producers could already warrant the status of ‘failed states’.

2.The Middle East was, however, highlighted by several speakers as remaining a bright spot for both oilfield services and equipment.

3.Global E&P spending is expected to drop 20% in 2015. Onshore, North American drilling and oilfield services have been hit hardest by the oil price collapse, though offshore drilling tells a different story, with the long-forecast rig oversupply being the key issue.

4.In 2016 North American spending is expected to decline further and higher incentives are required to sustain drilling and exploration. However, a 2017 rise in the US onshore rig count is expected and a number of oilfield services & equipment sectors are forecast to show significant growth from their present lows.

5.In the offshore rig markets, new construction activity could be limited for the next five years.

6.The impact of the oil price downturn on the offshore segment has to some extent been masked by the long-lead time of field development projects.

7.Offshore, commercial relationships and business models must change. The FPSO sector for example, faced major challenges even before the oil price fall and there is now a real need to standardize the approach to design.

8.The North Sea is “stuck in a time warp”, with high costs and low productivity, a result of “poor planning and management”.

9.The oil price fall has raised the potential of North Sea decommissioning which is now “definitely going to happen”.

10.Emerging sectors such as FLNG and offshore wind are growing and now significant in scale.

11.The oil & gas supply chain is overpopulated by too many small companies and there is a major need for more corporate consolidation in order to improve efficiency.

12.Institutional equity energy allocations for the oil services industry are the lowest of all groups compared to historical averages.

13.Though hit by pricing pressure, the impact on MMO-related (Maintenance, Modifications and Operations) activity has been comparatively lower than others.

14.The downstream maintenance market will display a rapid recovery due to investment in new infrastructure for North American crudes and upgrades of international facilities.

15.It was noted from a private equity view however, that although there will be challenging investment decisions, significant opportunities do exist.

16.Fossil fuel investors are being targeted by organized opposition pushing for disinvestment; however, natural gas can play a key part in the move towards a greener future by displacing coal in power generation.

17.Oil & gas is a 155 million boe/d industry with major long-term prospects.

18.Ultimately, oil prices will increase due to growing demand outpacing supply.

19.“The decline curve never sleeps” and some 448,000 new development wells are needed from 2015-21 to offset production decline and rising oil & gas demand.

Finally, John Westwood closed the event, adding “When we formed Douglas-Westwood in January 1990 Brent crude was $23.73 a barrel. Applying the US $ inflation index this equates to a 2015 price of $43.20. Today (23rd October 2015) Brent Crude is $46.50.”

Douglas-Westwood extends its sincere thanks to everyone participating in the event and to all our clients and friends we have worked with over the last 25 years.

In November, Energy Secretary Amber Rudd announced her vision for the energy system: to put consumers first, increase competition and secure electricity generation for the UK. In addition to a proposal to end unabated coal-fired power stations and prioritise gas-fired power stations, the Energy Secretary disclosed a commitment to offshore wind (OW) whereby the government will support the target of 10GW of capacity by 2020, if costs reduction conditions are met.

According to Rudd, the cost of contracts for OW have reduced by 20% over the last two years, but costs need to reduce further to secure government support. If the government’s conditions are met, there will be funding for three auctions by the end of 2016.

This is good news for companies involved in the OW supply chain who have already seen the benefits of increased activity in the sector in recent years. OW projects have been delivered on schedule and on budget: 3.7GW of capacity has been installed over the past five years, whilst costs have been reduced, resulting in a 38% reduction in government subsidy.

Given the current downturn in O&G activity, many companies are looking to diversity into the OW sector. Halfan Brustad, VP of Statoil recently noted that OW can learn from the O&G industry, and vice versa:

“Project management for OW farms can be learnt from O&G as well as marine & logistics"

“Renewables has a strong commercial mind set to specifications and materials choice which is key to keep low margins - we could take this back to oil and gas [during this period of cost-cutting]."

In addition to O&G companies moving into the OW supply chain, a number of start-ups are entering the OW sector. This has been evident to DW, who in addition to covering this sector via our Offshore Wind Market Forecast series, have recently provided bespoke consulting for new companies looking to take advantage of this growing sector. Given the announcement by the Energy and Climate Change secretary recently, the opportunities for investors wishing to cash-in on this rapidly growing sector are significant.

As the end of October saw upstream operators release disappointing Q3 results, with Shell in particular announcing record losses, a completely different picture is being painted in the downstream sector. A host of North American refiners, including Tesoro, Valero Energy, Phillips 66 and Marathon Petroleum have seen profits soar as the low oil price has improved margins; WTI cracking margins for Q3 2015 averaged $22.02 compared to $14.01 in 2014.

With refiners benefiting from high margins amidst the oil price decline, the impact on those companies providing maintenance services to the sector is rather more complex. On one side, higher margins are increasing utilisation – Tesero reports that during Q3 their plants were running at 101% of their officially stated capacity – intensifying the level of maintenance required to prevent downtime. Conversely, refiners will seek opportunities to delay large turnaround programs in order to take advantage of the high margins.

This has been apparent as a number of refineries announced delays in their maintenance schedule, with some refiners, such as Cepsa, postponing to January 2016. However, the extent to which refiners are able to delay plans is limited due to both the project lead times, which can be up to 16 months in advance, and the vital nature of maintenance work, particularly when plants are run at an elevated capacity. North America has already seen a series of refinery shutdowns resulting from over utilisation, including the large BP Whiting plant and an explosion at Exxon Mobil’s Torrance refinery, highlighting the importance of routine maintenance work.

Whilst the effects on the downstream maintenance industry are somewhat complex, it is clear that the sector is currently an attractive industry for investment. Despite the prospect of some delays in maintenance work, Douglas-Westwood’s “World Downstream Asset Maintenance Market Forecast 2015-2019” expects the market to remain strong, growing at a 4.8% CAGR between 2015 and 2020. As maintenance remains particularly vital to the smooth running of plants during this period of above average utilisation, the sector is likely to remain relatively sheltered from the industry downturn and struggle that upstream has borne.

NYC-based PIRA Energy Group reports that October crude prices traded within a narrow range. In the U.S., total commercial stocks drew again this week. In Japan, crude runs eased again while crude imports and stocks surged. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

North American Midcontinent Oil Forecast

October crude prices traded within a narrow range, with bullish sentiment related to declining domestic production offset by a bearish 20+ million barrel U.S. crude stock build associated with seasonal refinery maintenance. The majority of that stock build occurred in PADD III, resulting in weaker crude differentials in both West Texas and the Gulf Coast, relative to Cushing, where crude stocks were unchanged. Meanwhile, Bakken and Canadian light grades strengthened on the imminent start-up of two new northern pipelines.

Upside Production Surprise Before Abrupt Ongoing Downturn

Last Thursday's storage injection brings total inventories to 3,929 BCF assuring a new end-October record high. Updated balances now point to a 3.98-4.00 TCF weekly peak for the season with a daily foray above 4.0 TCF still in the cards. The inability to post an even higher peak underscores the extent to which supply and demand responses were needed to limit builds given feasible storage limits, namely within the Producing Region (PR), where stocks are projected to peak a bit above 1.4 TCF by mid-November. Such a level would be ~94% of demonstrated capacity — a figure that also highlights the need of incremental demand and the additional pullback in production of late needed to keep storage in check.

As Marginal Costs for Coal Units Hold Up, German Power Sets to Remain Firm

This week will see wind output rise well above normal levels, bringing German day-ahead prices down with them. There are, however, some structural factors that will continue to underpin German prices. While EUAs remain at multi-year highs, marginal costs for coal units are also relatively stronger than anticipated. In fact, critically low water levels in key stations along the Rhine River imply higher delivery costs by at least 0.8 to 2 euro/MWh. Power generators have announced possible disruptions, especially as water levels are moving further lower.

Brief Bullish Run Tamped Down, Market Returns to Downward Trajectory

The modest coal rally that occurred in late October into early November came to an end last week, with the entirety of the three major forward curves falling compared to the end of the previous week. FOB Newcastle (Australia) generally lost the most ground, while API#2 (Northwest Europe) and API#4 (South Africa) also fell, but to a lesser extent. API#5 prices (higher ash, lower cv FOB Newcastle coal) fell sharply to a new low for the year. This is a reflection of how weak buying activity, particularly from China, is in the current market. With underlying Chinese coal demand and thermal coal imports continuing to contract year-on-year, it will be very difficult for prices to structurally rise.

Interest in California Offsets Prior to Compliance

PIRA expects a continued slow escalation in carbon price — with upward pressure from the increasing reserve price will be muted somewhat by bearish emissions data, weak inflation figures (impacting reserve price), and compliance offset usage. November has seen the milestone Compliance Period 1 surrender and will see the final auction of 2015. Interest in offsets drove prices higher and narrowed the spread vs. allowances.

European LPG Prices Mixed

Large cargo butane import prices were crushed 9% lower to be called below $360/MT, as low Rhine River levels are stifling barge traffic to Germany. Although higher prices persist up the river, halted barge traffic has disconnected inland markets and the Amsterdam/Rotterdam/Antwerp cargo market. Propane prices gained $11/MT to $367/MT for December futures — a level that has the arbitrage from the United States wide open.

Ethanol Prices Higher

U.S. ethanol prices increased the week ending October 30. Assessments were supported by higher gasoline and corn values.

Dollar Pressure

With commodity indices struggling to maintain multi-year lows, and farmers extremely undersold on 2015 production, it’s hard to find much to be bullish about.

Strong U.S. Labor Market Report Significantly Raises Odds of December Fed Tightening

Last week’s better-than-expected U.S. data for October removed worries about the economy’s momentum. They also suggested that the country’s labor market is increasingly running out of slack. There were signs of faster wage growth, but they remained tentative. The relationship between unemployment and wage inflation is likely to be a key concern for U.S. policymakers going forward. Asian manufacturing confidence data for October showed encouraging improvements.

U.S. Commercial Stocks Draw Again

Total commercial stocks drew this week, the second draw in a row. A drop in crude and product imports seems to be the primary driver. Total commercial stocks are down 6.0 million barrels from the all-time high. With larger draws the same few weeks last year, the commercial stock excess. Crude stocks built and the surplus widened to the highest of the year. With crude runs still low due to maintenance, this is not an unexpected outcome.

U.K. Gas Enters the Switching Band with Coal, but Effect Limited at this Point

The slide in NBP prices is leading gas to a more competitive position relative to coal. At current market prices, PIRA will be upgrading the utilization of U.K. gas-fired generation by roughly 1 GW through the end of the year and about 2 GWs in 1Q 2016.

U.S. Coal Market Forecast

Warm weather (actual and balance of month) is depressing natural gas prices and inflating coal stock levels, stirring memories of 2012. The downside price risks for gas and coal, which we warned about the past few months, have already arrived. More supply-side destruction in fossil fuel markets is expected.

WCI Carbon Market to Carry Surplus Forward, 2015 With Record Expected Length

Newly released California and Quebec GHG emissions data, through 2014, contained few surprises. The Compliance Period 1 allowance surplus is at least 35 MT, not accounting for use of offsets. Should 2014 CA broad scope emissions levels persist for 2015, the surplus would be about 35 MT for that year alone. CCA prices were not affected by the release.

Key Ethanol Industry Indicators Reverse

The week ending October 30, U.S. ethanol and production and stocks rose and the manufacture of ethanol-blended gasoline fell.

Key Indicators Continue to Gain

The S&P 500 posted a fifth week of gains. Most of the related indicators improved again (Russell 2000, volatility, and U.S. high yield credit). Emerging market bond credit performance has been flat the last several weeks, while the U.S. indicators have continued to improve. Overall, commodities eased again, as did ex-energy. Oil was slightly higher. With regard to currencies, the U.S. dollar was mostly stronger, most notably against the euro, yen, British pound, and key eastern European currencies. U.S. government bond yields have inched higher on short and longer-term maturities as markets continue to contemplate the Fed raising short-term rates at its next meeting, which will conclude December 16th.

Japanese Crude Runs Ease Again, Crude Imports and Crude Stocks Surge

Crude runs eased again and crude imports rose sharply from very low levels such that crude stocks ballooned 7.9 MMBbls. Finished product stocks posted a draw, though kerosene continued to build seasonally and there was a minor build in gasoline. Margins remain good and strengthened on the week due to higher cracks on all the major products.

Ukraine Receiving Gas Cheaper from Western Europe Despite Deal to Lower Russian Price

The price of natural gas (delivered to Ukraine) from the European Union under some contracts with national joint-stock company Naftogaz Ukrainy has fallen to the level that is lower than the price of Russia’s Gazprom, Business Development Director at Naftogaz Yuriy Vitrenko has stated. “Last week we’ve signed an agreement at the price lower than Gazprom’s [price]. This week we’ve also bought at a price lower than Gazprom’s [price],” he said.

CSAPR Emissions Below Cap — Awaiting New Regs

Emissions data for the Cross State Air Pollution Rule are complete through Q3 2015 (including the Ozone Season) and show significant year-on-year emissions decreases, with all programs set to finish 2015 at or below even tighter Phase II caps. The Seasonal NOx market awaits the new federal Transport Rule for 2008 Ozone NAAQS; it is unclear whether current allowances will be recognized. EPA must also address certain states’ budgets/caps, while a decision is soon expected from the D.C. Circuit on MATS.

Global Equities Gain on the Week

Global equities gained on the week. In the U.S., growth sectors led the complex higher. Banking and energy well outperformed and posted strong gains. Defensive sectors underperformed as evidenced by declines in consumer staples and utilities. Internationally, many of the tracking indices were higher, led by a strong gain for China.

Petrobras Oil Workers Strike — A Step Toward a More Politicized Movement

The Petrobras oil workers' strike has spread to producing fields in the Campos Basin, which account for 65% of Brazil’s crude oil output. Oil production losses on Monday and Tuesday averaged 226 MB/D and reportedly increased on Wednesday. The company is trying to reduce the damage to production by sending contingency teams to the affected platforms. The downstream impact of the strike is likely to be limited since, by law, refining operations must meet a minimum requirement in order to avoid serious disruptions of supply. Unlike most previous labor actions, which focused on wages and have ended with typically little impact, the unions this time are demanding a say in management business decisions. PIRA’s best guess is that the strike does not last more than two weeks. Production losses will mostly impact exports, but not initially because ample stocks can be drawn down, but inevitably they will be lower than they would have been because of the output losses.

Poor Showing in China LNG Will Remove Support for Asia Spot

The illusion of spot price support in Asia is bound to be short lived if only for a severe slowdown in China, which has subscribed to a large portion of the new regional LNG supplies on offer.

Aramco Pricing Adjustments for December: Europe More Generous, Asia Tightened

Saudi Arabia's formula prices for December were just released. The most significant change was more generous terms for European destinations, with Northwest Europe being cut more aggressively than the MED. U.S. pricing was lowered by a modest amount, while Asian pricing was raised. The adjustments, in a broad sense, were in line with what fundamental pricing drivers would have suggested.

Keystone XL Pipeline Rejected

On Friday, U.S. President Obama formally rejected TransCanada’s application to build an oil pipeline from Alberta to Steele City, Nebraska, where it would connect with the existing Keystone pipeline system, increasing its capacity by 830 MB/D. This was a political decision and the President made it clear that fighting climate change is a priority for his remaining 14 months in office. In the near term, this decision will not have much impact on Canadian price differentials. However, by the end of this decade, new capacity will be needed to avoid steeper discounts for Canadian grades.

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

NYC-based PIRA Energy Group believes that Global economic momentum is stabilizing, which is supportive for the demand for inventory. In the U.S., peak refinery turnarounds drive DOE petroleum balances. In Japan, crude runs ease and stocks jump. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

World Oil Market Forecast

Global economic momentum is stabilizing, which is supportive for the demand for inventory. Global oil demand growth is strong, especially in China, India and the industrialized countries, and will remain so in 2016. Supply growth is quickly eroding. Capacity constraints limit OPEC growth while non-OPEC crude/condensate is about to fall below year-ago levels. Oil markets will need more oil and prices will have to signal this. However, short term, there are strong headwinds for oil prices, but once January is front month and December inventory declines are evident, prices will rally strongly. Political risks to supply are turning higher with more turmoil in Iraq and a rising potential for infrastructure attacks in Nigeria.

Less Potential for Weather-Driven Demand Erases Upside Risk; Supply Builds

The strong supply out of Russia and Norway, combined with the growing presence of unsold LNG in the Atlantic Basin, makes the short-term outlook continuously vulnerable to the downside. PIRA does not expect a major selloff to emerge, and if one were to come, it would not be until mid-December at the earliest due to the need to protect storage going into 1Q peak demand season.

Dutch Imports at Three-Year Lows in Spite of Coal Retirements Ahead; Weaker Gas Prices Will Keep Prices in Check

Total Dutch net imports plummeted to only roughly 100 MWs so far during October, or a three-year minimum. While 1.6 GWs of coal is set to be retired by the year end, the removal of the coal tax, combined with significant weakness in the gas pricing picture, will keep the Dutch prices in check, translating into structurally lower imports in the months ahead.

China’s Coal Demand Struggles Continue; Market Recovery Still Distant

The coal market pushed lower again last week on weaker oil pricing, a strong U.S. dollar (particularly relative to the euro), and continued softness in coal fundamentals. The weakness in pricing was most notably apparent for API#2 (Northwest Europe), likely due to the drop in the euro, while FOB Newcastle (Australia) prices also fell, but to a lesser degree. Demand continues remain soft in many key demand markets, and outside of India, there has been limited rationalization of uneconomic supply. Absent any unforeseen supply disruptions and/or mine idlings or closures, weakness in pricing will persist.

LPG Pulled Lower, Ethane Rebound Continues

U.S. NGL markets were pulled lower by the broader energy markets. November Mt Belvieu propane futures fell 3.5% to near 43¢/gal, outperforming to more than 5% decrease in global crude prices. Butane at the market center fared slightly better, losing 2.8% to settle near 58.5¢/gal on Friday. Ethane’s outperformance continues with prices flat week-on-week despite the plunge in Henry Hub prices, which led to ethane’s premium in Btu terms surging to 64¢/MMBtu — the largest premium in years.

Clean Power Plan Published, Additional Info Released

The Clean Power Plan is finally set to be published in the Federal Register, with regulations for new/modified power plants and the proposed Federal Implementation Plan (FIP) / Model Trading Rule. Stakeholders will have access to technical support documents on proposed free allocations for the individual covered units, "Gas Shift" ERCs for rate trading. Publication will start the 60-day clock to file legal challenges to final rules and the 90-day comment period for the proposed FIP/Model Rule.

U.S. Ethanol Prices and Margins Fall

U.S. ethanol prices decreased the week ending October 16 and manufacturing margins dropped to the lowest levels since January. D6 and D5 RIN values rose after the EPA implied that the final biofuels mandates will probably be higher than those proposed on May 29.

All About the Dollar

After spending most of the trading week eking out modest gains, the ECB’s forward guidance on rates resulted in an extended rally for the dollar and an apparent end to any immediate bullish hopes for the grain/oilseed quadrant.

Asia’s Manufacturing Indicators Remain Sluggish, but Other Data Are Looking Better

China’s economic data suggested that the country’s economic momentum was roughly stable. The recent resiliency came from the service sector, while the industrial sector continued to struggle. Housing indicators were encouraging. China’s latest rate was not a surprise and is basically seen as a calibration of the government’s policy stance. Data from Japan, Korea, and Taiwan were mixed, but contained encouraging signs.

Peak Refinery Turnarounds Drive DOE Petroleum Balances

We are still around the peak of the refinery turnaround season and this past week’s data, like the prior week, showed a large crude stock, which was almost offset by a large product draw. The resulting 1.5 million barrel overall stock increase was 2.9 less than the increase last year in the same week, narrowing the year-on-year stock excess slightly to 165 million barrels. Sixty percent of the stock excess is in crude oil and 21% is in the two major light products.

Gas Flash Weekly

Another all-time record high for salt storage helped pull total Producing Region inventories deeper into new high ground. Still, maneuverability remains considering that non-salt inventory is ~65 BCF below its high, and capacity remains available in the Consuming East and West. While space remains to absorb surplus supply, the pall of a mild start to the heating season is not only placing an effective cap on near-term prices, but keeping alive the risk of even lower levels.

U.S. Coal Stockpile Estimates

Power sector coal stocks saw a strong seasonal build this month as fall weather patterns and weaker gas prices sapped coal burns. PIRA estimates U.S. electric power sector coal stocks will reach 180 MMst at the end of this month, or 85 days of forward demand based on our forecast of Nov./Dec. average coal burn (vs. 63 days one year ago).

U.S. Ethanol Production and Stocks Increase

The U.S. ethanol industry was stable the week ending October 16, with production rising only 2 MB/D from the previous week to 951 MB/D. Stocks built 84 thousand barrels to 18.9 million barrels, with the only draw occurring in PADD I.

Little Enthusiasm

The last week of the month usually brings with it an anticipation for the upcoming WASDE, but this month feels a little different than most. Whether it’s the general malaise around trading contracts that remain range-bound, or the realization that harvest is quickly coming to an end and with it any chances of a “surprise,” there’s just not a lot of enthusiasm about the November WASDE, scheduled to be released on Tuesday, November 10th.

S&P 500 Continues to Improve

The S&P 500 posted a third week of solid gains. Also, all of the related indicators improved again (Russell 2000, volatility, high yield credit and emerging market credit). Overall, commodities eased slightly, as did ex-energy. Oil was also slightly lower. With regard to currencies, the most noted move was strength in the Korean won and Thai baht. Korea reported rather strong GDP growth in 3Q of 5% annualized, which was better than expected. China moved to lower interest rates last Friday morning in an attempt to further stimulate their growth prospects.

Japanese Crude Runs Ease; Crude Stocks Jump

Crude runs eased along the lines suggested by our maintenance schedules. Crude imports rose sharply and stocks built 4.9 MMBbls. Finished product stocks drew slightly, but gasoline, naphtha, gasoil, and kerosene stocks built as those demands eased back. The indicative refining margin remains good, though most cracks, other than naphtha, eased.

Seasonal Demand Rises, but Supply Gains Are Formidable

A wide disconnect between incremental, fully operational and functional liquefaction capacity and incremental buying is emerging with no signs of abatement in the coming years.

Global Equities Post a Another Strong Week

Global equities gained again. In the U.S., many of the tracking indices were positive on the week, with technology and industrials performing the best. Retail and energy lagged and were lower on the week. Internationally, many of the tracking indices gained. The Japanese tracking index did slightly better than the U.S. market, but most of the other international indices did not do as well. Latin America was the only index to post a decline.

China Using Carrot Rather than Stick to Rationalize Tea Kettle Refineries

For years, China has been trying to rationalize its inefficient tea kettle refining capacity despite opposition from local/provincial governments and the tea kettle refining companies. China seems to have now found an effective strategy by offering crude import quotas to those refiners rationalizing small CDUs. Eight refiners have already applied for or been granted crude import quotas. PIRA expects the total effect will be a rationalization of 500-600 MBD of capacity, higher utilization of remaining Chinese refining capacity, and higher quality products.

Azerbaijani Company AzMeCo Suspends the Purchase of Gas for Methanol

“Due to the fact that the world prices for methanol decreased, the purchase of gas from Gazprom at the current price has become unprofitable for the company,” said AzMeCo. “As a result, it was decided to suspend the purchase of gas, as methanol production is unprofitable under existing conditions.” During the contract period, AzMeCo received more than 100-mmcm of Russian gas. Azerbaijan Methanol Company (AzMeCo) planned to purchase up to 2-bcm/y of gas from Russia’s Gazprom Export.

U.S. Refiners Creep Capacity Faster

2014 was a banner year for U.S. distillation capacity creep; 2015 also appears to be a good year for creep, although below 2014. With favorable refining margins and crude runs approaching effective capacity, refiners are able to justify a greater amount of creep investment.

Costs Are Down in Low Price Environment, but Current and Future Supplies Are Still at Risk

The current low oil price environment has made it cheaper to operate existing oil fields and to develop new supplies. Compared to last year, Brent-equivalent costs to produce current supplies have decreased by around 9%, while costs to develop new supplies have been reduced by 25% for U.S. shale and 12% for non-shale projects worldwide. However, in spite of these reductions, some high-cost existing production remains at risk of being shut in were Brent prices to fall below $40/Bbl. Also, many new projects require Brent prices well above $50/Bbl to become profitable. Low-cost, non-OPEC supplies and the likely increase in OPEC supplies will not be sufficient to meet future demand. Therefore, higher-cost supplies, including oil sands and deepwater, will be required to balance global supply and demand, requiring prices to rise from current levels.

Analysts Obsession with Conventional Oil Discoveries May No Longer Be Warranted

Conventional oil discoveries have dropped significantly in the past 50 years in spite of record exploration activity, especially in recent years. In the past, this would have driven concerns over reserves replacement, R/P ratios and remaining years of production. However, as unconventional volumes (bitumen/extra heavy oil and shale oil) play a more significant role in meeting future oil demand, the focus increasingly shifts from reserves to costs. But, higher oil prices will still be required for development of high cost unconventional volumes needed to meet demand growth and decline from existing fields.

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

NYC-based PIRA Energy Group believes that entering 2016, the oil market really faces two surpluses: excessive inventories and an ongoing imbalance between supply and demand of over 1 MMB/D. In the U.S., the commercial stock surplus made a new high. In Japan, crude runs eased and stocks corrected downward. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

World Oil Market Forecast

The global oil surplus grew in 4Q15. Entering 2016, the oil market really faces two surpluses: excessive inventories and an ongoing imbalance between supply and demand of over 1 MMB/D. Strong demand growth in 2016 and declines in non-OPEC supply eliminate the imbalance but excess inventory remains.

Ukraine to Align Gas Royalties with Market Rates

The Ukrainian parliament has amended the Tax Code and changed the conditions of calculating the sale price of natural gas for royalties for the use of deposits during gas production. The amendments to the Tax Code bring the calculation of the royalty in line with the requirements of the law on the natural gas market. Previously, the calculation of the royalty was pegged to the upper price of natural gas set by the National Commission for Energy, Housing and Utilities Services Regulation (NCER) before October 2015.

Switching Away from Coal

An extremely long LNG market is translating into a structural recovery of the spark spreads, while the dark spreads have collapsed, especially in the summer months, mirroring the ineluctable eclipse of coal in favor of gas. Our balances have now been changed to reflect a higher risk that French net power exports will be moving lower, especially during the summer. This shift means that French prices will eventually converge more closely toward Germany, also in light of the recent announcement that Belgium’s Doel 3 and Tihange 2 will be soon reconnected to the grid. Germany is relatively less affected by a bearish gas market, as it is pricing closer to marginal costs for efficient coal, which is relatively more difficult to displace.

Dry Bulk Freight Outlook Cut on Iron Ore Outage, China Weakness

The prospects of a late rally in Cape freight rates during the remainder of 2015 have faded. In the Atlantic, the disaster at Samarco’s 30 MMmt/year iron ore operations in Brazil will reduce cargo volumes and restrict long-haul shipments to the Far East. Over in the Pacific, a structural realignment in China’s steel industry finally appears to be taking place, with crude steel production, steel exports and iron ore imports all down in October. The Cape market looks grim for the rest of this year having hit bottom earlier compared to last year. We will be marking down our near-term Cape demand forecasts following the loss of Samarco exports plus its consequential impact on Atlantic to Pacific trade and ballasting patterns. We also have a more bearish outlook on China’s dry bulk demand and on the outlook for Cape freight rates in 2016.

Less-Than-Bullish WCI Auction with New 2016 Reserve Price

The California/Quebec joint carbon auction saw current vintage allowances clear at the projected 2016 minimum reserve price. This mirrored the November 2015 auction, but is lower than secondary market pricing at the time of the auction suggested. Though the future vintage auction saw solid bidding interest, it cleared a bit lower than expected. 88 bidders registered for the auction with 3 new bidders and a number of formerly active bidders taking a break. See PIRA’s excel sheet summary of the auction results and participants.

U.S. Ethanol Prices Decline

U.S. ethanol prices tumbled during most of November, although assessments bounced off the bottom the last few days. The market softened because of higher production and lower demand for ethanol-blended gasoline. As a result, stocks built to a 16-week high.

Corn Demand Picking Up

Export Sales for the week ending November 19th, as released Friday, showed strong corn sales as seasonality hopefully starts to takes over. Soybean sales were average, while wheat sales once again lagged. Corn sales/exports have made up significant ground against last year’s numbers but remain 23% behind, while soybeans are 17% behind last year’s pace at this point.

Global Equities Modestly Changed

Global equities were fractionally changed on the week. In the U.S., the indices were modestly higher. For individual sectors, retail, consumer staples, and energy all outperformed. Utilities were the weakest. Internationally, many of the tracking indices declined. The poorest performers were Latin America, BRIC’s, and emerging markets.

Freight Market Outlook

Wide monthly swings in tanker rates have become the new normal, and October was no exception. VLCC rates plunged from a high of WS 88 in early October to WS 46 by the end of the month, but they have bounced back since. Rates in other size sectors also experienced wide swings. The current glut of oil (500 MMB by end 4Q 15) has helped the tanker sector in a number of ways. Higher OPEC production and expanding waterborne trade have been added substantially to vessel demand, but a bloated supply chain has also contributed. Higher land inventories have caused excess port time and discharge delays, especially in China. In addition, charterers knowing that discharge delays are inevitable on arrival are slowing vessels down on their laden legs while capturing contango credits, reducing fleet efficiency. Floating storage economics are improving and the volume of crude stored in tankers will grow in 1Q16.

U.S. Stock Surplus Makes New High

The U.S. commercial stock surplus has increased to the highest surplus of the year. Coming out of turnarounds, crude runs continue to ramp up, and are now 1.0 MMB/D over early October run rates. This alters the balance to where refined product stock builds have been outpacing crude stock builds, and we expect the same for the week of November 27. Domestic crude supply, however, is remaining high, reflected by crude stocks posting small builds instead of draws, with the ramp up in crude runs.

Coal-to-Gas Switching Enters the Discussion

The central focus on gas demand growth should be on power generation. Lower spot and contract prices have reached the point where a competitive position versus coal is beginning to enter the conversation. The market for gas to replace the least efficient coal units with the most efficient gas units began to emerge in the U.K. in recent months and is now spreading to the Continent, as day ahead and front month prices slowly deteriorate on an absolute basis and relative to ARA coal, which has bottomed out to a greater extent.

U.S. Coal Stockpile Estimates

Power sector coal stocks continued to expand this month as mild weather east of the Rockies, and resulting slack gas prices, deflated coal burns. PIRA estimates U.S. electric power sector coal stocks will reach 185 MMst as of the end of this month, their highest level in three years.

RGGI Fundamentals Weak but Policy Support Strong

Even with additional nuclear retirements, our latest modeling indicates a fundamental cumulative surplus in RGGI through 2020 without any CCR tons. The Dec. auction is expected to affirm prevailing higher price levels seen since the Sept. auction, though the market has also seen strong interest gains in put options. At its Stakeholder Meeting, RGGI confirmed that it wants lead on climate – offering a transition to a post-2020/CPP-compliant RGGI market that supports the value of currently-traded RGGI allowances.

Mixed Week for Key Indicators

The S&P 500 moved modestly higher on the week. Some of the related indicators also improved (Russell 2000, VIX, emerging market debt). The notable outlier was the decline in high yield credit for the third straight week. This is believed to be an important leading indicator with regard to overall market health. Commodities remain in a downtrend, both energy and ex-energy. Precious metals were again lower along with copper and aluminum. With regard to currencies, the U.S. dollar was again mostly stronger. The strength was focused against the euro and the British pound, along with key Eastern European currencies.



Record Ethanol Output

U.S. ethanol production soared to 1,008 MB/D last week, eclipsing the mark of 994 MB/D set in the third week of June. Record outputs were established both inside (916 MB/D) and outside (92 MB/D) of PADD II. Total manufacture was up from 975 MB/D in the prior week. Inventories rose for the fourth consecutive week, building by 378 thousand barrels to 19.6 million barrels.

Japan Crude Runs Ease, Crude Stocks Correct Downward

Crude runs eased in line with our turnaround schedules. Crude imports fell back sharply and produced a strong crude stock draw. Finished product stocks also drew due to a decline in gasoil and naphtha stocks. Kerosene stocks continued building. The most recent holiday appeared to have minimal impacts on the data. Refining margins remain strong with all the major product cracks improving further on the week.

LNG and Seasonal Storage: The Next Major Conflict

A delay of a few weeks here and a few months there on new supply is managing to support spot prices in Asia, but the second quarter of 2016 is sizing up as one of the weakest we have ever seen. Asia is capable of storing very little LNG on a seasonal basis, which will shift the burden to Europe.

Intangibles Sealed the Deal to Lower PIRA’s Reference Oil Prices

Lots of assumptions go into forecasting global supply/demand balances which are aggregated from data for over 140 countries of the world. In recently revising 2016 crude oil prices, PIRA was reflecting in prices a higher starting surplus stock position and higher end year 2016 stocks. Another important factor which contributed to the decision to lower prices was the intangibles associated with our forecast having more downside than upside risks. This is the case despite the greater surplus in our revised November balances.

More Extended Price Weakness

Directionally the answer to near-term HH price prospects is that aside from all important winter weather, prices should remain under enough downward pressure to keep gas competitive against coal for electric generation (EG) — a need reflected by PIRA’s price markdown for the first several months of 2016 tied partly to lower prices going into 1Q16.

OPEC to Meet Dec 4 with Little Flexibility

PIRA’s view is that the most likely outcome of the upcoming December 4 OPEC meeting is a rollover, continuing the current market share policy. The Organization faces four rather big problems which are unlikely to be resolved.

Another Bearish Bidweek Signals Weak Fundamentals Ahead

Last week's report revealed 4,009 BCF in the ground setting a new record for U.S. storage. With such high storage, the need for gas to continue to price low enough to stay competitive with coal in the EG queue remains paramount, though seasonally rising heating loads, however delayed at this point, will support sequential increases in demand and mitigate the overall tenor of substitution necessary.

Qatari Marketing Challenges Offer New Solutions to Pricing Conundrums

It’s back to the future for the Qatari marketers that just agreed in principle to a significant downward price revision on an existing long-term contract. The move will essentially halve the sales price for the 10.8-bcm/yr. (7.5 million tons) the Qatari's sell to India’s Petronet.



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.

Piper Jaffray Companies (NYSE: PJC), a leading investment bank and asset management firm, today announced that it has reached a definitive agreement to acquire Simmons & Company International (“Simmons”).

Founded in 1974, Simmons is one of the largest and most experienced independent investment banks specializing in the energy industry, offering M&A advisory, capital markets execution and investment research. With over 170 investment banking, sales & trading, equity research and private equity professionals, the firm’s broad range of coverage spans the entire energy spectrum, including energy services & equipment, exploration & production, midstream and downstream. The average tenure for a managing director at Simmons is in excess of 15 years, and during its 41-year history, Simmons has executed more than 830 strategic advisory transactions, over 330 private and public financings, representing total transaction value of approximately $260 billion. Simmons also manages two private equity funds in the U.K. that specialize in energy. Headquartered in Houston, the firm also has a major presence Aberdeen, as well as offices in London and Dubai.

“Simmons is the preeminent firm in energy investment banking and we are proud to have the opportunity to partner with such an accomplished team. This addition represents a major step in our drive towards $500 million in annual investment banking revenue,” said Andrew Duff, chairman and CEO of Piper Jaffray.

“This is a milestone transaction as we meaningfully increase the firm’s investment banking footprint. Expanding into the energy sector has been a long-term goal for us and we are pleased to have found the ideal partner to fulfill this strategy,” added Scott LaRue, global co-head of Piper Jaffray investment banking. “We look forward to combining our broader product suite with Simmons’ sector expertise, unmatched reputation and extensive relationships to build on the firm’s long history of success.” “Simmons has been a name synonymous with excellence in energy investment banking and providing quality service to clients for over 40 years. This transaction is a logical step in taking our firm to the next level as we expect our entire investment banking and equities groups to transition to Piper Jaffray in a seamless manner. Our clients will greatly benefit from the enhanced breadth of products and capabilities that Piper brings to the table,” said Michael Frazier, Simmons’ chairman, president and CEO. “On behalf of my partners, we are additionally pleased to be combining with a firm that shares similar values and our client-focused culture.”

Piper Jaffray intends to operate the business under the Simmons brand as a Piper Jaffray company and it will continue to run its energy practice from Simmons’ Houston and Aberdeen locations. The business will be integrated into Piper Jaffray’s equities and investment banking group, with senior leaders at the firm assuming senior leadership roles with Piper Jaffray. Fred Charlton will be appointed chairman of energy investment banking and will serve as co-head of energy investment banking together with James Baker. Bill Herbert will become head of global energy research, and Will Britt will continue to lead specialized energy equity sales. Ira Green will become head of energy capital markets and Coling Welsh will become head of international energy investment banking and executive chairman of Piper Jaffray’s U.K. subsidiary, and continue to lead Simmons’ international activities. Michael Frazier, Simmons’ chairman, president and CEO, has entered into a consulting agreement with Piper Jaffray and will continue to serve in a senior role that leverages his relationship and experience.

Simmons generated revenue of $96 million, including $65 million in advisory revenue, in its most recent fiscal year ended June 30, 2015. The transaction is expected to be accretive to Piper Jaffray’s non-GAAP earnings during the first full year of operation. Piper Jaffray intends to offset dilution from shares issued in the transaction with future share repurchases under its existing share repurchase program.

The transaction is subject to regulatory approval and customary closing conditions and expected to close in the first quarter of 2016.

History repeats itself. In January 1959 the first LNG vessel shipped out from Lake Charles, Louisiana to deliver its trial cargo to Europe. Soon, another important LNG shipment is going to leave the Gulf of Mexico. This time, the destination is Lithuania – one of the first deliveries from Cheniere’s Sabine Pass LNG export terminal will be sent to Port of Klaipėda in January 2016.

Driven by significantly higher natural gas prices compared within Western-Europe, Lithuania took the decision to reduce dependence on Russia by building an LNG import terminal. The project was executed within three years and the Independence FSRU (Floating Storage and Regasification Unit) started operations in December 2014. If planned gas infrastructure developments are delivered in the future, Lithuania will be able to cover domestic natural gas demand from LNG and even export gas to its neighbors. As a result, Gazprom has offered a gas price discount of almost 20% to the country.

Other Central-Eastern European countries are seeking to diversify their gas import sources through LNG. After a two-year project delay, the Polish LNG terminal is scheduled to start its commercial operation in May 2016. The Croatian Government has also announced the construction of an LNG import terminal as a strategic investment project which has recently received the location permit on Krk Island. If Hrvatska LNG passes the final investment decision next year, the plant could be commissioned in 2019.

Currently, 26 LNG import terminals are in operation in the EU-28 countries, with annual regasification capacity of 195bcm. An additional 23bcm/y of capacity is currently under construction with 13bcm/y expected to come online this year with the start of the Dunkerque LNG Terminal in France. Total European LNG import capacity already exceeds recent Russian exports volumes. With extensive LNG export infrastructure developments in North America and Australia, and slowing gas demand growth in China and Japan, more LNG is anticipated to be available to European gas markets, potentially reshaping the continent’s natural gas landscape significantly.

The recent JCPOA agreement reached between Iran and the P5 +1, and approval of by the Iranian Parliament, is a big step forward in normalizing Iran’s relations with the international community. In anticipation of the removal of the economic sanctions, Iran has produced a list of fifty oil & gas projects worth an estimated $185 billion that it intends to develop. These projects will be presented at a post-sanctions summit in London planned for February 2016, and auctioned to secure much-needed foreign investment in Iran’s oil & gas sector. A number of IOCs, including BP, Shell and ENI, have expressed interest in re-entering the Iranian market.

Despite these positive developments, DW takes a conservative view with regards to Iranian hydrocarbons production. Total onshore production post-2015 is expected to rise steadily at a 2% CAGR through to 2021, with additional output coming predominantly from projects in the Khuzestan region, including the North & South Azadegan field developments. Several phases of the giant South Pars gas and condensate field development are expected to come onstream within the next few years, contributing to a significant rise in offshore hydrocarbons production to over 5 mboe/d in 2019. However, DW does not expect Iran to reach its 2016 target of raising total oil production to over 4 mb/d until 2018.

There is significant upside potential for this forecast, with projects such as the North Pars, Golshan and Ferdowsi field developments listed amongst those Iran plans to auction for foreign investment. However, Iran’s ability to secure the necessary investment is dependent upon its compliance with the terms of the JCPOA, some of which could take several months to implement. Smooth implementation of the JCPOA will also depend on a continued dialogue between Iran and International Atomic Energy Agency. It is therefore unlikely that Iran will be able to fulfill the commitments needed to lift the sanctions before the end of 2015 or early 2016. Uncertainty also remains surrounding the structure of the new Iranian Petroleum Contract, due to be introduced at the London summit. Therefore, despite the positive outlook for hydrocarbons production, limitations to growth in the short-to-medium term remain.