The subsea sector is highly consolidated with just five players servicing the $12billion annual requirements of the global E&P community. The two largest, FMC and OneSubsea, account for approximately two-thirds of the market but despite this, have shown no signs of resting on their laurels, forging strategic partnerships to reshape and redefine the commercial landscape. This has become increasingly critical as projects have grown in scale and complexity.

Recent years have seen a shift in focus from mechanical tree designs towards value added instrumentation, monitoring and processing technologies. The joint venture between Cameron and Schlumberger to form OneSubsea in 2013 is a deliberate attempt to unite the former’s subsea skill with the latter’s downhole and processing expertise. Likewise, the recent partnership between FMC and Technip to form Forsys Subsea, combines subsea production, processing and installation capabilities, minimising both supply chain and technological interfaces for the end user.

Ultimately, E&P companies have been gradually moving from a ‘pick and choose’ approach, to procuring systems from a single vendor. DW data suggests that 15 years ago, nearly a fifth of subsea wells installed had different manufacturers for the trees and controls. In 2015 it is expected that over 95% of subsea trees installed will have wellheads and controls from the same manufacturer. This trend is set to develop further with an appetite for standardisation of subsea equipment that has been driven by cost pressures, lower oil prices and the subsequent need to deliver projects on-budget, on-time.

NYC-based PIRA Energy Group reports that North American crude differentials were mixed in June, with little change in outright prices. In the U.S., both crude and product stocks posted a build. In Japan, crude runs jumped, crude stocks built, yet finished products drew. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

North American Midcontinent Oil Forecast

North American crude differentials were mixed in June, with little change in outright prices. Rising pipeline takeaway capacity and shrinking production generally strengthened differentials in the Rockies, Permian Basin and Cushing area. At the same time, an end to wildfires and oil sands upgrader maintenance brought Canadian differentials back down from very strong springtime levels.

Another Large U.S. Stock Build

Both crude and product stocks posted a build last week, and weekly commercial stocks stand at 145 million barrels, or 13% above year-ago levels. Some of this excess is for infrastructure expansion. While moderating, demand growth remains strong, with total product demand growth estimated to be up 1.06 MMB/D versus last year, over the last four weeks. Our construct domestic crude supply – reported production plus balance item – has moved up in recent weeks, after seemingly peaking a few months ago.

Japanese Crude Runs Jump, Crude Stocks Build, Yet Finished Products Draw

Crude runs posted a significant rise as maintenance continues to wind down and unplanned outages began to restart. Crude imports increased and stocks built. Finished product stocks drew, due to lower jet-kero, gasoline, and fuel oil stocks more than offsetting builds in naphtha and gasoil. The indicative refining margin remained good, though it was somewhat softer on the week as all the major cracks again gave ground.

Strong Air Traffic Growth Means Robust Jet Fuel Demand

The International Air Transport Association (IATA) recently released their data on global air travel through May. On a global basis, Revenue Passenger Kilometers (RPKs) grew 6.3% for the year through May, when compared with the same period in 2014. Available Seat Kilometers (ASKs) are a better indication of jet fuel demand by eliminating the impact of changing load factors, and this measure of global air travel was up 5.9%. This strong growth in air travel indicates robust demand for jet fuel. PIRA's World Energy Demand model shows jet fuel consumption growing 3.6% in 2015, followed by a gain of 3.1% in 2016, with volumetric growth averaging more than 190 MB/D per year.

Smaller-Than-Expected 2Q Stock Build in Latest 3 Major OECD Data

Preliminary data indicate commercial onshore inventories in the three major OECD markets - - United States, Europe and Japan - - built 48 million barrels (525 MB/D) in the second quarter with crude stocks flat and the entire build essentially occurring outside of the major products. The overall stock increase is less than last year’s 66 million barrel stock build (725 MB/D) in the second quarter. The stock data are consistent with PIRA’s just released World Oil Market Forecast (June 30) and PIRA’s estimate of 260 million barrels of surplus global commercial inventory accumulated over the last four quarters, a far smaller figure than market analysts were generally expecting. Gasoline stocks are especially low, after adjusting both for higher 3Q demand in these markets and export demand.

U.S. LPG Prices Stand Strong in Flat Price Rout

The U.S. NGL complex outperformed the broader energy complex by a wide margin. July propane at Mt Belvieu was only 1¢ lower, settling near 43.5¢/gal Friday. Propane prices increased from below 30% of WTI to near 35% in this week’s price action. Contango in the front three months of the Mt Belvieu forward curve narrowed to the tightest levels in over a month – just under 3.5¢/gal, a remarkable reversal from nearly 8¢ prior to June expiry. Butane at the market center managed to increase 0.5% on the week to settle near 58.2¢/gal.

U.S. Ethanol Prices Jump

Ethanol prices soared the week ending July 3, following a spike in corn values. Lower output and inventories, as well as higher production of ethanol-blended gasoline, provided support.

U.S. Output and Inventories Increase

U.S. ethanol production climbed to 987 MB/D from a six-week low 968 MB/D the week ending July 3, continuing the saw-toothed pattern that began in late May. Stocks built by 309 thousand barrels to 19.8 million, reversing the nearly identical draw that occurred one week earlier.

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.

A new piece of research could help the oil and gas industry understand and implement greater collaboration in the North Sea, as the sector continues to manage lower oil prices.

Business advisory firm Deloitte launched its inaugural oil and gas collaboration survey, with support from Oil & Gas UK.

The research will assess the level and quality of collaboration currently taking place on the United Kingdom Continental Shelf (UKCS), as well as how companies across the supply chain could work together in new ways.

The research, which has comparisons with a Deloitte study carried out in the US looking at the automotive industry, will survey participants on:

• What collaboration means;
• What constitutes effective collaboration;
• How companies view themselves and each other as collaborators.

Collaboration has been a consistent industry theme since the publication of Sir Ian Wood’s UKCS Maximising Economic Recovery Review. It was a core recommendation in Sir Ian’s report, but there is currently little data available on what it means and how it might benefit the upstream oil and gas industry on the UKCS.

Justin Watson, a partner in Deloitte’s consulting practice, said: “Collaboration has been the focus of many client conversations about how we take the industry forward. With subdued oil prices set to continue, it’s more important than ever that companies look at what could be gained by working more closely together to bring down costs, reduce complexity and boost efficiency.

“However, what collaboration means for the oil and gas industry is not well understood. Our research aims to help define what collaboration is, how it looks in practice and how companies can better collaborate with one another.

“We would encourage anyone operating in or providing services to the UKCS to take part in this research. We hope a better understanding of collaboration could help companies in the North Sea improve productivity and efficiency, cut costs, adopt new ways of working and make the most of what remains in the basin.”

Oil & Gas UK’s business development director, Stephen Marcos Jones, added:

“Whilst tough decisions on resources and projects are being taken by individual companies, there is a growing effort to work together to make the UKCS more efficient and attractive for investors in a world of $60 oil.

“Any work looking at collaboration in our sector, and specifically how companies can work together in new ways, is therefore of real benefit and will be warmly welcomed by the UK’s offshore oil and gas industry.”

This project builds on Deloitte’s previous work on ‘Making the Most of the UKCS’ – Cultural shift key to maximising economic recovery of oil and gas.

NYC-based PIRA Energy Group reports that Brent crude prices lost their earlier upward momentum over the last few weeks with on-going Atlantic Basin crude length. In the U.S., slight stock decline this past week further narrows stock excess. In Japan, runs drop Sharply and crude stocks surge. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

European Oil Market Forecast

Brent crude prices lost their earlier upward momentum over the last few weeks with on going Atlantic Basin crude length. But fundamentals are at an inflection point and will improve from here with high refinery runs this summer and sequentially declining U.S. crude production. As crude stocks erode, prices will gradually strengthen. Gasoline cracks are currently strong with declining inventories and increasing coverage requirements for local/export demand growth in the Atlantic Basin. Gasoline cracks should remain very healthy for the next few months. With high refinery production in the Atlantic Basin and new distillate-oriented refineries starting up in the Middle East, Turkey, and Latin America, middle distillate stocks will build. Diesel cracks will weaken, bottoming in July-August before seeing seasonal recovery. Recent European refinery margin strength, the best in many years, will gradually erode.

Slight U.S. Stock Decline this Past Week Further Narrows Stock Excess

The crude stock decline this past week more than offset the product inventory increase, leaving stocks slightly lower. This was the largest crude stock decline this year and it came as refiners ramped up runs to a weekly high for the year. For the same week last year, overall commercial stocks increased, resulting in the year-on-year stock excess narrowing. The bulk of this excess is in crude oil. Gasoline stocks are now just 1.8% higher than last year, and with recent demand up 4.6%, days supply forward inventory cover is a lot tighter than last year.

Japanese Crude Runs Drop Sharply, Crude Stocks Surge

Crude runs dropped sharply reflecting a major refinery fire and ongoing turnarounds. Crude imports rose and crude stocks surged 6.7 MMBbls. Finished product stocks drew 0.5 MMBbls. Gasoline demand rebounded with higher yield, and stocks posted a draw. Gasoil demand eased with a surge in yield and lower exports so stocks built. Kerosene demand was very low and the stock build rate came in at 41 MB/D, despite lower yield. The indicative refining margin remains very good.

Earthquakes in Oklahoma: Increased Costs Looming for Wastewater Disposal

The increasing frequency of earthquakes in Oklahoma is becoming a growing concern for the state’s fracking industry. While the causal link may not have been conclusively proven, regulators are already taking action to impose restrictions on the disposal of produced water. Additionally, insurance companies are denying coverage for "man-made" earthquakes, and lawsuits from parties suffering earthquake damage continue to increase in frequency. While we do not believe that production is threatened, costs are likely to rise. If shallower injection wells and lower pressures solve the problem, the cost impact will likely be minor. If water treatment is required, the costs would become meaningful, but we do not believe that is a likely case.

Propane Price Recovery Underway

U.S. NGLs prices were broadly higher last week as the plunge in propane over the past several weeks was seen as overdone. Market participants saw value at lower levels and scooped up length. Mt. Belvieu June NYMEX futures ripped 15% higher on conviction buying, with prices increasing every day of last week. Contango in the June-August propane spread has blown out to 6¢/gal, a price sufficient to make storage plays profitable in even the most expensive storage situations.

Manufacturing Margins Fell for the Third Straight Week

U.S. ethanol prices were slightly higher the week ending June 5, tracking corn values. Manufacturing margins fell for the third straight week as co-product DDG prices decreased.

U.S. D6 Values Plunge

U.S. ethanol production advanced to 992 MB/D last year matching the highest level ever reported in the DOE's weekly supply report. D6 RIN values plunged to the lowest levels in over a year.

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

Global upstream oil and gas deal activity, including capital markets and Mergers and Acquisitions (M&A), totaled $19.3 billion from 125 transactions in June 2015, marking a $4.3 billion decrease in value from the $23.6 billion across 119 deals posted in May 2015, says research and consulting firm GlobalData.

According to the company’s latest monthly upstream deals review*, upstream M&A accounted for $8.8 billion from 18 transaction announcements in June 2015. While this was a significant drop from $11.7 billion in May 2015, the number of M&A transaction announcements increased from 13 in the previous month.

Matthew Jurecky, GlobalData’s Head of Oil & Gas Research and Consulting, states: “Capital raising continues at the healthy clip seen in 2015, driven by debt offerings in the US almost a year from prices collapsing. Companies continue to seek financial flexibility and restructure short- and reserves-based capital to avoid bankruptcy.”

GlobalData’s report says that Europe, the Middle East and Africa (EMEA) led the global acquisitions market in terms of value in June 2015, with a 39% regional share totaling $4 billion. This came from 18 deals, of which 14, with a combined value of $4 billion, were announced, and four, with an undisclosed value, were completed. The majority of M&A activity in EMEA was centered on offshore assets, which delivered the greatest share of deal volume with 10 deals in June 2015.

Jurecky comments: “M&A momentum continued in June with Emirates National Oil Company proposing a buy-out of Dragon Oil, BP buying a stake in one of Rosneft’s Siberian fields, and Wintershall selling a package of North Sea assets to Tellus Petroleum (Tellus).”

Other significant transaction announcements include a proposed $2.3 billion merger between Vedanta and Cairn India, as well as an acquisition of royalties from Cenovus for $2.67 billion by the Ontario Teachers' Pension Plan.

Jurecky concludes: “Market conditions will continue to fuel a desire for M&A. After a failed attempt years ago, Emirates National Oil Company is another case of a company taking advantage of depressed asset values to consolidate ownership in one of its positions, Dragon Oil.

“On the other hand, Wintershall is disposing of lower growth assets, which for Tellus is an opening into a stable and dependable production base.”

*Monthly Upstream Deals Review – June 2015

As strained negotiations between the Greek government and European financial ministers enter the end-game, the impact on energy markets remains uncertain. Setting aside both the deeply troubling social impact for Greek citizens and other major forces – from Chinese equities to an Iranian nuclear deal – the threat of Greece leaving the Euro is already dampening crude prices. The concern for oil markets centers around two factors: the consequences for economic stability and growth in Europe, and strengthening of the US dollar.

Greece herself consumes less than 0.4% of global crude, produces fewer than 9,000 barrels per day and had an economy of $240bn last year – around 0.3% of the global total. An exit from the Euro, however, threatens the breakup of the Eurozone itself, a major global economy and consumer of 9.7 million barrels of oil per day. Should Greece ‘walk away’ from her debts, exposure to the debt in other member states, coupled with premiums for borrowing (particularly in Southern Europe) could be expected to usher in another period of recession. Estimates from the IMF suggest a contraction of between 2% and 5% is possible. While this picture remains highly uncertain, historical linkage of oil consumption and GDP growth would imply a potential reduction of 360 kboe/d per year in consumption. Tiny indeed, but in an over-supplied market, every portion of demand is important.

Ever-deeper uncertainty within Eurozone economies however, is likely to increase the flight of capital to dollar-based equities, The Euro has already fallen 18% against the dollar in the past 12 months and a Greek exit would likely dampen this significantly as investors look nervously at other debt-laden Euro members. A strong dollar weakens international oil demand as the commodity, traded in USD, is more expensive on a relative basis.

If ‘Grexit’ becomes a reality it will serve to further dampen the recovery in oil price – It will be interesting to see the impact of the weekend’s ‘In-Out’ meetings in Athens and Brussels on oil prices in the week ahead.

Between 2009 and 2014, refining margins rarely exceeded $5/bbl in Europe and $8/bbl in Asia, whilst the USA was the only safe-haven, averaging $15/bbl. In 2015, however, the game changed as the global oversupply triggered a crude price collapse, resulting in healthier refining margins – year-to-date averages in Europe are $9, $12 in Asia and the in USA $20.

This plot is not new and many would expect that in markets geared heavily towards light/sweet oil the premium for processing lower quality crude – the ‘complexity advantage’ – should tighten in a low oil price environment. However, this is not happening. Since early 2015, a barrel of Russia’s Urals trades at a discount to Brent of $1.5, oscillating in a -$1/-$2 range. Nigeria’s Bonny Light, arguably one of the highest quality crudes, traded last week at a 10-year low premium to Brent of $0.23, vs. +$2 in early 2014.

Many factors are at work here. Firstly, the downstream supply chain is rather rigid, as refineries are designed and located for ease of supply and so process specific crude grades, making switching uneconomical. But the primary driver of reduced premiums is now the level of oversupply of crude. Spectacular growth in US light oil production has squeezed output of light/sweet West African, and heavy/sour South American crude grades. Meanwhile, the Middle East maintains production and becomes the reference for Asian buyers, leaving European refineries with a steady Russian output supplied through pipelines.

Recent history teaches the virtues of composure. Following the US fracking revolution, Gulf Coast refineries freshly upgraded to process anticipated heavy/sour foreign crude have not seen returns on their investments, while those who passed on costly upgrades are now well positioned to process booming domestic light/sweet production. However, refiners shouldn’t be banking on sustained high margins. As the market works through an enduring supply glut, and grapples with the prospect of renewed Iranian output, the complexity advantage is likely to prove as volatile as crude prices.

Antoine Paillat, Douglas-Westwood London
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A sustained supply glut has maintained Brent oil prices through the first five months of 2015 at some 47% lower than the same period in 2014. Industry observers expect low oil prices to eventually take supply out of the market and drive a price correction.

So, when will this happen? To-date, supply appears unaffected – latest figures from the EIA indicate that US production has risen almost 13% in the last 12 months. Saudi Arabia is much the same, production has hit a record rate of 10.3 mb/d. Many of the projects committed to over the 2011-2014 period (where we saw record levels of E&P Capex) are only just starting to come into production due to the long lead-times.

Returning off-market crude has further boosted supply. Political disruption notwithstanding, Iraqi oil production has hit new highs in 2015, while recent announcements by the Ministry of Oil (MOO) show crude exports in May hit record levels for the second consecutive month. What with OPEC’s 5th June meeting reaffirming the cartel’s decision to hold crude production at 30 mb/d, it is hard to see a supply-led oil price recovery any time soon.

Oil price recovery will instead hinge on growth in energy demand and, by association, economic growth. However, in April this year the IMF reported an expectation for 2015 of ‘moderate’ growth of 3.5% with “weaker prospects for some large emerging market economies”.

According to BP’s Energy Outlook 2035, liquids demand growth to 2020 will be focused outside of Europe and North America, with China playing a large part. Total growth in oil demand is expected to be 6%, while DW’s D&P forecast indicates supply growth of 5% over the same period. It follows logically that prices will recover, but that recovery is likely to be slow and gradual.

Matt Adams, Douglas-Westwood London

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NYC-based PIRA Energy Group believes that pessimism about oil prices because of the Iran nuclear deal and economic concern about China and Europe are overdone. In the U.S., the stock excess modestly widens. In Japan, crude runs continue to rise while product stocks rise on lower demand. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

European Oil Market Forecast

Brent crude prices lost ground over the last few weeks with bearish news/sentiment leading to a selloff of non-commercial (financial) net length in oil. However, pessimism about oil prices because of the Iran nuclear deal and economic concern about China and Europe are overblown. Under the Iranian nuclear agreement, incremental Iranian oil will not likely hit the market until the second quarter 2016. The ECB and Chinese authorities have enough levers to pull to maintain economic growth momentum, and there has been enough stimulus injected into the financial system to provide uplift to global growth in second half 2015. Near-term crude oil fundamentals have been tightening with high refinery runs this summer and sequentially flat/declining U.S. crude production. With crude stock declines, prompt prices have strengthened as expected. Gasoline cracks are very strong and should remain healthy for the next few weeks at least but will continue to decline from their seasonal peak earlier this month. For middle distillates, with high refinery production in the Atlantic Basin and new distillate-oriented refineries ramping up in the Middle East, stocks will build. Diesel cracks will continue to erode over the next one to two months before seeing some seasonal recovery. Recent European refinery margin strength, the best in many years, will fall below last year’s levels by 4Q15.

U.S. Stock Excess Modestly Widens

This past week’s 2.8 million barrel inventory increase was 1.6 million barrels larger than the build last year for the same week, slightly widening the year-on-year inventory excess to almost 147 million barrels, or 13%. The product excess narrowed by 1.6 million barrels, but the crude excess widened by 3.2 million barrels despite this past week’s substantial crude inventory decline.

Japan Crude Runs Continue to Rise, Post-Turnarounds, While Product Stocks Rise on Lower Demand

Crude runs posted a second straight significant rise as maintenance continues to wind down and unplanned outages have restarted. Crude imports fell back and crude stocks posted a 3 MMBbls draw. Finished product stocks built by a slightly lesser amount, with gasoline, gasoil, and kero demands falling and their stock levels rising. The indicative refining margin remained good and little changed. Stronger gasoline cracks offset declines in the other major cracks.

Fracking Policy Monitor

EPA's study thus far did not find evidence that fracking “led to widespread, systemic impacts on drinking water resources in the United States.” A judge in Wyoming has temporarily put a halt to the BLM’s rules for fracking on federal lands. Texas and Oklahoma passed laws that would prohibit local bans on fracking. Also in Oklahoma, a state Supreme Court ruling makes it easier for it to sue for damages resulting from earthquakes.

U.S. LPG Prices Outperform

Mont Belvieu LPG prices stood strong for a second weak despite sharply lower broader energy market pricing. August propane futures at the market center were mostly unchanged on the weak despite sharply lower crude oil, thus propane’s ratio to WTI strengthened yet again, to near 36% of US benchmark oil. Augy butane at MTB fell a fraction of a percent to settle just under 58¢/gal. Prompt ethane prices gained 1% with stronger natural gas prices.

Ethanol Manufacturing Margins Declined for the Eight Straight Week

Most U.S. ethanol prices rose slightly the week ending July 10, supported by higher corn costs. Manufacturing margins in Chicago have decreased for eight straight weeks, however, as recent increases in raw material costs could not be fully passed through.

U.S. Production of Ethanol-Blended Gasoline Decreases

Ethanol-blended gasoline production declined sharply to a six-week low 8,837 MB/D the week ending July 10 as total gasoline output dropped and ethanol made up a smaller percentage of the total pool. Ethanol output fell slightly to 984 MB/D, down 3 MB/D from the previous week, but up 41 MB/D year-on-year.

Incremental Iranian Oil Now Expected in 2Q16

PIRA updates its view on the return of Iranian oil given the timeframe laid out in the nuclear accord finalized on July 14. We now believe incremental Iranian oil will hit the market in the second quarter of 2016, likely April or May. Once sanctions are lifted, we expect Iranian crude production to rise rapidly, from 3.0 MMB/D currently to full capacity of 3.5 MMB/D by the end of 2016. Our forecast for 2016 Iranian production is close to PIRA's June Reference Case, although first half production is slightly lower and second half production slightly higher.

Finalized Nuclear Deal Confirms Incremental Oil Not Likely Until 2016

The final nuclear deal reached by Iran and the P5+1 is in line with PIRA's expectations that incremental Iranian oil will not hit the market until sometime in 2016. The deal is to be adopted within 90 days, perhaps sooner, but implementation is not likely to occur in less than four to six months. Sanctions relief is dependent upon IAEA verification that Iran has implemented specific nuclear-related measures, which will take time to establish, verify, and report. There is also still potential for delays or slow movement during the process. For now, PIRA assumes Iranian oil exports will increase by 300 MB/D in the first half of 2016. Increases are expected to slow thereafter, and we expect Iran to reach full crude productive capacity of 3.5 MMB/D in 2017.

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

NYC-based PIRA Energy Group believes that crude stock draws have already begun and will pick up momentum in the third quarter. In the U.S., crude and products stocks showed builds. In Japan, crude runs fell marginally and imports dropped back such that crude stocks corrected lower. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

World Oil Market Forecast

Wage gains in developed world to drive faster second half global economic growth with Greece risks muted by potential aggressive ECB/Fed action if needed. The worst of oil market imbalance is over with inventory overhang being much less than generally expected. Crude stock draws have already begun and will pick up momentum in the third quarter. Longer-term supply/demand fundamentals are bullish. The United States is becoming a big factor in the NGL market. MENA geopolitical risks to supply remain substantial, and while an Iranian nuclear deal looks more likely than not, oil markets are expected to have to wait until 2016 for more Iranian oil, and by that time it will need it.

Robust U.S. Stock Build

Commercial stocks built this past week, as both crude and products showed builds. This reversed eight consecutive weeks of crude stock draws, but we expect the crude draws to continue next week. Total demand growth remains strong, including gasoline and distillate. We think the April and current weekly reported crude production values are too high, most likely driven by an overstatement of Texas production.

Japanese Crude and Finished Product Stocks Draw

Crude runs fell marginally and imports dropped back such that crude stocks corrected lower. Major product demand performance was much stronger, up nearly 0.5 MMB/D. All the major finished product stocks levels declined. The indicative refining margin remains very good, though softer on the week as all the major cracks gave ground.

Freight Market Outlook

Tanker markets have been counter-seasonally strong in all size groups during May and June. OPEC and Saudi crude production are near record levels, while refiners are reaping stellar margins across the globe and are more than willing to process (and ship) the additional barrels. Unintended floating storage has also provided support as international markets are struggling with surplus barrels. As a containment step while seeking a buyer, these unplaced cargoes are being slowed down while in-transit or delayed upon arrival resulting in substantial opportunity and demurrage costs well in excess of current contango credits. The recent surge in rates is not likely to persist unless floating storage expands further, which is unlikely in PIRA’s view.

U.S. NGL Field Production Soars

U.S. NGL field production has been increasing at accelerating rates. New data from the EIA show that at 3,314 MB/D, April total NGL field production was nearly 14% higher than a year ago. Year-on-year production increases have been running between 13-15% for each month of this year thus far. PIRA had expected to see field production increases begin to abate due to lower drilling and investment activities; however, this has yet to occur in any meaningful way.

Ethanol Prices Increased

Ethanol prices strengthened during the last half of June as stocks drew and the production of blended gasoline hit record levels. Assessments were also supported by rising raw material costs.

U.S. Output and Stocks Lower

U.S. ethanol production dropped to a six-week low 968 MB/D the week ending June 26 as heavy rain and flooding disrupted operations at some Midwestern plants. Inventories have plummeted by nearly 1.2 million barrels over the past two weeks as ethanol-blended gasoline production soared to a near-record 9,106 MB/D last week.

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 the peak in the crude oil surplus has passed. In the U.S., commercial stocks reach new record level, as surplus falls again. In Japan, crude runs rebounded, imports were low and stocks drew. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Asia-Pacific Oil Market Forecast

The peak in the crude oil surplus has passed. Products stocks, on the other hand, which had been near multi-year norms in the three major OECD markets, will grow in coming months, despite rising demand. The transition from crude surplus to more of a product surplus will begin to pressure refinery margins lower. Gasoline cracks should remain healthy for the next several months due to declining inventories and increasing coverage requirements in the Atlantic Basin. Middle distillate cracks will ease, with new refinery startups in the Middle East, Turkey, and Latin America ramping up and supplies increasing ahead of demand growth.

U.S. Commercial Stocks Reach New Record Level, As Surplus Falls Again

Total commercial stocks built last week to a new record high level. However, last week’s stock build was less than half of last year’s build, as the total commercial stock surplus versus last year narrowed to the lowest excess since January. June of last year is when commercial stocks began to approach the top of the five-year range.

Japan Crude Runs Rebounded, Imports Were Low and Stocks Drew

Crude runs recovered almost one third of the drop from the previous week despite the ongoing outage at Kashima. Crude imports were very low and crude stocks drew 4.1 MMBbls. Finished product stocks drew 1.4 MMBbls. There were draws on all the major products other than kerosene. Demand performance was mixed across products, but aggregate demand was higher. The indicative refining margin remains very good. Gasoline and naphtha cracks firmed, while middle distillate and fuel oil cracks eased.

Tight Oil Operator Review

Operators focused on the direct and indirect effects of the lower price environment on their production profiles for 2015. Drastically lower rig counts have started to make a dent in production growth, but the bulk of the effect will not be felt until 2Q15. Most operators predict that their 2015 exit rate will be lower than 1Q15 production, indicating a relatively weak 2H15, unless prices improve. The outlook for 2016 remains uncertain, but most operators appear upbeat for 2016, expecting prices to rise and claiming to be ready to ramp up activity.

U.S. Octane Values Spike Higher

Octane values have recently spiked. This follows a pattern that has prevailed since 2012 of rising octane values during spring turnaround season and the transition period between summer and winter grade gasoline. There is a confluence of factors that led to this increase, notably increased premium gasoline demand and changes in refinery and petrochemical operations.

El Niño's Impact on Distillate Demand in the U.S. and Europe

PIRA analyzed the 5 strongest El Niño's measured over the October through March period for the last 20 years. For the U.S. only the strongest El Niño impacted distillate demand. For Europe, 3 out 5 El Niño's had an impact on distillate demand.

Waterborne LPG Freight Leaps Higher

Spot VLGC freight rates are soaring at the highest levels of the year. The cost of freight on the benchmark Ras Tanura to Chiba route jumped 5% to just below $120/MT. Meanwhile the cost of freight from the USGC to Japan continues to be quoted above $250/MT and around $90 for shipments from the U.S. Gulf to NW Europe.

Ethanol Prices plunge

U.S. ethanol prices plummeted the week ending June 12 due to near record production and rising inventories. Manufacturing margins fell for the fourth consecutive week as co-product DDG prices decreased to the lowest level of the year.

Ethanol Output Falls

U.S. ethanol production fell for the first time in six weeks during the week ending June 12, dropping to 980 MB/D from 992 MB/D in the preceding week. Despite the decline, output was still at the second highest rate of the year.

Biofuels Programs Continue in Over 60 Countries

Although about 80% of the biofuels are produced or consumed in the U.S., Europe and Brazil, more than 60 countries have biofuels programs.

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

NYC-based PIRA Energy Group reports that May WTI price rises as Cushing crude stocks fall. In the U.S., commercial stocks reach another new record level, even as surplus falls. In Japan, crude runs continue dropping with higher stocks. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

May WTI Price Rises as Cushing Crude Stocks Fall

The rebound in crude prices continued in May, with WTI averaging nearly $60/Bbl and exceeding that level on several occasions. Crude balances remained tight in Canada and West Texas, and stocks began to decline from record high levels in Cushing and the Rockies. Most price differentials were little changed, remaining near or slightly above pipeline parity, except for heavy Canadian grades, which continued to strengthen on heavy demand and late-month wildfires.

U.S. Commercial Stocks Reach Another New Record Level, Even as Surplus Falls

Total commercial stocks built a combined 7.4 million barrels this week, but still built less than this week last year, so the year-over-year surplus narrowed. Demand fell about 1.1 million barrels a day this week, reflecting a similar fall last year, most likely influenced by the Memorial Day holiday. The total commercial stock level was a new record high.

Japanese Crude Runs Continue Dropping with Higher Stocks

Crude runs dropped another 89 MB/D, with a big reduction in the crude import rate such that the crude stock build was limited to 1.6 MMBbls. Finished product stocks rose primarily due to builds in naphtha and fuel oil with a lesser rise in kerosene. Gasoline stocks built slightly and gasoil stocks drew. The indicative refining margin remains good but slightly lower on the week due to narrower light product cracks but better fuel oil cracks.

2015 Iraq Oil Monitor

Rhetoric is escalating between Baghdad and the KRG over alleged noncompliance with the export- and revenue-sharing agreement. The need for revenue is expected to drive cooperation for now, but risks to the deal are rising. The fight against ISIS does not present an imminent danger to Baghdad or southern production, but the growing role of Shiite militias in Anbar province threatens to exacerbate sectarian tensions. Investment cuts could endanger anticipated production ramps, but new infrastructure and segregation of crude grades at Basrah should facilitate higher exports starting in June.

EIA’s Upwardly Revised U.S. Monthly Crude Production Not Necessarily Bearish

The recent upward revisions to monthly and weekly crude production data caught analysts off guard. We do not think this is a bearish development, however, because the offsetting decline to the crude balance item, following the upward revisions to crude production, minimizes the bearish impact of the higher reported production numbers. March crude stocks and stock change were revised down, not up, in spite of the highest reported monthly crude production since 1970.

OPEC

OPEC met to roll over the existing agreement. Efforts to have a non-OPEC/OPEC output cut have been thwarted by Russia’s unwillingness to participate. The recent strength in oil prices over the last month has reduced pressure for this initiative. The Gulf OPEC members see strong demand for their crude and expect prices to strengthen to end year with $75/Bbl Brent a distinct possibility.

Ethanol Prices Fall

U.S. ethanol prices tumbled the week ending May 29 pressured by higher production and lower corn values. The EPA's bearish announcement of proposed biofuel mandates added to the decline.

Ethanol Output Increases

U.S. ethanol production continued to advance the week ending My 29, rising to a four-month high 972 MB/D from 969 MB/D in the prior week. Inventories were essentially flat, declining by only 29 thousand barrels to 20.1 million barrels.

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.

After 10 years of diplomatic negotiation, the UN P5+1 countries (the US, the UK, France, China, Russia and Germany) at last reached an agreement to unwind economic sanctions on Iran in return for significant international control and surveillance over its nuclear activities. The long-awaited deal will revive foreign investment in Iran, as Western IOCs renew pre-sanction projects. Brent dropped $1.15 to $56.70/bbl on the back of the announcement, with markets fearing a worsening of the global supply glut.

Iran holds the world’s fourth-largest oil reserves and second-largest gas reserves, whilst being the second largest OPEC producer after Saudi Arabia. In 2014 total Iranian production, heavily driven by gas and condensate production from the giant South Pars field, amounted to 6.7 mboe/d. During the sanction period, however, Iran had limited access to technology from the West and complex LNG export terminal projects stalled. Vast capital inflows will now be required to develop under-invested Iranian fields, however, due to the large reserves base, DW believes appetite to invest in Iran will be strong amongst major operators.

Whilst no sanctions will be lifted before December, DW believes that Iranian liquids production will rise to a 2015 average of 3.5mb/d, based on pre-sanction production levels and available oil currently stored in storage tankers off Iran. Further production gains are expected as additional development phases of South Pars come onstream, while the removal of sanctions will clear supply bottle necks out of the Persian Gulf. IOC investment in the country’s huge potential will further boost production as sanctions are rolled back, though any new projects will see a lag of several years from lease acquisition to production phases.

Global oil prices have been weighed down in recent months by resilient US production, record Saudi output, continued weakness on the demand side, and the Grexit prospect. Whilst commodity prices are unlikely to be aided by an opening of Iranian taps, the true tidal wave of Persian crude could be later rather than sooner.

www.douglas-westwood.com

Petrobras has long been a pioneer in the adoption and deployment of deepwater technology. This has enabled them to build huge reserves of some 16 billion barrels of oil. Converting these reserves to production, however, is another matter and Petrobras has a history of setting ambitious targets, with a poor record of meeting them.

The long delayed ‘2015-2019 Business and Management Plan’ released last week is a reflection of the new reality for Petrobras. With collapsed oil prices and unfavorable exchange rates, Petrobras has slashed their expenditure plans by 40% from the plans announced a year ago. Recognizing the upstream challenges, the company is now allocating 84% of its budget to E&P compared to 70% in the previous plan. The biggest cut goes to their refining and supply sector which has seen its budget reduced by 67% compared to last year’s plan.

Production decline from existing fields is a huge challenge with around 200,000 bpd of capacity eroded each year. Brazil’s huge deepwater potential remains constrained with Petrobras having to revise their production target for 2020, which now forecasts domestic oil output to increase to 2.8 million barrels per day – 40% lower than its projection 12 months ago. Douglas-Westwood predicts that over the forecast period, Brazil will need to drill around 300 development wells in deepwater, in order to sustain and reach its production target. However, of the 29 new rigs being built by the company, many are under threat from either funding problems or yards withdrawing from the contracts. Douglas-Westwood had already taken a conservative position on Brazil and the cut in production target now brings in line Petrobras’ expectations and our own ‘DW D&P’ forecast. The scale and importance of Brazil in the overall offshore sector means that the impact of the latest spending revisions will be felt throughout the oilfield service industry supply-chain.

Mark Adeosun, Douglas-Westwood London, This email address is being protected from spambots. You need JavaScript enabled to view it.

The crash in oil prices has led to a dramatic decline in the number and value of awards for FPSO units. There have only been three contracts awarded this year; a conversion for the Sankofa-Gye Nyame development in Ghana, a small conversion in Iran and an upgrade in Indonesia. In total these awards account for around $1.5 billion.

By comparison, in the first half of 2014 there were six orders and crucially, the value of those six was 528% higher than the three this year – demonstrating the lack of high Capex orders in the current low oil price environment. H1 2014 saw two newbuild contracts worth over $1 billion each, in addition to the awarding of a $4 billion contract for two converted FPSOs on the Kaombo field in Angola. This demonstrates the current caution of operators at the moment as they aim to bring costs down and wait for a recovery in oil prices before commissioning major projects.

Expectations for the rest of this year are little-better. Many awards have been pushed into 2016, while Petrobras are rumoured to be considering cancelling two topside contracts for FPSOs planned on the Buzios field. Douglas-Westwood forecasts that four more awards are likely this year while a further five could potentially be awarded if there is an improvement in the oil price.

Whilst the immediate outlook may not be positive, the future of FPSOs is still considered encouraging. FPSO solutions will be vital for the development of oil and gas fields in deeper waters as well as for marginal fields in mature regions. The current low oil price may lead to a decline in orders that continues well into 2016. However, Douglas-Westwood still forecasts FPSOs with a total value of $60billion will be installed 2015-2019 and within our in-house data we are tracking over 130 potential future deployments.

www.douglas-westwood.com

Despite surging production from U.S. shale plays, the scale of long-term production remains uncertain, leading to the question of where will be the next major play? Attention is being focused on Arctic Alaska, where reserves are waiting to be exploited. Geologists estimate total Arctic oil reserves of nearly 134bn BOE, 28% of which lie in US territory, and some 39bn BOE of natural gas. So what’s the catch?

Early last week, hundreds of “kayaktavists” blocked the entrance to Seattle’s port where Shell docked its Arctic bound Polar Pioneer drilling rig. The activists are concerned with the environmental impact and risks of Arctic drilling. Wilderness experts say there is a 75 percent chance of at least one large spill occurring in the Chukchi Sea over the next six decades. Shell’s initial exploration attempts in 2012, ending with the Kulluk drilling rig running aground, increased concern over the safety and potential environmental impact of the drilling activity.

With high depletion rates and uncertainty around the long-term ability of unconventional production to meet growing demand, Alaska is of strategic importance. In the longer-term, Alaska has the production potential to maintain US crude supply for decades to come. And Alaska needs the revenues. This future supply, however, depends on decisions made now. It takes years to acquire a permit and begin production in Alaska due to difficult conditions and non-existent infrastructure. Shell expects environmental approvals will delay production till the 2030s.

Other nations, such as Russia are moving forward with Arctic drilling and China is ‘ready to assist’. U.S. reserves, however, remain untapped as the “Paddle in Seattle” protest attempts to derail Shell’s efforts for Alaska exploration. Shell has sunk over $6 billion in preparing to recover oil with plans to drill up to four exploratory wells over two years in the Chuchki Sea. Shell’s drilling program this year could determine the future of Alaskan and US crude supply over the coming decades.

www.douglas-westwood.com