WTI Fell Below $40/Bbl in August, Hitting a 6-Year Low Before Recovering Somewhat at the End of the Month
New York, NY (PRWEB) September 09, 2015
NYC-based [ PIRA Energy Group reports that WTI fell below $40/Bbl in August, hitting a 6-year low before recovering somewhat at the end of the month. In the U.S., the crude stock build propelled commercial stocks to a new record high. In Japan, crude stocks drew and kero-jet stocks led product stocks higher. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
North American Midcontinent Oil Forecast
The price of WTI fell below $40/Bbl in August, hitting a 6-year low before recovering somewhat at the end of the month. Regional differentials were mixed, with inter-pipeline competition in the Permian Basin causing Midland grades to strengthen relative to Cushing WTI, while differentials for Western Canadian and other northern grades continued to weaken from very strong second quarter levels.
U.S. Crude Stock Build Propels Commercial Stocks to a New Record High
Crude imports coming in higher than expected and crude runs lower than expected drove a crude stock build that, in turn, drove total commercial stocks to a new record high. With a smaller overall build last year, the year-over-year excess widened. With a 9.5 million barrel build in commercial stocks the first week of September last year, we expect the surplus to decline when we see next week’s data.
Storage Refills Set to Swell
After the NYMEX September futures contract limped off the board at its lowest settlement since the May contract, an outbreak of above-normal temperatures forecasts for a large swath of the U.S. in early September — particularly in the east — has for now lessened the risk of steeper price declines. With storage refills set to swell, sustained weather intervention remains necessary to temper seasonal gas-fired electricity generation (EG) declines and thereby reduce the need for still lower prices.
Western Grid Market Forecast
Western spot on-peak prices reverted to a more familiar summer pattern with Mid-Columbia at a discount to the Southwest hubs. That market shed $8/MWh to average ~$31.50/MWh. NP15 was down $2 to average ~$37.50. However, SP15, the West's premium market, was virtually unchanged at just under $39, and Palo Verde rose by $1.50 to just over $35. Inland Southwest price gains were driven by strong cooling loads with temperatures in the region's load centers averaging 2-4º F above normal. Weather in Southern California has also been hotter than normal this month, helping to propel the CAISO Balancing Authority to its strongest loads of the summer in late August. Mid-Columbia on-peak heat rates are expected to average 12,000 Btu/kWh in CY 2015 up from 8,900 in 2014. Heat rates are also expected to be up at the Southwest hubs for CY 2015 with the largest increase (~10%) at Palo Verde. However, going forward, growth in solar capacity, gradual improvement in hydro supply, and higher gas prices are expected to lead to downward pressure with modest year-on-year declines through 2017.
Cracker Margins Fall with Olefin Product Prices
U.S. steam cracker margins for all feedstocks fell last week with plunging ethylene prices. Propane and butane cracks weakened by nearly 26% to 20¢/lb ethylene. Pentanes plus margins lost 8¢ week-on-week and are now near 9¢/lb ethylene. Ethane cracks continue to trail LPG, falling to 19¢/lb ethylene per PIRA calculations.
Freight Market Outlook
The weakness in the midsized crude tanker groups seen in July was a harbinger that the counter-seasonal strength in VLCC rates was unlikely to persist much longer. VLCC rates followed suit and crashed in August, falling by 50 WS points (65%) from their July highs. The support from near record crude imports into China during June and July (7.2 MMB/D) and discharge delays in Asia related to high inventories and typhoons waned at the same time that September term crude nominations were being reduced to reflect crude runs cuts in Asia due to refinery maintenance and perhaps weaker underlying demand.
Seaborne Thermal Coal Pricing Falls, Retracing Gains from Prior Weeks
Despite a modest rebound in oil pricing last week, coal prices moved notably lower, mostly due to a bearish turn on Friday. For 4Q15 coal prices, FOB Newcastle (Australia) again held up better than API#2 (Northwest Europe) and API#4 (South Africa), as was also the case across the forward curve. The market seems to be saying (similar to PIRA’s view) that the rebound in pricing that occurred in the past two weeks was premature. Fundamentals remain soft, with major demand centers facing challenges, while supply is not backing off quickly enough. Rising oil prices limit the downside for coal pricing, but there is not enough bullish impetus to spark a sustained rally yet.
U.S. Ethanol Prices Lower in August
Ethanol prices were pushed down by oil values in August despite robust demand, lower stocks and reduced output. By the end of the month, prices were close to gasoline values in most of the country.
Italy-France Spreads Remain Compressed on a Forward Basis
Italian day-ahead prices have been quite resilient, with the PUN during September moving even higher than August, having averaged €56.6/MWh. The spreads with France also remain at historically high levels on a spot basis, and yet while widening slightly along the curve, the spreads on a forward basis have stayed extremely compressed.
Bearish Developments Predominate in the Beleaguered Thermal Coal Market
Physical coal prices moved lower during August, but have not been nearly as volatile as oil and equity price movements. Despite the devaluation of the yuan hurting the ability of Australian producers to compete in China, FOB Newcastle prices declined by the smallest extent of the major pricing points. Physical Atlantic Basin balances have experienced tightening over the YTD from warmer weather in Europe, and the supply constraint in Colombia, yet pricing has consistently faded. With European coal demand expected to recede while Colombian supply normalizes, it will be difficult for prices to rebound.
Record Production of Ethanol-Blended Gasoline
Ethanol-blended gasoline production soared to a record 9,223 MB/D the week ending August 28. Ethanol manufacture dropped to a 16-week low 948 MB/D as more plants cut back due to poor margins.
Japanese Crude Stocks Draw, Kero-jet Stocks Lead Product Stocks Higher
Crude runs eased due to planned maintenance and unplanned outages. Crude imports were very low and stocks drew strongly. Finished product stocks rose on higher kerosene and jet fuel stocks. Gasoline demand was fractionally changed with a big drop in yield such that stocks drew slightly. Gasoil demand was higher, but even with higher yield and lower incremental exports stocks still drew slightly. Kerosene demand rose again and seasonal stock building continued. The indicative refining margin remains acceptable, though on the week, most of the cracks eased.
Italians Find a Russian-Sized Gas Field Off the Coast of Egypt
Just as Egypt hits the twin milestones of 6 months as an LNG importer and the installation of a second regas terminal, also at Ain Sukhna, a significant domestic supply discovery has emerged to shift the long term supply balance significantly, this time in Egypt’s favor.
U.S. Coal Market Forecast
As producer bankruptcies and mine shut-ins continue to occur, financially stronger producers are reaping the spoils. Murray Energy (ME) just purchased Goldman-Sachs’ Colombian mining operations, with the intent to increase coal output. Whether this is an effective longer-term strategy remains to be seen. It definitely will add to the market’s oversupply woes.
EIA’s Long-Awaited Form 914 Crude Production Data Published
The EIA’s used their new Form 914 as the source of monthly crude production for Texas and a number of other states, for the first 6 months of 2015, with the August 31 release of their June 2015 Petroleum Supply Monthly. Texas production was revised down, closer to PIRA’s estimates. The downward revisions to U.S. production were offset by upward revisions to the crude balance item, resulting in domestic crude supply values that were largely unchanged. These data do show that reported crude production and domestic crude supply (production + balance item) both peaked in April 2015, and have fallen 0.42 MMB/D by June 2015.
EIA Upside Production Surprise
The EIA’s expanded monthly survey released on August 31st revealed a surprising jump in U.S. gas production from May to June that had not been fully reflected in earlier pipeline flow models. For the U.S. as a whole, the EIA reported that June dry production climbed to 74.5 BCF/D, up month-on-month by ~0.7 BCF/D. Although PIRA’s state-by-state estimates vary from the EIA, our upwardly adjusted June total virtually matches the above EIA estimate. PIRA’s state specific estimates cannot be strictly compared with EIA estimates, given they are not reported on a dry basis.
U.S. Refinery Turnarounds, September 2015 – June 2016
As anticipated the pace of U.S. refinery downtime picks up quite sharply in the coming months. This considers both scheduled turnaround activity as well as the carryover of unplanned events into the period. During June thru August 2015 the average distillation unit cutback was around 1.3-1.4 million B/D. This reaches around 1.7 MMB/D for September, before jumping to nearly 2.2 million B/D for October 2015. These are just some of the findings of PIRA's latest U.S. Refinery Turnarounds report.
U.S. June 2015 DOE Monthly Revisions
DOE released its final monthly June 2015 (PSM) U.S. oil supply/demand data today, along with its annual PSA revisions for 2014. June 2015 demand came in at 19.59 MMB/D, identical to what PIRA had carried in its monthly balances. Compared to the DOE weeklies, total demand was lowered 362 MB/D. Total demand for June 2015 versus June 2014 (PSA) grew 701 MB/D, or 3.7%, compared to the final June 2014 data (year-on-year), and was even stronger than the 530 MB/D (2.9%) growth seen in May. For 2014, annual product demand was raised 70 MB/D, from what had been carried in the preliminary monthlies. End-June total commercial stocks stood at 1,277.4 MMBbls, spot-on with PIRA's assumption for end-June stocks on both crude and product.
U.S. Annual PSA Demand Revisions: Modest Increases
DOE released its Petroleum Supply Annual (PSA), yesterday, which finalized data, by month, for 2014. Annual demand was revised upward by an average of 71 MB/D compared to what had been reported in the Petroleum Supply Monthlies, which for 2014 are now supplanted by the PSA. The upward revisions began to kick in as prices began declining in the second half of the year. By product, the greatest upward revision was in NGL and liquid refinery gases (LRG) demand, which on an annual average basis accounted for 53 MB/D of the 71 MB/D increase. The second largest product increase was in distillate, revised on average 27 MB/D. As evidenced by the data, the magic of price continues to stimulate demand growth, not only in the U.S, but elsewhere.
Tight Oil Operator Review
Despite the weak oil price environment, Eagle Ford was the only one of the "Big Three" U.S. shale plays to see production decline on the quarter. Production continued to rise in the Permian and the Bakken was mostly flat as a drawdown in the inventory of drilled but uncompleted wells offset the impact of reduced drilling. Ongoing deflation in service costs, improved drilling times, high-grading, and enhanced completion techniques allowed operators to increase production using fewer capex dollars. As of the second quarter, full-year spending budgets were down 43% from 2014 levels, but spud-to-total depth (TD) times have come down 10-25% and drilling and completions costs down 15-25%. Operators expect to realize another 5-10% in savings by the end of the year. Most operators expect production to remain flat or decline slightly in 2H15.
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.
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