NYC-based PIRA Energy Group reports that Basrah Heavy enters the market. In the U.S., another counter-seasonal U.S. stock draw. In Japan, crude runs decline, with much lower crude stocks. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Basrah Heavy Enters the Market

Basrah Heavy, a new Iraqi crude grade, will begin loading in June 2015. The crude is quite heavy (23.5° API) and high in sulfur (4.2 wt. %), and is more similar to Mexican Maya crude than most other Middle East grades. SOMO, the Iraqi oil marketing authority, has introduced this crude because the average quality of Basrah production from southern Iraq has been declining over the last several years due to inclusion of new production from heavier fields including West Qurna 2, Missan and Halfaya. PIRA believes SOMO has crafted a sensible marketing strategy to deal with changing production quality and capture high value for their sales.

Another Counter-Seasonal U.S. Stock Draw

Overall commercial oil inventories fell 2.1 million barrels this past week following the week earlier stock decline of 5.5 million barrels as product demand remained very strong. Year to date, the DOE weekly demand data adjusted for normal degree days and actual product exports (versus the DOE assumptions) is up 440 MB/D. Sixty percent of this increase is in gasoline certainly suggesting price matters despite a weak U.S. economy. The latest four week average adjusted demand is running 740 MB/D, or 4.0%, higher than last year.

Japanese Crude Runs Decline, with Much Lower Crude Stocks

Crude runs dropped 174 MB/D with low imports such that crude stocks drew strongly. Finished product stocks rose modestly. Gasoline demand fell back after the holiday, while gasoil demand rebounded. Kerosene demand was moderately strong and the stock build rate fell back. The indicative refining margin remains good with all the major product cracks firming on the week.

U.S. Shale Oil Independents Also Winning Reserves Additions Battle

For the period between 2010 and 2014, the average reserves replacement ratio of a group of U.S. independents has been twice as high compared to Big Oil (216% versus 105%). However, a large portion of these newly added reserves are associated with future shale oil/gas drilling locations that may need to be drilled within a five year period or be taken off the books. If drilling activity stays at the current low level due to sustained low crude prices, it may be a challenge for the independents to keep all those reserves in the proved category. For independents, this can affect their ability to get favorable financing or issue equity.

Asian Arbitrage Hampered by Soaring Freight

Saudi CP Propane futures languished as soaring spot freight continued to make the arbitrage East unworkable. June CP futures lost 7% to $407/MT, approaching the low levels plumbed in January. Meanwhile, the Far East Index dipped 2.6% to near $500 while butane prices were steady at $542/MT. LPG prices in Asia remain in tight competition with naphtha for petrochemical use, necessitating lower source pricing for triggering incremental demand.

U.S. Ethanol Prices and Margins Increase

Chicago ethanol prices rose the week ending May 15, supported by robust demand in the domestic markets, as well as the third straight week of stock draw. Manufacturing margins improved for the ninth consecutive week to levels not experienced since December.

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 Cushing crude stocks hit record high, but big draws coming. In the U.S., stock excess marginally narrows. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Cushing Crude Stocks Hit Record High, but Big Draws Coming

Crude prices rebounded in April, as rig counts continued to drop and shale production appeared to be leveling off. Cushing stocks rose to a record 62 MMB, but Canadian stocks dropped, as the flood of exports to the south continued. These volumes will be sharply lower over the next few months. In addition to less crude from Canada, Cushing will receive less from Midland, while sending more out to the Gulf Coast. Stocks at Cushing have likely peaked.

U.S. Stock Excess Marginally Narrows

The lowest crude and product imports of the year could not manage to substantially change the week-on-week stock build because reported demand fell sharply to the weakest level of the year. The overall inventory build was marginally lower than what occurred last year in the same week. The obvious noteworthy feature of the data was the first crude stock draw of the year. Gasoline and distillate stocks remain above last year, while the crude excess narrowed.

Aramco Differentials Generally Raised for June Barrels

Saudi Arabia's formula prices for June were just released. Adjustments have been made consistent with a number of important factors Saudi Arabia considers in setting its monthly prices: market value for their crude in the key importing markets, available supply for export against increasing domestic burn during summer, competitiveness against competing grades, and global refining margins. Differentials to Northwest Europe were raised most significantly, $1.10-1.40/Bbl, with the greatest increase on the heaviest grades. Elsewhere, changes were minor.

Constructing a Back-of-the-Envelope Model of the U.S. Jet Fuel Demand

Back-of-the-envelope models succinctly capture the important variables in forecasting a particular petroleum product’s demand. PIRA has built just such a model for U.S. kerojet demand. We capture the impact of ticket prices, revenue passenger miles traveled, available seat miles and load factors on kerojet demand. The model predicts U.S. jet fuel demand will increase 3.5% in 2015.

Panama Canal Expansion in 2016 Will Impact U.S. LPG and Condensate Exports More than Crude

When the Panama Canal Authority delivers on its long awaited $5.2 billion canal expansion project next year, the impacts will vary depending on the petroleum market. U.S. exports of LPG and condensate will gain significant competitive advantages due to reduced transit times to Asia, and the subsequent freight cost savings, while the changes to crude oil and refined product trade flow will be relatively minor.

LPG in Asia Dragged Lower

Asian LPG markets followed the rest of the world lower with the June Propane Far East Index losing $19 on the week to settle at $506/MT on Friday, just 50¢ higher than cash. Butane for June delivery was assessed at a $20 premium to C3. Regional LPG prices are becoming increasingly attractive to the petrochemical sector, with C3’s discount to naphtha now wider than $70/MT.

Ethanol Values Increase

U.S. ethanol prices advanced during April boosted by lower supply because many plants were shut down for spring maintenance. Higher petroleum values also provided support.

Ethanol Output Plunges

U.S. ethanol production plummeted last week, dropping to a 29-week low 887 MB/D from 921 MB/D in the previous week as several more plants went offline for spring maintenance. Only 35 thousand barrels were drawn from inventories, which remained at a relatively high 20.8 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.

The oil & gas industry currently suffers a shortage of mid-career professionals primed for leadership & supervisory roles, the legacy of the last oil price downturn in the 1980s to mid-90s. At that time the industry endured significant job losses, and hiring came to a standstill. As a result of the limited talent added, the group of individuals advancing into supervisory or eventual leadership positions in the oil and gas industry is notably small.

Since oil price started declining late last summer, layoffs in today’s industry are nearing 100,000 worldwide. Oilfield service companies Schlumberger, Baker Hughes, and Halliburton announced layoffs of around 20,000, 10,500, and 9,000 employees respectively, while E&Ps BP and Chevron each announced layoffs approaching 10,000 of their employees. According to a survey completed in January 2015 by Rigzone, 44% of the surveyed companies indicated that they plan to hire fewer workers over the next six months while 5% indicated they plan to completely halt hiring efforts.

Although the oil & gas industry employs numbers of low-skilled workers, the lifeblood of the industry is the variety of specialized engineers, technicians and rig crews who boast years of involvement in the field along with formal training or university degrees. Continuing widespread layoffs, frozen or reduced pay checks and the effects a lengthy downturn will have on the industry can dissuade such individuals from pursuing careers in oil & gas and encourage college graduates to move into more stable industries.

Just as the legacy of the 1980s-90s created a shortage of experienced workers – contributing to rising costs, execution challenges, and safety concerns – the numbers of lost personnel, both current and future, threatens the long-term capacity of the industry. To many in the business it feels like history is repeating itself.

Katherine Dunn, Douglas-Westwood Houston

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NYC-based PIRA Energy Group reports that Saudi Arabia opts for market share over price. In the U.S., commercial stocks reach new record level even as surplus falls. In Japan, crude runs slightly higher, but lower crude and product stocks. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Playing with Fire, Lessons from the 1980s

The recent decision by Saudi Arabia to opt for market share over price, at least temporarily, is similar in many ways to the decision reached in the mid-1980s. However, there are important differences as well, particularly with regard to the level of spare capacity. In the 80s the change in behavior was not instituted until spare capacity built to over 10 MMB/D. This time, the change was made in advance while spare capacity was still historically low. If the demand and non-OPEC supply responses to lower price are similar to what was experienced in the 80s, the very low level of spare carries a risk of a price spike in the not too distant future.

Commercial Stocks Reach New Record Level, Even as Surplus Falls

Total commercial stocks built last week to a new record high level. However, the stock build was half of last year’s, so the total commercial stock surplus versus last year narrowed for the first time during 2015. It was that week last year that U.S. commercial stocks started their long march up, from the low end of the range to the high end.

Japanese Crude Runs Slightly Higher, but Lower Crude and Product Stocks

Crude runs increased slightly, with crude imports staying low such that stocks drew modestly. Finished product stocks drew a similar amount. Gasoline and gasoil demands eased, with gasoline stocks modestly higher and gasoil stocks modestly lower. Kerosene demand rose and stocks drew 31 MB/D. The indicative refining margin eased on the week but still remains statistically strong.

Fracking Policy Monitor

BLM issued rules for fracking on federal lands, though unlikely to impact production. EPA methane rules are still awaiting proposal. Bottlenecks are possible: in the Bakken due the state’s crude processing standards; and in the Marcellus due to state and federal regs limiting options for wastewater disposal. Seismic events have caused restrictions on wastewater disposal, while also causing friction between the state government and the insurance industry in OK. The Denton, TX fracking ban seems destined to be overturned.

U.S. NGLs Follow Crude Prices Higher

Mt Belvieu LPG prices rose in line with WTI, with May propane prices increasing 7.2% to 57.5¢ and butane +6.6% to 68¢/gal. prices in Conway, KS also rose, but continue to be pressured by high stocks with discounts to Belvieu in May increasing to over 6¢ on both C3 and C4. Gulf coast ethane outperformed Henry Hub natural gas, increasing nearly 1¢ to 17.3¢/gal.

The EPA Will Issue the Proposed Mandates for 2015 by June 1

The EPA announced a proposed settlement with the API and AFPM regarding deadlines for issuing the annual requirements under the RFS program. The Agency will propose the mandates for 2015 by June 1.

U.S. Ethanol Output Drops to a 25-Week Low

U.S. ethanol production fell to a 25-week low 924 MB/D the week ending April 10 from 936 MB/D in the preceding week as several plants were down for spring maintenance. Inventories increased by 162 thousand barrels to 20.6 million barrels, with all of the build occurring in PADD I.

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.

For the US energy industry, 2014 will be remembered as the year when crude oil prices fell below 50 $/bbl, resulting in significant realignments in the sector. Aside from the oil price collapse and the historic high of domestic natural gas production, several other energy records were set last year. Both solar and wind energy production reached an all-time high in the US, contributing to a record 9.8% of total primary energy supply.

The US is ranked the second largest producer of wind energy. With more than 65 GW installed capacity in 39 states, wind energy represented over 4% of national power generation in 2014. Annual installations peaked in 2012 when some 13 GW of new capacity came online. At the time of writing, onshore wind energy is approaching cost-competitive levels around the country. However, while the US is internationally recognized for its strong offshore energy operations, there has been no utility-scale offshore wind energy production in the country to date.

Several groups have been working on offshore wind project plans, but they have faced funding difficulties and public resistance, which have negatively impacted their ability to reach a final investment decision. Throughout two rounds, the US Department of Energy selected three Offshore Wind Advanced Technology Demonstration Projects which are expected to start their operation in 2017.

Ahead of the government supported projects, and after seven years of planning, the construction of the Block Island Wind Farm – the first US offshore wind plant – finally began in April 2015. The 30 MW farm which will be located 18 miles from the coast of Rhode Island, consists of five turbines and is expected to start its operation in Q4 2016. The feasibility of the project is secured by a 20-year power purchase agreement. Compared to the European sites, the Block Island project is tiny, but it could prove the commercial viability of such projects for policy makers, utilities and capital funds, boosting further investment in the US offshore wind energy sector.

Patrik Farkas, Douglas-Westwood Houston +1-832-591-0202 or This email address is being protected from spambots. You need JavaScript enabled to view it..

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When oil prices dramatically dropped in the fall of 2014, operators began to significantly alter their plans. As months passed, many thought service providers would gain clarity on the upstream situation and begin to develop their own strategic plans. However, as we have progressed toward mid-2015, as answers have been obtained, many new questions have arisen.

Conoco CEO Ryan Lance said many producers were trading at valuations that still reflected a price closer to US$80 per barrel while Private Equity executives have mentioned to DW that many bid-ask spreads are too wide on transactions for E&P producers, particularly U.S. unconventional shale players. This is inhibiting some of the necessary revaluation and consolidation that will lead to a more normalized market environment. So oilfield service providers remain in limbo and investors struggle to mark them to market. Until management of service companies can assess market pricing, future activity levels and an understanding of which of their customers are going to be active, short term strategic plans remain fluid and long term strategies in jeopardy.

So how have service companies and manufacturers managed the situation? Schlumberger, for instance, have been very proactive and cut jobs and capital spending relative to projected activity declines. Others are betting on a stronger and quicker recovery, have less aggressively cut, and hope to be well positioned for a market resurgence – which could lead toward greater cuts if the environment doesn’t rebound accordingly.

Strategic planning is crucially important to the investor community and will be scrutinized in critical moments. It will also be an indicator for how in-touch leaders of oilfield service providers are with their businesses. It will be nearly impossible for managers to make unanimously popular decisions, but they will be expected to make the right ones. Time will tell on what companies managed the uncertainty most appropriately.

Andrew Meyers, Douglas-Westwood Houston

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NYC-based PIRA Energy Group believes that the vast majority of the bearish news is already out and that the price lows for global crude oil markers are in. In the U.S., stocks build but surplus to last year narrows. In Japan, crude and finished product stocks build, amid higher demands. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Asia-Pacific Oil Market Forecast

PIRA believes that vast majority of the bearish news is already out and that the price lows for global crude oil markers are in. The current trajectory to crude stocks peaks in May, and then draws commence June-August. Supply disruptions, while having come off in March, will remain high for the foreseeable future. Any final deal with Iran will not result in significantly higher volumes until much later in 2015 at the earliest. Meanwhile, Saudi Arabia’s production is making new historic highs and the Kingdom is raising prices to Asian customers. The magic of price is working to tighten oil markets and higher oil prices are in the offing. PIRA has once again revised its 2015 crude oil price outlook higher.

U.S. Stocks Build but Surplus to Last Year Narrows

The United States had another hefty stock build this past week. Last year’s overall build in the same week was even larger leaving the year-on-year inventory excess modestly down. Over half of the year-on-year increase is in crude oil, while the bulk of the rest is in other products. Gasoline and distillate stocks are each 15-17 million barrels above last year, but since gasoline inventories are nearly double those of distillate the year on year excess is a smaller 7%.

Build, Amid Higher Demands

Crude runs increased slightly and crude imports rose such that stocks built. Finished product stocks also built. Gasoline and gasoil demands were higher, but with a slight stock build for gasoline and a more significant stock build for gasoil. Kerosene demand rose and stocks drew 30 MB/D, similar to the rate drawn in the previous week. The indicative refining margin eased on the week but still remains statistically strong.

Freight Market Outlook

Thus far in 2015 spot tanker markets have eluded the seasonal decline generally experienced during the second quarter of the year. Firm spot tanker rates helped by rising OPEC output and cheap bunkers combined to propel first-quarter vessel earnings to their best showing since 2008, and this momentum has continued in April. Although floating storage has not yet materialized to any significant degree, a current overhang of West African crude could produce some floating stocks.

High U.S. LPG Stocks to Keep Building

Propane inventories continue to climb in the offseason, with stocks adding 1.99 million barrels in the latest week, matching the previous week’s build. Propane inventories are currently 57.5 MMB, 31 million barrels higher than a year ago. Inventories of other NGLs and LRGs (excluding propane) increased by 2.7 million barrels last week, climbing to the 85.2 MMB level. The surplus to a year ago expanded to 12.6 MMB.

Ethanol Prices Rise

U.S. ethanol prices gained the week ending April 17 as petroleum values surged. Demand was strong as blenders prepare for the peak driving season. 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.

2015 may well be remembered as the year when natural gas truly announced itself as the major energy fuel source. With the announcement that Shell are targeting a $70bn deal for BG Group, and in doing so increasing their current LNG capacity to around 33 million tons per annum, the big dollars to secure gas capacity are coming into sharp focus. Should the acquisition complete, Shell will have access to gas resources from Trinidad & Tobago to Tanzania. BG’s Queensland Curtis LNG project could also provide a viable option to develop the major Arrow coal-seam gas development in Australia.

Elsewhere in Australia, Chevron is expecting to see first production from the defining Gorgon project by Q3 this year. A massive LNG project with estimated capacity of 15.6 million tons per annum, Gorgon is expected to boost the company balance sheet for 40 years. Described as a black hole for Capex following well known cost overruns – expected to approach 50% of the initial $37bn budget – safe and timely execution this year will be critical not only for the company but for the future of Australian supply capacity. Similarly, 2015 is a big year for the Wheatstone LNG sister project as major modules are completed and project integration continues prior to 2016 operation.

After much anticipation, the world’s first floating LNG vessel is also expected to begin operations for Petronas in Q4. The FLNG 1 represents a major technological advancement in the monetization of offshore gas assets. The success or otherwise of this unit, along with that of the under-construction Prelude (to begin operations for Shell in 2016), could signal the beginning of an era where stranded gas, marginal fields and major offshore gas discoveries can be processed offshore.

Acquisitions, major capital projects and large-scale technical developments suggest that 2015 is a fulcrum year for global gas supply.

Matt Loffman, Douglas-Westwood Houston

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www.douglas-westwood.com

NYC-based PIRA Energy Group believes that Brent crude prices will continue to gradually strengthen for the next few months. In the U.S., commercial crude and product inventories both declined this past week. In Japan, crude runs decline while crude and product stocks rise. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

European Oil Market Forecast

Brent crude prices will continue to gradually strengthen for the next few months reflecting improving crude balances with higher refinery runs, increased shipments to Asia, flattening United States/non-OPEC crude production and rising geopolitical concerns. Refinery runs will ramp up as maintenance winds down, peaking in June-August in the Atlantic Basin.

First Major U.S. Stock Draw of 2015

U.S. commercial crude and product inventories both declined this past week. The strongest weekly product demand of the year combined with relatively low crude imports to push stocks lower. The year-on-year stock excess narrowed by 9 million barrels to 157 million barrels or to a still large 14.4%.

Japanese Crude Runs Decline, While Crude and Product Stocks Rise

Two weeks of data were released this past week covering the traditional May holiday period. Crude runs eased both weeks, while crude and finished product stocks rose both weeks. Gasoline demand was higher, while most other product demands eased. Kerosene stocks began to build seasonally. The indicative refining margin remains good, but it has been coming off its highs.

Asia-Pacific Oil Market Forecast

Oil balances are tightening. A global crude surplus has been built, but it is about to be reduced as runs continue to rise supported by healthy refining margins. The balances will be increasingly helped by slowing non-OPEC supply growth as 2015 plays out, and then outright year-on-year declines in non-OPEC supply as we move towards year-end. Over the summer, Middle East producers, particularly Saudi Arabia and Abu Dhabi, will have limited additional barrels for sale as new refineries continue their ramp up and increased summer burn absorbs supply. Strategic reserve purchases of crude oil in India and China will add to crude demand.

Energy Commodities Continue to Strengthen

On a weekly average basis the S&P 500 rose modestly, and closed at a record high on Friday. Emerging market debt prices fell slightly with higher yields. Bond yields on Greek debt eased modestly as a resolution to the Greek debt problem continues to be worked through. The total commodity index rose on the week, as did energy. The U.S. dollar has continued to weaken against many currencies with noted declines against the euro, British pound, and Russian ruble. The Shanghai Interbank Offer Rate eased for the tenth straight week. Bond yields for longer term maturities have risen in the U.S., Europe, Canada, UK and Japan. The Chinese policy interest rate (1-year banking lending rate) was cut again.

European LPG Imports Saturating Demand

Well supplied markets are facing limited incremental demand in Europe. Coaster sized lots of propane were called a significant $50/MT (13%) lower on the week near $320/MT while the spread to larger cargoes widened to $60, indicating that prices on the latter will face increasing pressure in the coming weeks. Large butane cargoes fell 7% to $399, while barges were little changed.

U.S. Ethanol Prices Higher

The rally in U.S. ethanol prices continued the week ending May 8 as many plants were shut down for spring maintenance. Higher petroleum values also provided support.

Ethanol Production Rebounds

U.S. ethanol production rebounded from a six-month low the week ending March 8 as several plants came back online following spring maintenance. Output rose to 912 MB/D from 887 MB/D in the previous 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.

TRACS Urges Energy Sector to ‘Take Control’ of Its Global Assets Ahead of OTC

TRACS Assets, the Aberdeen-based leading asset tracking and rental management software firm on Wednesday 29th April 2015, announced the launch of ‘TRACS Mobile’ ahead of May’s Offshore and Technology Conference (OTC) 2015 in Houston, Texas. Thanks to a new strategic partnership between ecom instruments and Samsung, leading to their development of the world’s first ATEX Zone 1/Division 1 tablet, TRACS mobile application can now be brought into hazardous areas in the oil and gas sector around the world.

TRACS Mobile is a workflow application, which drives improved visibility of assets, facilitates stock movement in the field, reduces costs, enables more efficient workflow and enhances performance.

Jennifer Hall, Business Development Manager for TRACS, Assets, and Derek Austin, managing director of TRACS Assets, look forward to showcasing ‘TRACS Mobile’ at May’s Offshore and Technology Conference (OTC) 2015 in Houston.

Dr. Derek Austin, former student of Professor Higgs, of Higgs Boson God particle fame, and managing director of TRACS Assets says, “TRACS Mobile was a natural evolution for our software as it enables our customers to take control when in the field and in hazardous areas, thus simplifying the still common pen and paper reporting process and reducing human error. We recognized the future importance of hand held devices for the oil and gas sector and how this would impact on the use of our software, so looked to form a partnership with a leader in industrial hand held devices.”

Derek continues, “The strategic partnership formed with ecom instruments UK made complete sense in that we provide pioneering technology/software and they provide cutting edge devices, which can be used in even the most hazardous of areas. There was a definite synergy between both companies. We will be attending OTC and look forward to showing the benefits and usability of TRACS software to our clients, and the global energy sector. When coupled with the innovative handheld device from ecom, our software really does come into its own.”

Carl Henderson, managing director of ecom instruments UK, says, “We immediately saw the potential when running the TRACS Mobile application on our latest hardware. This powerful application, twinned with our latest device will be an effective tool for engineers and mobile workers in the oil and gas industry.”

Carl continues, “Innovation is not about invention, innovation is about taking existing components and bringing them together to create something greater than the sum of its parts. A prime example is the smartphone; operating systems, touchscreens, Gorilla Glass and integrated cameras all existed previously but when combined in the form of a smartphone, the results were breathtaking. The combination of ecom’s hardware and TRACS’ software solutions are extremely innovative and powerful and are certain to unlock the door to large cost savings across the industry.”

“With rapidly changing market conditions, there is an ever-growing need to become more productive and efficient while increasing the life-span of assets and equipment, all the while maintaining exceptional levels of safety. With a built-in camera and a full range of wireless capabilities, the Tab-Ex®, when used with TRACS software, enables equipment defects to be captured at the point of inspection, while maintenance work is executed, and made instantly visible to those who need to diagnose the issue and determine follow-on actions. We look forward to having the Tab-Ex® showcased at OTC, which will show end users the functionality of our device and its ease of use when combined with the TRACS Mobile software.”

The industrial revolution and ensuing growth of the great cities of the western world some 200 years ago was enabled by a change in primary energy supply – from wood to coal. Today it is said we are at the beginning of another period of change, from fossil fuels to sustainable energy – the move from black to green. However, this cannot be achieved all at once, it is a long journey and the first step is to change from burning highly polluting coal to cleaner natural gas.

Indeed to some extent this is already happening; coal-fired power generation in the US provided 39% of electricity production in 2014, down from 53% 1997, mainly as a result of the move to lower cost natural gas. In the European Union between 2000 and end 2013 coal consumption fell by 11%. However, the world still burns huge amounts of coal, accounting for some 30% of global fuel consumption. Even in the UK, where the industrial revolution began, on Christmas day 2014, 38% of electricity still came from burning coal.

In the run-up to the United Nations Climate Change Conference ‘COP21’ in Paris in December 2015, green activists are already embarked on a campaign calling for disinvestment from the oil & gas industry. In April the Guardian Media Group announced it will divest from fossil fuel companies. Academia has joined the campaign with sit-ins underway in a number of universities.

Much of this rhetoric is misdirected. There is a major gap between the realities of oil & gas and the public understanding of its fundamental importance to society. To many, filling the car tank is just a tax on driving and natural gas a monthly charge on home ownership. Few realise the sheer scale and importance of the oil & gas industry, not just in the supply of fuels but also its role as a provider of a huge range of products essential to our daily lives, from plastics to pharmaceuticals, from fertilisers to house paint.

The industry should be recognised a part of the solution in providing the natural gas that can enable step one of the journey, to stop burning coal.

John Westwood, Douglas-Westwood London

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NYC-based PIRA Energy Group reports that Cushing stocks hit a record high in March. In the U.S., the crude stock surplus hits a new high. In Japan, crude runs ease with higher maintenance and crude and finished product stocks post slight builds. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Cushing Stocks Hit Record High in March

Cushing crude stocks rose to record levels in March, causing the NYMEX WTI contango to widen and strengthening most onshore crude differentials, as Cushing WTI prices weakened relative to regional grades. Outright prices weakened through the first half of March, but began to recover by month end, helped by improved refining margins and geopolitical risks. Stocks at Cushing are expected to peak just above 60 million barrels in April or May. But WTI will remain in contango until stocks fall toward the 30-35 million barrel level — not likely until at least mid-2016.

U.S. Stock Surplus Hits New High

With the largest weekly inventory increase of the year, the year-on-year inventory surplus swelled to 177 million barrels, or 17%. Crude stocks are almost 100 million barrels higher than last year. Gasoline and distillate inventories are a combined 33 million barrels higher.

Japanese Crude Runs Ease with Higher Maintenance; Crude and Finished Product Stocks Post Slight Builds

Crude runs eased and remain in good alignment with our turnaround schedules. Crude imports also declined, but crude stocks still posted a modest build. Gasoline and gasoil stocks drew slightly despite falling demands. Kerosene stocks built as demand seasonally ebbed. The indicative refining margin remained strong, though major product cracks softened on the week.

Aramco Differentials Announced, Asia Raised

Saudi Arabia's formula prices for May were just released. U.S. and European differential adjustments were mixed and seen as minor. European differentials were tweaked, higher on the lightest and heaviest grades, and cut marginally on Arab Light. U.S. differentials were lowered on Arab Extra Light and Light and lowered on Arab Medium and Heavy. Differentials to Asia, however, were raised more significantly and across the board. The adjustments for all regions are seen as keeping in step with refiner demand for crude and downstream profitability.

Saudi Arabia Producing 10.3 MMB/D: Bullish or Bearish?

On balance, Saudi Arabia producing 10.3 MMB/D in March 2015 is bullish. Incremental Saudi crude burn demand could push its volume this summer to levels that would substantially reduce global spare capacity, at a time when oil markets will be tighter and geopolitical risks to supply are growing. Look for Saudi Arabia to continue to increase prices to restrain demand as it has done the last two months. All of this will be supportive to higher oil prices in second-half 2015.

Asian Steam Cracker Margins at 2015 Highs

Asian steam cracker margins have been in a broad upswing since January of this year. Margins improved yet again last week and continue to make new 2015 highs. Naphtha cracks added 2¢ to 53¢/lb, but they look increasingly challenged by LPG in the coming weeks as heating demand deteriorates and prices weaken. Butane margins jumped 14% to 51¢/lb while propane cracks added 5¢ to 49¢/lb.

U.S. Ethanol Prices and Margins Increase

The week ending April 3, U.S. prices advanced to the highest levels of the year. Rising petroleum prices and robust demand for ethanol-blended gasoline were the main drivers. Margins also reached a 2015 high last week, as corn prices fell after bearish USDA reports.

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.

When the price of oil started its tumble late last fall so too did the oilfield services (OFS) market. The rig count in the U.S. has been halved compared to this time last year and operators are struggling across the board to cut costs in this low price environment. Some of the major U.S. shale plays are being hit harder than others, some will bounce back quickly while others may start to fade away.

DW expects a 34% decrease in total U.S. oilfield services spend in 2015 for the 20 services that we cover. On a basin-by-basin level, the Barnett and the Bakken will be hit hardest. The Barnett rig count has continued its steep decline from a 2008 peak, now with only four rigs drilling for gas. With the fall in oil price, operators in the Bakken will spend 40% less on services in 2015. The Bakken is one of the more expensive shale plays and the low price environment will lead to fewer wells being completed and intense cost cutting pressure on services companies. Conversely, the Marcellus is likely to be hit the least as recently the gas drilling market has not suffered to the same extent as the oil plays.

To give one key OFS example, proppant is the sand or ceramic material designed to keep an induced hydraulic fracture open during or following a fracturing treatment. Here we expect Operators’ spend to fall by 42% in 2015 as a result of a strong decrease in demand and a shift away from ceramics towards cheaper sands. While all drilling and completion-led services will suffer in 2015, those driven more by the active wellstock will suffer less than new drilling activity. Historically, services such as artificial lift and slickline services for example have been less directly correlated to oil price and are less affected by downturns.

As the oilfield services industry continues to rebalance over the course of 2015, some basins and service lines will feel the pressure more than others.

Jacob Halevy, Douglas-Westwood Houston 

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NYC-based PIRA Energy Group believes that the current global setting as conducive to growth and expects a springtime rebound in economic activity. In the U.S., stock excess is about flat. In Japan, crude stocks draw and product stocks move higher. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

World Oil Market Forecast

While economic worries remain, PIRA judges the current global setting as conducive to growth and expects a springtime rebound in economic activity. The magic of price is working on both oil supply and demand; balances are tightening. This is occurring at the same time the Middle East is mired in sectarian conflict.

U.S. Stock Excess about Flat

This past week’s inventory build approximately matches last year’s build for the same week, leaving stocks 167 million barrels, or 15.5%, higher than last year. The overall composition of the build did not change relative to last year so products are still 75 million barrels higher (11%) while crude is 92 million barrels (23%) higher than last year. Some 61% of the product excess is in NGLs.

Japanese Crude Stocks Draw, Product Stocks Move Higher

Crude runs eased slightly and crude imports declined, producing a stock draw. Finished product stocks built mostly on a rise in naphtha stocks. Gasoline and gasoil demands were lower, with slight stock changes for each. Kerosene stocks drew again fractionally as the heating season closes out. The indicative refining margin remains good and was little changed on the week.

European LPG: Supply Weighs, Demand Wanes

European LPG prices were sharply lower as buyers remained quiet while supply continues to weigh on markets. Cash cargo sized lot prices lost 9% on the week to print near $380/MT, just $2 below June swaps, and at a $175 discount to regional naphtha. Butane prices were mixed, with coaster batch prices losing ground but larger cargoes improving to $445. Current LPG prices are now so attractive that petrochemical feedstock buyers will likely look to maximize runs in the coming weeks, wherever possible.

U.S. Ethanol Output Drops

Ethanol production dropped to a six-month low of 921 MB/D during the week ending April 24 as several plants were offline for spring maintenance. PADD II output declined to 834 MB/D while production outside of PADD II climbed to a record 87 MB/D.

U.S. Ethanol Prices and Manufacturing Margins Gained in April

Ethanol prices climbed during April, supported by rising petroleum values and robust demand in both the domestic and export markets. Manufacturing margins improved as corn costs fell.

The information above is part 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.

While the latest revisions to the terms for shallow water areas in Mexico’s first licensing round have increased the attractiveness of the Production Sharing Agreement terms by improving the contractor’s upside potential, the benefits remain significantly limited at higher prices compared to other fiscal regimes in the Americas, says an analyst with research and consulting firm GlobalData.

According to Will Scargill, GlobalData’s Senior Analyst covering Upstream Fiscal & Regulatory Regimes, even with revised terms, Mexico has yet to appease initial concerns that the adjustment based on pre-tax Internal Rate of Return (IRR), combined with royalty rates that adjust according to price, offers exploration and production companies too little upside.

Scargill explains: “The fact that royalties adjust to prices means the regime is relatively competitive in a low-price environment, insofar as a 30% bid for the state’s initial share of profit oil would be comparable to the fiscal regimes of Colombia and the US Gulf of Mexico at $50 per barrel (bbl).

“However, as prices rise, the royalty and profit oil adjustment mechanisms kick in at an increasing rate, meaning that in order to be comparably attractive to the Colombian and US regimes, the bid would have to be around 25% at $70/bbl, 15% at $90/bbl and 0% at $110/bbl.”

The analyst states that despite competitive economics at lower prices, companies will likely be reluctant to bid at levels that would give them little upside potential and the effect that the government can have with further revisions to the mechanism is limited.

Scargill continues: “Two possible options would be to base the mechanism on post-tax IRR rather than pre-tax, or to further increase the IRR thresholds by 5% each. However, the result of either of these options at a $90/bbl oil price would only be to increase the bid that is comparable to Colombia and the US to 20% rather than 15%.

“A 20% bid would mean that the state’s share of profit oil would range from 20–80% and contractors will pay royalties, taxes and fees on top of this. If the round is to be successful, the government will need to avoid setting an overly high minimum bid while striking a balance between market conditions and public sentiment,” the analyst concludes.

Despite major cost reduction measures, Q1 2015 earnings for supermajors are expected to be the weakest in recent memory. Operational and financial indicators for FY 2014, however, reveal that recent performance amongst the big 5 has been far from homogeneous.

In short, the Americans outperformed the Europeans. Exxon and Chevron posted high net margins of 8.3% and 9.1%, respectively. Shell’s was a more modest 3.5%, whilst BP (1.1%) and Total (2.0%) struggled badly. Chevron and Total were the most aggressive risk takers, as their CAPEX-to-Sales ratios for the year stood at 19% and 14%, respectively, while the other majors conservatively avoided spending more than 10% of sales.

Among other factors, refining interests are a key driver of this disparate performance. While Exxon, Chevron and Shell refined broadly as many barrels as they extracted in 2014 (113%, 105% and 94%, respectively), BP and Total were much more exposed to upstream (55%, 83%) and have not benefitted from the traditional buffer effect of downstream activities in a low price environment.

Looking at the long-term indicators, not much change can be seen in the 2014 Proved Reserves-to-Production ratio – XOM 17.4, CVX 11.8, RDS 11.6, BP 15.2, TTA 14.7 (expressed in years). In an oversupplied market, the challenge is not to bring volumes, but value. In this respect, the Europeans looked to offset poor performance by building strong net cash positions – between $20-30 billion at year-end 2014 – to maintain dividends and shareholder confidence. However, while Exxon, Chevron and Shell managed to keep their Gross Debt-to-Equity ratio at around 20%, BP and Total ended the year with a degraded financial structure, at 47% and 62%, respectively.

Considering the above, Shell seems to be the healthiest among the European majors, but crucially lacking in long-term organic growth opportunities. In this light, the £47bn takeover of BG Group makes sense: it will boost Shell’s production by 20% and reserves by 25%, and also provides exposure to high-potential Brazilian assets. With similarly modest leverage and potential for quick cash generation, Exxon and Chevron are well positioned for their own M&A moves now the starting gun has sounded.

Antoine Paillat, Douglas-Westwood London

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