Market Update: Oil & Gas - May 2016 | KPMG | OM

Market Update: Oil & Gas - May 2016

Market Update: Oil & Gas - May 2016

Not out of the woods yet

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With many oil majors announcing subdued quarterly results over recent weeks, it is clear that the oil industry is not out of the woods yet. However, the oil markets are showing renewed signs of life, as oil prices nudge upwards towards US$50/bbl. Geo-political risk continues to be a driving factor for oil prices, with various oil-producing powers - Russia, the US, OPEC, to name but a few - locked in a struggle to agree a sustainable global supply level that could help prices bounce back. As a result, the global energy markets remain an interesting space to watch.

Mexico

Engaging the Majors and enhancing transparency - Round 1.4 deep waters

"Despite the well-known collapse of crude oil prices and the continued overflow of crude inventory, Mexico has been able to stand its ground when it comes to attracting enough interest in its first round for deep waters; a direct result of the historic Energy Reform approved back on December 2013. Round 1.4 as it is known is a “Bid License agreement for Exploration and Extraction of Hydrocarbons”, published by the National Hydrocarbons Commission (CNH) on December 18, 2015. It includes 10 contractual areas with water depths ranging between 1500 to 3000 meters in the Gulf of Mexico. As of today, there are a total of 15 Majors and Super Majors participating in the bidding process for a December 7 2016 award."

 

At this year’s Offshore Technology Conference (OTC), Lourdes Melgar, Mexico’s deputy secretary of energy, said that “Mexico has submitted a formal request to join the International Energy Agency and is preparing to join the Extractive Industries Transparency Initiative (EITI) in 2018, so as to enhance its energy sector’s transparency and accountability”. These important policy making steps, should consolidate and position Mexico further towards legal certainty and rule of law, important issues when it comes to attracting and keeping investors.

– Alexander Braune, Director, Energy & Natural Resources, KPMG in Mexico

Europe

Future looking upbeat for downstream

Although the highpoint of 2015 has passed and oil continues a strong, if uncertain, recovery, the European downstream sector continues to show some strength through 2016. Refining margin outlooks are positive, with an anticipated lift ahead, driven by gasoline cracks off the back of the US summer driving season. Terminal utilization remains high across all key supply and trading locations and retail margins, for the most part, are reasonable.

 

"In the short and medium term the European downstream sector will be a game of two halves; strong gasoline cracks this summer will drive increased refining runs globally, and with that, more middle distillates. These might struggle to find a market without accepting lower prices and storage may be challenging. Longer term the underlying trend remains of unbalanced refining capacity in Europe, volume growth in the east and rationalization in the west and the need for capacity realignment across the value chain."

Barry van Bergen, Director, Downstream Advisory, KPMG in the UK

Asian energy market

Finely balanced

Approaching the northern hemisphere summer, the Asian oil products market is still characterized by the effect of a mild winter: surplus gasoil and fuel oil stocks. Within the middle distillate complex, there is an interesting push-pull mechanism at play: with gasoline and light-end product margins creeping up, but ultimately being kept at bay by the aforementioned supply glut. The balance struck by refineries at the moment is between increasing light-end yields (and profits) and adding to the ever growing middle distillates and residuals inventories in the face of an already oversupplied market.

 

"The gradual climb of oil prices since late January has been contrary to high inventory levels and the 'lower-for-longer' mantra currently embraced by the market. Hedge books are relatively thin at both ends of the energy value chain: with producers not wanting to lock in low prices should prices rise again, and consumers currently happy to buy on a spot or short-term basis. The weakness in Asian demand anticipated by the markets has not materialized. In fact the opposite could be said: with a number of Asian investors actively eyeing energy assets from cash-strapped international players as a means to acquire high-quality assets at reasonable prices."

Oliver Hsieh, Associate Director, Commodity & Energy Risk Management, KPMG in Singapore

Analyst estimates: oil

Brent forecasts have seen little movement since last month across the forecast period. Analysts maintain their prediction of a supply overhang through 2016 before the market balances in 2017, and a medium-term recovery in prices as capex cuts and low spare capacity support Brent. The inventory overhang, increased OPEC supply and possible demand weakness in the global economy are seen as key risks. 

  2016 2017 2018 2019
March Avg 41.6 55.7 71.6 76.1
April Avg 42.0 55.9 71.6 76.1
March Median 42.3 57.8 70.0 75.0
April Median 42.8 55.0 70.0 75.0

Analyst estimates: gas

Henry Hub forecasts have seen little movement since last month. The market continues to be oversupplied, and this is expected to continue in the near term. Record inventory levels will be an overhang on natural gas prices through 2016, with a growing storage surplus outweighing slowing supply growth and improved gas demand.

  2016 2017 2018 2019
Min 2.2 2.6 2.9 3.2
Average 2.3 3.0 3.3 3.5
Medan 2.3 2.9 3.3 3.5
Max 2.8 3.5 4.0 4.0
         
  2016 2017 2018 2019
March Avg 2.5 3.0 3.4 3.6
April Avg 2.3 3.0 3.3 3.5
March Median 2.5 3.0 3.5 3.5
April Median 2.3 2.9 3.3 3.5
3.3
3.3
3.5
3.5

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