Not out of the woods yet
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.
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
Although the highpoint of 2015 refining cracks has passed downstream sector continues to show some strength through 2016. There are challenges ahead however. Asian gasoline cracks have halved since the beginning of the year on the back of regional oversupply partly driven by Teapot’s running at maximum rates and Asian gasoline inventories sitting at an all-time high. Middle distillates remain a challenge and with current refining runs, they face a similar challenge in where to store and place them. The arrival of a VLC diesel cargo into Europe points to the challenge ahead. The sector will be looking to a robust US summer driving season to ease the pressure but a big question remains as to just how elastic US demand will be at the current price point.
"The rollercoaster we’ve witnessed in the oil price has really been a double edged sword for downstream. It’s produced some terrific refining and retail margins of late, but caused a bit of a dislocation in supply and demand and, globally, hydrocarbon infrastructure is not able to support this. Storage is becoming a big bottleneck which we anticipate will create a ripple right back up the value chain."
– Barry van Bergen, Director, Downstream Advisory, KPMG in the UK
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
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.
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.