PIRA Energy Market Recap for the Week Ending November 23, 2015

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Latin American Markets Continue to Struggle with Slow to Negative Economic Growth

PIRA Energy Group

Latin American markets continue to struggle with slow to negative economic growth. This has slowed the consumption and import of refined products.

NYC-based PIRA Energy Group reports that Latin American markets continue to struggle with slow to negative economic growth. In the U.S., the flat stock profile matches this week last year. In Japan, crude runs increased again and stocks moved higher. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Latin American Oil Market Report

Latin American markets continue to struggle with slow to negative economic growth. This has slowed the consumption and import of refined products. In addition, refinery revamp completion in Colombia (Cartagena) and Ecuador (Esmeraldas) will impact product balances beginning in 4Q15 but not fully until later in 2Q16. Margins will improve with a better than average gasoline season expected in 2Q16. Driven by a decline in GDP of over 3% in 2015, Brazilian demand for both gasoline and diesel will fall by approximately 45 MB/D each.

Russia to Review Ukrainian Gas Prices in December

The question of granting discounts on Russian gas for Ukraine will be reviewed closer to the end of 2015, Russia’s Energy Minister Alexander Novak told journalists Monday. He noted that according to the "winter package", the price of gas for Ukraine is calculated according to a formula based on the corresponding contract, and the Russian side is considering the possibility of a discount if natural gas price is higher than the comparable market prices.

Italian Spark Spreads Wider as Plant Availabilities Lower than Expected

Spark spreads in Italy have surged, with recent surprisingly higher settlements in the day ahead market, at over €70/MWh. Prices in the Italian Northern regions have settled well above expectations, following lower availability of several CCGTs, while 600 MWs of coal are also offline. In spite of a bearish gas market, Italian forward prices will continue to benefit from capacity retirements and optimization.

Modest Rise in Coal Pricing, Fundamentals Not Supportive of Further Gains

The coal market pushed higher for most of last week, with some modest physical tightness in the prompt market moving pricing somewhat higher. However, much of the gains made during the first four days of the week were given back on a selloff on Friday, although pricing did achieve a modest week-on-week gain. Coal supply fundamentals remain soft in PIRA’s view, with demand growth limited, particularly with Chinese imports down again in October, and no signs that buying activity in November was any stronger. Limitations in demand elsewhere in Asia (e.g., South Korea) and in the Atlantic Basin (e.g., Europe) in conjunction with insufficient supply cutbacks will make it difficult for any bullish rally in coal pricing to hold traction.

EPA Proposes Tighter Seasonal NOx Caps

EPA’s new proposed Cross State Air Pollution Update Rule would change the existing Seasonal NOx program in 2017, addressing state caps remanded by the D.C. Circuit Court this summer. The proposal includes significantly tighter caps and requires reductions from current emissions. KS would be brought into the program, FL, SC would not be covered. Currently-traded CSAPR allowances could be banked forward, but look to be heavily discounted.

U.S. LPG Export Arbitrage Window Open Wide

LPG prices in Asia continue to widen their premium to the U.S. despite a shut speculative arb from the Mideast for December cargoes purchased on a term (contract price) basis. Markets in the region seem to have been driven higher mostly due to seasonality based buying programs at present. Sharply lower freight has also led to a flurry of vessel fixtures from the U.S. – which will mean a wave of LPG will arrive in Asia from the U.S. in January and February. With the expanded Panama canal set to open next April, these next few months may see the last VLGC voyages to Asia routed around the horn of Africa for quite some time.

U.S. Ethanol Prices Lower

U.S. ethanol prices sank to the lowest level in two months the week ending November 13, pressured by corn futures values falling to a contract low. Soaring production, plummeting demand for ethanol-blended gasoline, and lower petroleum prices exacerbated the decline.

Farmers Undersold, Funds Entrenched

Funds defended their short corn position this week, as expected, adding another 15K net shorts. The farmer remains well undersold in corn, though a major buyer said they continue to buy a few million bushels every day. This implies that while bin doors are shut, they’re not locked.

Global Equities Post a Strong Week

All the tracking indices, both domestic and international, gained on the week. In the U.S., consumer discretionary, retail, technology, and housing performed the best. Energy was the weakest, but still posted a 1.4% gain for the week. Internationally, Latin America, BRICs, and emerging markets posted the strongest gains.

Flat U.S. Stock Profile Matches This Week Last Year

The year-on-year stock surplus remained at 178 million barrels this past week with commercial inventories almost 16% higher than last year. The crude stock surplus was marginally lower but was still a huge 106 million barrels higher than last year. Of the three major light products, jet is in the tightest stock position versus last year, followed by gasoline and finally distillate.

Coal-to-Gas Switching Remains Strongest Hope for Gas Demand Increases

If you are an LNG producer, it’s not a good sign that the marketing discussion has come to a point where LNG is threatening to replace coal in the power generation sector. Given the sizable capital and operating costs associated with building an LNG plant, a delivered price that is edging towards BTU plus carbon parity with coal does not bode well for the bottom line. And yet this is where the gas market is heading in 2016. Staving off switching through the first quarter is a realistic proposition, but starting in the second quarter, the prospects become much more real.

CPI Release sets California’s 2016 Auction Reserve Price

Inflation figures are available for the official announcement of the 2016 CA and QC minimum auction reserve prices, to be announced December 1st. The U.S. October-October CPI-U increased by 0.17%, translating to a CA reserve price of $12.73. PIRA had been anticipating a figure in this range, and expects that the market has largely anticipated these figures as well – though the 0.2% MOM growth in CPI in October was the strongest in the last four months.

U.S. Ethanol Industry Stocks Build

U.S. ethanol production declined to 975 MB/D the week ending November 13 after having soared to a four-month high 982 MB/D during the previous week. Inventories built for the third consecutive week, rising by 395 thousand barrels to a sixteen-week high 19.2 million barrels.

Argentina’s Election Results Bearish for Agriculture

Macri’s in, which was not a huge surprise, and in just 18 days Argentina will be governed by a conservative after 12 years of socialist rule. Mr. Macri has a large job ahead of him to turn the inflation-riddled Argentine economy around and while it will start with a devaluation of the Peso, agriculture will be a very large part of the plan.

S&P 500 Rebounds

The S&P 500 rebounded on the week. Some of the related indicators went counter to the upward performance. The Russell 2000 and U.S. high yield credit were weaker, while volatility (VIX) moved slightly higher on a weekly average basis. Commodities remain in a downtrend, both energy and ex-energy. With regard to currencies, the U.S. dollar was again mostly stronger. The Cleveland Fed released its inflation expectation series for November and it showed a rise in all the key maturities.

Japanese Crude Runs Increase Again, Crude Stocks Move Higher

Crude runs increased again as turnarounds continue wrapping up. Crude imports rose sharply and crude stocks built back over the 100 MMBbls threshold. Finished product stocks rose a bit. There were stock builds in gasoline, naphtha, gasoil, and kerosene. Margins remain very good and strengthened on the week with all the major cracks moving higher.

Gas Flash Weekly

PIRA has gained much greater clarity on likely balances for the month. While our forecast has centered on 4.0 TCF in the ground for some time, a shift in fundamentals made the trajectory less certain, but a different mix of supply and demand components ultimately made the new record carry a reality.

Strong Offset Use for California Carbon Compliance

CA entities used 13 MT of offsets for Compliance Period 1 compliance - 4.5% of the emissions, compared to an offset limit of 8% - up considerably from partial compliance usage last year. After the surrender, 17.1 MT of compliance offsets are currently available to the market, compared to about 30 MT of offset usage permitted for 2015 alone. Given concerns over offset availability, CARB has recently moved to bring international sector-based credits into the cap and trade.

Case for U.S. Monetary Tightening Has Only Grown Stronger

The minutes from the last Fed policy meeting were hawkish on balance. Since then, major data releases have been constructive, further strengthening the hawkish position. Looking forward, recent warm weather should provide an additional boost for economic activity. Equity movements over the past two weeks suggested that financial markets have become ready for an initial Fed rate hike. According to Japan’s third quarter GDP, the country was in a technical recession, but details of the data were actually encouraging.

Is Refracturing The Path To A Second Shale Oil Revolution In U.S.?

The collapse of crude prices has prompted operators to look for other ways to maximize production in a constrained investment environment. Refracturing offers such an opportunity, with costs being less than ½ of drilling and fracturing a new horizontal well. However, the technology and application of refracturing is still in its early stages. In the past ten years, more than 60,000 horizontal oil wells have been drilled and fractured in the U.S. shale oil plays. However, only a few hundred wells have been refractured. Results reported so far indicate good technical success but mixed economic results. PIRA recognizes that it will take time (several years) before this promising technology evolves and becomes common practice.

China Confronts Contract Wall, With Bearish Implications for Asia Spot

In confronting the 30-mmcm/d wall of increased contracted LNG supplies this year, China has at least started purchasing more volumes. Last month saw a scant 3-mmcm/d year-on-year increase in imports, and YTD volumes still remain down.

European Economy

Europe’s economy has been a glass half-full / half-empty story lately. GDP increased broadly across key European countries during the third quarter; but overall, the pace of expansion was modest at best. In October, the euro area’s core inflation accelerated, but the overall CPI was roughly flat year-on-year. Given this situation, there is a good chance that the European Central Bank will expand its quantitative easing program at the December policy meeting.

Third Quarter Asian Demand Update: Growth Improves

An update to our Asian demand assessment that was issued last month, indicates that Asian product demand growth is now showing year-on-year growth of 1. 6 MMB/D, an increase of 0.2 MMB/D from what had been seen. Our demand calculations cover almost all of 3Q. China still accounts for the largest increase in demand growth at 0.98 MMB/D. The most significant upward adjustment to total Asian demand growth reflects the most recent Indian demand data for October. India year-on-year demand growth for the three months Aug-Oct, is now nearly 0.5 MMB/D, an increase from the 0.36 MMB/D seen last month.

Bloated LNG Balances Bring Coal-to-Gas Switching Into International Focus

The rapid descent of spot and oil-indexed natural gas prices outside of North America will raise the specter of coal-to-LNG switching in the years ahead. The growing group of LNG importers possess large amounts of underutilized gas-fired generation in some countries in Europe and Asia. Access to gas or level of price is why they sit idle, but with LNG surpluses building and spot gas prices dropping, a significant shift toward gas and away from coal in power generation needs to enter into the discussion.

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

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

PIRA Energy Group
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New York, NY 10016

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