News 22nd August 2014

OPEC oil exports to rise by 40,000 b/d in four weeks to September 6

OPEC crude exports, excluding those from Angola and Ecuador, are expected to average 23.43 million b/d over the four weeks to September 6, up 40,000 b/d from the previous four-week period, UK-based tanker tracker Oil Movements said Thursday.

Compared with the same period last year, the latest forecast from Oil Movements shows a fall in OPEC crude exports of 90,000 b/d. Shipments from the Middle East over the four weeks to September 6 are expected to average 17.09 million b/d, up 30,000 b/d from the previous four-week period. Compared with the corresponding four-week period of 2013, Middle East shipments are expected to register a fall of 140,000 b/d.

Gazprom Neft to send over 80,000 mt from Novy Port in ice-free 2014 season

Gazprom Neft, the oil arm of Russian gas giant Gazprom, said Thursday it expects the first sea tanker with crude oil produced at its Arctic Novy Port, or Novoportovskoye, field to reach European markets in September.

During the 2014 ice-free season, a total of more than 80,000 mt of the Novy Port crude is set to be delivered to Europe, it said. Gazprom Neft received first crude at Novy Port in 2012 and since 2013 has been delivering crude to Russian consumers using winter roads, it said.

Until late 2015, when a sea terminal is to be built adjacent to the field, Gazprom Net plans to use the roads during the winter season and send tankers during the ice-free season. Once the terminal is completed, sea shipments will be possible throughout the year. Full scale industrial development of Novy Port is set to begin in 2016.

Wintershall waits for Libya nod on pipeline access before resuming production

Germany’s Wintershall, one of the biggest foreign oil producers operating in Libya, is ready to resume production at its onshore fields in the eastern part of the country, but is waiting for the nod from state-owned National Oil Corp. that the country’s pipelines are fully operational, a Wintershall spokesman said Thursday.

Wintershall-operated blocks C96 and C97 in southeastern Libya can produce 100,000 b/d but have been shut in since August 2013, when anti-government protesters blockaded key export terminals.

All of Libya’s export terminals -- including Es Sider and Ras Lanuf -- are now operational, but Wintershall said there were still obstacles to getting its production through Libya’s pipeline network to the ports. “Wintershall is ready to, but has not yet resumed, its onshore oil production in the Eastern Sirte Basin due to ongoing unavailability of the export infrastructure,” the spokesman said.

“We are waiting for a startup signal from NOC, which is working hard to resolve the issues behind the blockades along the pipelines,” he said.

Protesters and striking workers have staged sit-ins at fields over the past year, forcing production to stop, while some rebel groups have also attacked or taken control of segments of Libya’s pipeline infrastructure. Libyan production is currently running at 615,000 b/d, a spokesman for NOC said earlier Thursday.

UK’s Premier Oil upbeat on 2014 output; strong performance in UK, Vietnam

UK independent Premier Oil hinted Thursday it may exceed its 2014 production guidance thanks to a strong performance in the UK and Vietnam, while slightly upgrading its estimate of recoverable Falkland Island reserves ahead of a potential farm-down of its commitment there.

Premier slightly raised its previously announced first-half production figure, putting it at 64,900 b/d of oil equivalent, up 11% from a year earlier, and noted it has also had new production from the UK, Indonesia and Vietnam following the period.

The company is maintaining its full-year guidance of 58,000-63,000 boe/d due to asset disposals and pending completion of summer maintenance. It also said its plans to start up the UK Solan field in the fourth quarter -- amid a significant cost over-run -- could be delayed, “dependent on the successful completion of offshore installation activities within the weather window and progress of the offshore commissioning program.”

However, new CEO Tony Durrant was upbeat. “It has been a strong six months for Premier, with the company performing well on all fronts. We continue to exceed our production expectations...” Chairman Mike Welton said: “We are particularly proud of the improved performance from our operated assets in the UK and Vietnam, where a considerable amount of effort has been invested in improving asset integrity and operating efficiency.”

Generally for the industry, “the trend of rising service costs is slowing or even, in some instances, falling,” Welton said. On its Falkland Islands Sea Lion development, Premier slightly increased its estimate of phase one recoverable reserves, to 308 million barrels with potential for a further increase of 60 million barrels subject to drilling of one of the wells it plans next year.

Its earlier estimate was 293 million barrels. It said the Sea Lion second phase should recover 87 million barrels with potential for this also to increase. The company confirmed it made the delayed award of a Front End Engineering and Design Contract for the Sea Lion platform in July, and reiterated it is looking for a farm-down partner in order to reduce its 60% stake in the project.

Texas natural gas motor fuel use jumps

Houston, 21 August (Argus) — Texas retailers are selling significantly more LNG and compressed natural gas (CNG) for transportation than state officials had projected.

From September 2013 to July 2014, 11 months of the state's 2013-14 fiscal year, Texas collected $2.18mn in tax revenue from the combined sale of LNG and CNG motor fuels, according to the state's comptroller's office.

That is more than twice the $992,000 in taxes state forecasters had projected for the entire 2013-14 fiscal year, Texas railroad commissioner David Porter said.

"Natural gas vehicles are becoming mainstream faster than expected," Porter said. "And there's plenty of room for growth. These excellent sales figures represent only a fraction of the potential."

Texas assess a 15¢ tax on any volume of LNG or CNG that has the same Btu content as 1 USG of gasoline or diesel fuel, depending on whether the LNG or CNG is priced by the retailer in diesel USG equivalents or gasoline USG equivalents.

Based on that rate, LNG and CNG motor fuel sales in Texas from September 2013 to July 2014 roughly were equivalent to a combined 14.5mn USG of gasoline and diesel. Texas does not separately list the tax revenue generated by CNG or LNG motor fuel sales, so it is unclear what volumes of each fuel were sold.

CNG typically is used by lighter commercial vehicles that do not need to drive long distances, while LNG typically is used by long-haul trucks or other vehicles that need to store more fuel in their tanks. LNG has significantly more energy units than CNG by volume, but is more expensive to produce.

It is not clear how quickly CNG and LNG motor fuel sales have grown in Texas, as previously the state assessed the same tax on CNG, LNG and propane motor fuels, and did not provide a breakdown for each. Previously, the tax was prepaid on an annual basis with a decal, but in September 2013 Texas started charging the CNG and LNG tax separately at the pump, as some truckers complained that they were being overcharged with the annual decal system.

Tax revenues still indicate an upward trend for CNG and LNG sales, however. In the 2011-12 fiscal year, Texas collected $1.03mn in tax from the sale of CNG, LNG and propane motor fuels, and in fiscal year 2012-13 the figure more than doubled to $2.2mn. Most of that revenue likely came from CNG and LNG, as so far in the 2013-14 fiscal year Texas has collected about $323,000 in tax from the sale of propane motor fuel, which has limited uses in mostly rural areas.

CNG and LNG still account for a small share, less than 0.1pc, of the transportation fuel sold in Texas. So far in the 2013-14 fiscal year, Texas has collected $2.26bn in gasoline tax and $754mn in diesel fuel motor fuel tax. Since Texas charges a tax of 20¢/USG on those fuels, the revenue represents about 11.3bn USG of gasoline and 3.78bn USG of diesel motor fuel sold so far in the fiscal year.

In the US, CNG or LNG can be about $1.50/USG equivalent cheaper than gasoline or diesel fuel, with variations among regional markets, according to California-based Clean Energy Fuels, a major supplier of natural gas transportation fuels. Clean Energy operates about 40 public-access natural gas fueling stations in Texas.

Saudi oil output ‘can’t fill in for major losses’

New York, 14 hours, 29 minutes ago

The world is currently trailing four million barrels per day (bpd) in terms of oil supply disruptions, and with 2.4 million bpd in untested spare capacity, Saudi Arabia may not be able to accommodate the loss of Southern Iraq or another major conflict, a report said.

Fluctuations in global oil output have fallen to historic lows, added the latest Bank of America Merrill Lynch Global Energy Weekly.

A drop in global oil production swings to historic lows has been a key dampener of oil price volatility, the report said.

Yet, even if a faster Saudi reaction time has helped smooth global production, country-level oil output swings have turned wilder. History suggests that geopolitics and armed conflict are major drivers of global oil output fluctuations.

Geopolitical risk rising in recent years

From Arab Spring-related uprisings in Libya or Egypt, to a civil war in Syria and now violence in Iraq and the Ukraine, geopolitics is impacting oil. Geopolitical risk measured by combat deaths does not always correlate well with market volatility, the Global Energy Weekly said.

But wars and conflict are easy to spot on an oil price series. With combat deaths rising four fold in the last 10 years, oil markets should prepare for more turmoil, according to the research report.

America still takes up 38 per cent of global military spending, but appetite for foreign adventures is low. As an example, a drop in US combat deaths in recent years has been mirrored by a rise elsewhere.

The US plays a key role to secure trade and energy supply for the world. Inevitably, as the superpower retrenches, other regional and local powers will come to fill the void.

Russia’s attempt to exert influence on Eastern Europe or ISIS run on Syria and Iraq are recent examples. Following a drop to multi-decade lows, implied volume in long dated oil options at 15 per cent looks cheap. Oil after US hegemony may not be as steady, the report indicated.

Petroleum producers ‘shift attention from Mideast’

by John Kemp, 3 days ago

Following four decades of war, sanctions, nationalisation and unrest, oil and gas producers are gradually adjusting to rely less on the Middle East.

The countries around the Gulf and on the Arabian Peninsula still contain the greatest concentration of giant and super-giant fields anywhere in the world and have some of the most attractive oil and gas geology.

But the increasingly hostile political environment above ground has forced oil and gas companies to hunt for new reserves in other parts of the world where the geology is tougher but political conditions are much easier.

Diversification away from the Middle East is one of the main reasons why oil prices have remained virtually unchanged as unrest has spread across much of the region since 2011.

OUTPUT AND RESERVES

The region's importance has been declining in terms of both production and share of proved reserves in recent years.

In 2013, the countries of the Gulf and the Arabian Peninsula, which the BP Statistical Review of World Energy terms "the Middle East", accounted for almost 33 percent of global oil production and 17 percent of gas output.

But the share of both has flattened in the last three years after rising strongly since the mid-1980s.

The shift away from the Middle East is even more marked in terms of proved reserves, which represent future production.

Middle Eastern countries accounted for 48 percent of proven oil reserves worldwide in 2013, down from 56 percent in 2005 and 64 percent in 1993, according to BP.

The region contained 43 percent of proven gas reserves, down only marginally from 46 percent in 2005, but ending the steadily increasing share that had characterised the market since the 1980s.

For the last two decades, oil and gas producers have been adding reserves more rapidly outside the Middle East.

Between 1993 and 2013, oil producers added to proved reserves at an average annual rate of 4.2 percent in the rest of the world but just 1.0 percent in the Middle East.

Over the same period, gas producers added reserves in the rest of the world at an average rate of 1.8 percent per year compared with 3.0 percent in the Middle East.

But growth in the Middle East has slowed recently. In the second half of the period, reserve growth in the rest of the world accelerated to 2.3 percent a year, while reserve growth in the Middle East eased to just 1.1 percent.

The metaphorical centre of gravity in the global oil and gas industries is gradually shifting from the Middle East towards North and South America, Africa and Asia.

And the trend seems set to continue over the next decade, given the shale boom in North America, and intensive exploration and production in other regions outside the Middle East.

RELATIVE LATECOMER

The Middle East was a comparative latecomer to the oil and gas industry and its dominance of global production is a relatively recent phenomenon.

During the first five decades of the 20th century, global oil production was dominated by the United States, Mexico, Venezuela, Romania, Russia, Malaysia and Indonesia.

The first oil was found in Persia only in 1908, followed by Iraq in 1927, Bahrain in 1932, Kuwait in 1937, Saudi Arabia in 1938, the United Arab Emirates in 1954 and Oman in 1962.

As late as the 1940s, the Middle East was still a relatively small oil producer in global terms. In 1950, the Persian Gulf countries accounted for less than 17 percent of worldwide production.

Massive field discoveries between the 1940s and the 1960s, and extensive development work by the international oil companies, boosted the Gulf's share of global output to 25 percent in 1960 and 31 percent in 1970.

But disputes escalated over pricing and government revenues. Between 1970 and 1980, a wave of nationalisations saw all production in the region pass into government ownership, after which production growth all but ceased.

The Middle East's share of global oil production peaked at 37 percent in 1975, a record that has never been seriously challenged since then.

REGIONAL STAGNATION

The Mid East region has become progressively more hostile for international oil and gas producers.

Nationalisations in the 1970s were followed by the Iranian revolution; the Iran-Iraq war; the first Gulf War between Iraq and the United States; sanctions against Iraq; the second Gulf War; intensified sanctions on Iran; the eruption of a civil war in Syria; and now an insurgency in northern Iraq.

Only Saudi Arabia, Kuwait, Bahrain, Qatar and the UAE have retained a fragile sort of calm amid the violence and geopolitical instability (and Bahrain was convulsed by riots in 2011).

With the exception of Saudi Arabia, the UAE and Qatar, the rest of the region has achieved no net growth in oil production since 1976.

Even in Saudi Arabia, production gains over the last 37 years (2.8 million barrels per day since 1976) pale in comparison with the increases achieved during the 1950s, 1960s and early 1970s.

Increasingly locked out of the best Middle Eastern oil and gas fields, international oil companies have been forced to shift their efforts to other, more readily accessible, sources of supply.

Huge new oil provinces were developed during the 1970s and 1980s in Alaska, the Gulf of Mexico, the North Sea and the Soviet Union in response to the oil shocks of 1973 and 1979.

Collapsing oil prices after 1985 led to a big reduction of exploration and production expenditure around the world and stemmed the shift away from the Middle East. But the renewed rise in oil prices in the 2000s has spurred a new exploration boom, and the shift away from the Middle East has resumed.

DECLINING FORTUNES

The shift will almost certainly continue over the next decade unless there is a radical improvement in the region's political environment.

Saudi Arabia's enormous oil and gas resources remain closed to outside companies. Sanctions have prevented any increase in oil or gas production from Iran. Syria and Iraq have become failed states where central authority has collapsed and both are convulsed by civil war.

By contrast, the shale revolution has added millions of barrels per day of extra production in the United States and Canada, and similar quantities of natural gas. Oil and gas companies are now exploring similar shale deposits around the world - including in Argentina, China and Russia.

Enormous conventional gas reserves have been developed in Australia and the industry is prospecting for more off the coast of Mozambique. Deepwater drilling is developing oil and gas off Latin America and West Africa. The industry is also prospecting in Thailand and elsewhere in Southeast Asia, as well as the South and East China Seas, East Africa and the Arctic.

With the possible exception of shale, none of these resources is as geologically attractive as the giant conventional oil and gas fields of the Middle East. But the politics of the region have become too hard, so oil and gas companies are increasingly looking elsewhere.

Advances in horizontal drilling, hydraulic fracturing, seismic surveying and deepwater drilling have opened a much broader global oil and gas resource base, giving exploration and production companies many more options.

Middle East producers, especially Saudi Arabia, will remain hugely influential in the oil market for many more years.

Saudi Arabia and its close allies the UAE and Kuwait are the only countries that routinely hold spare production capacity and therefore play a crucial role in helping to smooth out short-term fluctuations in supply and demand.

However, until the political and security situation improves, or oil prices fall, the Middle East's relative importance as an oil and gas producer will continue its long, slow decline. – Reuters

* John Kemp is a Reuters market analyst. The views expressed are his own.

Kuwait to double supplies to China's Sinopec

Kuwait, 3 days ago

Kuwait has concluded a new 10-year deal with a China's Sinopec Corp to nearly double its supplies by offering to ship the oil and sell on a more competitive cost-and-freight basis, according to a KPC official and a trading source.

State-run Kuwait Petroleum Corp will export 300,000 barrels per day (bpd) of crude oil under the agreement, which would amount to 15 percent of Kuwaiti petroleum exports and estimated to be worth $120 billion, said Nasser Al-Mudaf, KPC's head of international marketing told Reuters.

Mudaf said the contract replaces a previous one for between 160,000 bpd 170,000 bpd that had expired.

A senior trading source with direct knowledge of the contract said KPC managed to increase the supplies to Sinopec because it offered "a good deal", under which KPC will use its own oil fleet and sell the oil on a cost-and-freight basis.

"It will be the first cost-and-freight term deal between KPC and China," said the source, adding it would be more competitive than previous contract that Sinopec bought on a free-on-board basis and shipped the oil by itself.

"We look for the best markets which has stability and gives high return to KPC," said Mudaf, the marketing chief.

The agreement with China's Sinopec's trading arm, Unipec, was reached "in accordance with international prices and under purely commercial terms," Mudaf said, adding the quantity was subject to increase, but did not specify by how much.

As Kuwait does not have spare crude production capacity, the incremental supplies to Sinopec would be diverted from other markets such as Japan and Europe, where demand has been weakening, said the trade source, who declined to be named as he's not authorised to talk to media.

An official signing ceremony will be held in Hong Kong in three days, both said.

State news agency Kuna, quoting government data, reported in July that Kuwait's crude oil exports to China in the first half of this year stood at 3.87 million tonnes, equivalent to around 157,000 bpd.

Most of Kuwait's exports go to Asia. The state pumped 2.81 million bpd in July, according to a Reuters survey. - Reuters

Natural gas can keep those motors running: Kemp

London, 2 days ago

Cheap natural gas is starting to revolutionise traffic on US roads, cutting bills for some of the country's heaviest fuel users while reducing carbon emissions and other pollution.

The revolution is still in its very early stages. Gas remains a niche vehicle fuel, with last year's nationwide consumption less than the amount of gasoline and diesel dispensed in the tiny state of Vermont.

But gas consumption by motorists, taxis, refuse trucks, transit operators and logistics companies is growingly rapidly at a time when overall gasoline and diesel sales are flat.

Like other bold gambles on new technology, there is no guarantee that this one will pay off. But the steady rise in natural gas sales suggests that gas-fuelled vehicles are making progress.

Gas as a transport fuel is sometimes portrayed as a cottage industry, but the truth is rather different. Gas-fuelled vehicles have strong support from some of the biggest and most powerful names in truck manufacturing and petroleum.

Royal Dutch Shell is constructing a network of natural gas fuelling stations at truck stops along the interstate highway system in association with TravelCenters of America, an existing truck refuelling operator.

Love's Travel Stops, Blu LNG, Kwik Trip, Questar Fueling and TruStar Energy are also adding gas-refuelling systems at locations across the US as well as parts of Canada.

The concept has powerful strategic and financial backing from engine manufacturer Cummins, gas producer Chesapeake Energy and equipment maker and financing company General Electric.

Leading truck manufacturers including Freightliner, International, Kenworth, Peterbilt, Mack and Volvo all offer natural gas trucks using Cummins' ISX 12G engine, which one major fuel supplier hopes will be a "game changer" for the industry.

TRADE-OFFS

Gas-fuelled vehicles typically cost significantly more than conventional gasoline and diesel-powered equivalents, while fuelling stations dispensing compressed natural gas (CNG) or liquefied natural gas (LNG) to the public remain rare.

Set against these disadvantages, however, is the substantially lower price of natural gas.

Between 2011 and 2013 compressed CNG and LNG delivered cost savings of more than $1 per gallon on an energy equivalent basis compared with gasoline and diesel to California customers.

For individual vehicles and fleet operators that use a lot of fuel each year, the savings on fuel can more than offset the increased equipment costs and inconvenience arising from restricted refuelling infrastructure.

Switching to gas makes most sense for high-mileage vehicles and those with very large engines, which explains why taxi fleets, transit operators, refuse collectors, airport shuttles and trucking companies have shown the most interest in gas-fuelled engines.

SLOW START

Gas conversion, however, has been plagued with the teething problems typical in any new technology and there is still competition between companies promoting either CNG or LNG as the best fuel.

The transition has not been helped by early gas-fuelled engines not always being suitable for certain customer groups. Cummins, the leading engine manufacturer, supplied 8.9 lire and 15 litre engines suitable for LNG, but the former did not deliver enough horsepower and the latter was too large for efficient operation by most potential users.

Gas-fuel vendors are pinning their hopes on a new generation of 12 litre Cummins engines, led by the ISX 12G, to speed the spread of gas-fuelled vehicles.

Notwithstanding the problems, sales of gas as a road transport fuel are rising rapidly. Clean Energy Fuels, the leading provider of natural gas as an alternative fuel for vehicles in the US and Canada based on sales volumes and the number of refuelling stations, has reported rapid and sustained growth in the amount of CNG and LNG sold since 2009.

Clean Energy Fuels sold almost 65 million gasoline gallons equivalent (GGE) of natural gas fuels in the second quarter of this year, up from 50 million in the same period of 2012 and 25 million in 2009.

CNG accounts for two thirds of the company's sales, but deliveries of both CNG and LNG have been rising steadily over the past five years.

Roughly half of all natural gas sales for transport fuel are in California, according to the Energy Information Administration, and gas sales remain tiny compared with other fuels.

US drivers purchased 174 billion gallons of gasoline and diesel last year, according to the Federal Highway Administration. So if Clean Energy manages to sell 170 million gasoline equivalent gallons in 2014, it will still amount to less than 0.1 percent of all US fuel sales.

But Clean Energy has big ambitions and believes it is well positioned to capture expected future growth in demand for alternative-fuelled vehicles.

CLEAN ENERGY

The company owns, operates and supplies 516 refuelling stations dispensing CNG, LNG or biogas, up from 224 at the start of 2011.

Some of these stations are open to the public, but the majority are private stations operated on behalf of transit and refuse companies or other fleet operators.

In 2013 Clean Energy served 779 fleet customers operating approximately 35,000 natural gas vehicles and had fuelling stations in 39 states across the US, plus the provinces of Ontario and British Columbia in Canada.

In the first six months of this year the company added another 43 CNG fleet customers, accounting for an extra 9.8 million gallons of sales, and 11 new LNG customers, adding an extra 6.5 million gallons.

Clean Energy has been building a network of refuelling stations along major transportation corridors, which it calls "America's Natural Gas Highway" (ANGH). The idea is to guarantee refuelling facilities for coast-to-coast trucking companies.

More than 80 ANGH stations have been built, though only a minority are open to the public, with the company waiting for customer demand to increase.

Building so much infrastructure has pushed Clean Energy deep into debt. The company posted a pre-tax loss of $60 million in the first half of this year, bringing total pre-tax losses since the start of 2011 to $271 million.

"We have a history of losses and may incur additional losses in future," the company admits, adding in regulatory filings that it might never achieve or maintain profitability and that investment in the business "involves a high degree of risk".

The company had consolidated debt of more than $600 million on June 30, according to its quarterly filing with the Securities and Exchange Commission.

Clean Energy is essentially a concept company dedicated to the idea that cheap gas could grab a significant share of North America's giant fuel market.

The main risks are that the company will run out of cash before natural gas vehicles go mainstream or oil prices fall enough to spoil the economics of switching.

But otherwise the concept is a good one. Gas is cheap and abundant in North America and the engine technology is mature.

Gas will not be suitable for all motorists, but for a group of the heaviest users there is a compelling argument for making the switch. – Reuters

Iran ‘overly optimistic about oil production’

London, 3 days ago

by Andy Jenkins

Iran's Oil Minister Bijan Zanganah has boldly suggested that production could be boosted by 700,000 barrels per day within two months of sanctions being lifted. Yet there is growing consensus that this is exceptionally optimistic, a report said.

Ageing infrastructure will require substantial investment for production to approach anywhere near that figure, according to a report published by Douglas-Westwood London, a professional energy research group.

This could, however, provide numerous opportunities for international IOCs and oilfield service providers — if they are allowed to invest. Iran is already planning changes to its oil contract model to allow IOCs participation at all stages of production.

However, in the absence of a comprehensive sanctions agreement, all discussion of increased production and investment is purely academic. A final agreement must be reached if the oil & gas industry is to be shaken out of its stupor, according to Douglas-Westwood London.

Sanctions bite

In recent years, oil and gas production in Iran has been largely defined by the impact of international sanctions. The nation possesses the world’s fourth largest proven oil reserves and second largest gas reserves.

However, despite this, production has faltered. Sanctions enacted by the US and European Union in 2011 and 2012 have crippled an otherwise promising energy sector. The economic impact has been severe — oil & gas export revenues dropped by almost 53 per cent due to significantly decreased liquids export. This figure may make for sobering reading, but all is not lost for the oil & gas industry, said the Douglas-Westwood London report.

The historic Joint Plan of Action (JPOA) was widely lauded as a positive sign for extractive industries. The removal of certain restrictions and the promise of a permanent agreement have given hope to an embattled oil & gas industry. If sanctions are removed and international investment is allowed to return, reinvigoration of the sector could prove to be a potential goldmine for IOCs and oilfield service providers.

However, movement towards a final agreement on the future of Iran’s nuclear programme has been excruciatingly slow. The JPOA’s original July 20 deadline did not culminate in significant progress and negotiations have simply been extended to November 24. – TradeArabia News Service

Mexican Economy Grows More Than Forecast as Exports Pick Up

By Eric Martin and Brendan Case Aug 22, 2014 12:48 AM GMT+0700

Mexico’s economy expanded more than forecast in the second quarter as a rebound in U.S. demand boosted exports, helping Latin America’s second-largest economy recover from six months of disappointing growth.

Gross domestic product climbed 1 percent from the previous three months, faster than first-quarter growth that was revised up to 0.4 percent, the national statistics institute said today. The median forecast of 14 economists surveyed by Bloomberg was for growth of 0.8 percent. GDP grew 1.6 percent from a year earlier, down from 1.9 percent in the first quarter, as Easter fell in April this year instead of March.

Increased exports and a recovery in the services sector bolstered the second-quarter expansion, Deputy Finance Minister Fernando Aportela told reporters today. Growth is forecast to accelerate in the second half after the government boosted public spending and the central bank cut its key rate to a record-low 3 percent.

“We should rotate from an externally-driven recovery towards a services-led expansion in the second half of the year,” Gabriel Lozano, chief Mexico economist at JPMorgan Chase & Co., said in an e-mailed response to questions. “The data published today should confirm that there is no further space for Banxico to cut rates.”

The peso strengthened 0.3 percent to 13.0908 per U.S. dollar at 12:24 p.m. in Mexico City. The yield on government fixed-rate peso-denominated bonds due 2024 increased 0.03 percentage point to 5.76 percent.

Interest Rates

Mexico’s central bank will probably leave interest rates on hold until the third quarter of next year, when policy makers will increase borrowing costs by a quarter point, according to the median forecast of economists surveyed by Bloomberg.

The government today reaffirmed its forecast for growth of 2.7 percent this year, with Aportela saying that increased auto production and steady U.S. growth is helping bolster the economy.

The U.S., the buyer of about 80 percent of Mexico’s exports, grew at a 4 percent annualized rate from April through June after shrinking 2.1 percent in the first quarter, when harsh winter weather undercut demand. After declining from a year earlier in January, Mexico’s exports have increased at least 4 percent monthly, with the pace of growth accelerating to 7.7 percent in June.

Oil Monopoly

The government forecasts economic growth will continue to accelerate after President Enrique Pena Nieto ended the state oil production monopoly and opened the telecommunications industry to more competition, moves that his administration expects to help lift growth to almost 5 percent by the time he leaves office in 2018.

Mexico’s economy grew 1.1 percent last year, the least since the 2009 recession, amid debt defaults by the nation’s largest homebuilders and a lag in public spending due to the presidential transition. The government increased expenditure 9.7 percent in real terms in the first half of this year, the central bank unexpectedly cut borrowing costs in June and the construction industry expanded for the first time in 19 months.

Agriculture expanded 2.6 percent in the second quarter from a year earlier, services grew 1.8 percent and industrial activity rose 1 percent, according to today’s report.

Falling Sales

“Mexico’s second quarter acceleration reflects the end of its two post-election slumps: the real estate slump following changes in government incentives for homebuilders, and the public spending slump,” Bill Adams, senior international economist at PNC Financial Services Group in Pittsburgh, wrote in a note to clients today.

Empresas ICA SAB, Mexico’s largest construction company, saw sales rise 16 percent to 9.06 billion pesos in the second quarter, beating analyst estimates.

Auto production has been another bright spot in the economy. Industrial growth accelerated in the second quarter as vehicle output rose 8.2 percent from the same period a year earlier, compared with a 6.5 percent first-quarter increase. General Motors Co. (GM) boosted its Mexico output 17 percent during the first half of the year, while new plants built by Nissan Motor Co. (7201), Honda Motor Co. and Mazda Motor Corp. added to the nation’s production.

Still, economists have cut their 2014 growth and inflation estimates since the start of the year after consumer spending proved weaker than expected following tax increases.

Policy makers lowered their 2014 growth forecast for the third time last week, saying GDP will rise 2 percent to 2.8 percent, down from the previous estimate of 2.3 percent to 3.3 percent. The government projects a 2.7 percent expansion after reducing its estimate in May from 3.9 percent.

The Mexican economy strengthened in the second quarter and has a “good outlook” for the rest of 2014, Carstens said last week.

U.S. Oil Imports Fell to 19-Year Low for July, API Says

By Moming Zhou Aug 22, 2014 2:00 AM GMT+0700

U.S. imports of crude and fuel in July dropped to the lowest level for the month in 19 years as domestic production rose, the American Petroleum Institute said.

Imports slid to 9.06 million barrels a day, the least for July since 1995, the industry-funded group said today in a monthly report. Domestic crude-oil production rose to the highest July level since 1986, staying above 8 million barrels a day for a sixth month.

“Last month generated new records for many of the petroleum statistics we track,” John Felmy, chief economist at the API in Washington, said in the report. “Imports of crude oil and refined products set multidecade lows for the month.”

Total imports dropped 12 percent from a year earlier, the API said. Imports of crude oil decreased 7.2 percent from 2013 to average 7.49 million barrels a day, also the lowest July level in 19 years.

Crude production jumped 14 percent from 2013 to 8.5 million barrels a day. Output has surged as a combination of horizontal drilling and hydraulic fracturing, or fracking, has unlocked supplies trapped in shale formations, including the Bakken in North Dakota and the Eagle Ford in Texas.

Total deliveries of petroleum products, a measure of consumption, climbed 1.3 percent from a year earlier to 19.3 million barrels a day. It was the highest level for the month in four years. Gasoline demand increased 1 percent to 9.15 million.

Distillate Demand

Demand for distillate fuel, which includes diesel and heating oil, climbed 6.6 percent to 3.81 million, the highest July level since 2007. Jet fuel consumption rose 3.3 percent to 1.57 million.

Deliveries of residual oil, used for commercial and industrial heating, electricity generation and ship propulsion, dropped 49 percent to 183,000 barrels a day.

U.S. refinery input reached 16.6 million barrels last month, the highest July level, the API said. Production of gasoline advanced 6.6 percent to 9.93 million barrels a day and output of distillates rose 1.5 percent to 5 million. Both were record levels for the month.

Russia Said to Forgo $6.7 Billion of Oil Revenue for Investment

By Elena Mazneva and Evgenia Pismennaya Aug 21, 2014 11:53 PM GMT+0700

Russia may lose as much as 240 billion rubles ($6.7 billion) of oil revenue next year after the government chose a three-year tax plan favored by crude producers, according to two state officials.

Deputy Prime Minister Arkady Dvorkovich picked the lower of two proposed oil output tax rates, leaving an additional 55 billion rubles in producers’ pockets, the officials said, asking not to be identified because discussions were confidential. Dvorkovich, who made his choice to encourage investment, met today with government and business representatives to set the rates before the budget is sent to parliament.

Russia, the world’s biggest energy exporter, is trying to balance the interests of producers and the budget with the $2 trillion economy on the brink of recession amid a standoff with the U.S. and Europe over Ukraine. Oil taxes provide about 45 percent of the country’s budget revenue.

The oil companies got what they wanted, one of the people said. The Finance Ministry had proposed a higher increase in the extraction tax than the one that passed, which would have lowered the budget losses to 185 billion rubles next year, according to the person.

Producers’ Benefits

Dvorkovich approved next year’s extraction tax rate at 765 rubles per metric ton of oil, rather than the 775 rubles that the Finance Ministry included in a draft plan published on a government website yesterday, according to the officials.

The main points of the plan were agreed on today and the ministries will now adjust their budget calculations during the next 10 days, Aliya Samigullina, Dvorkovich’s spokeswoman, said, declining to elaborate. There is now a minimal chance for significant changes in the rates, while the estimate of lost revenue may be cut, according to the official.

State-run OAO Rosneft, which pumps 40 percent of the nation’s oil, may boost earnings before interest, taxes, depreciation and amortization by about $1 billion next year because of the new tax plan, two government officials said before the meeting.

OAO Lukoil, Russia’s second-largest oil producer, may also add about $1 billion to Ebitda, oil analysts at VTB Capital in Moscow said in an e-mailed response to questions.

Rosneft gained 0.6 percent, while Lukoil shares rose 0.8 percent. The Micex Index advanced for a 10th day on bets that President Vladimir Putin’s meeting with his Ukrainian counterpart, Petro Poroshenko, on Aug. 26 will help reduce tensions that have led the U.S. and European Union to impose sanctions against Russia.

New Plan

Russia is bringing its oil export taxes in line with those of Kazakhstan, one of its two customs union partners and the second-biggest producer in the former Soviet Union.

To comply with Kazakhstan’s rates, the government in Moscow is lowering export duties on crude and refined products, compensating by accelerating increases in the extraction tax. Export duties will continue to decline in 2016 and 2017, except for fuel oil, which will rise to 100 percent of the crude tax by the last year of the plan.

A three-year tax plan approved in 2013 and calling for the fuel oil duty to reach 100 percent next year, would have been a shock for the industry, which still produces a significant amount of heavy products, another government official said.

As well as increasing the extraction tax and lowering most export duties, the three-year plan will also cut gasoline excises to prevent jumps in domestic prices.

‘Complex Construct’

Russia’s finance and energy ministries have been trying to reach a compromise on the rates with oil producers since at least May.

While all companies may gain about $3 per barrel in output by 2017 because of the new plan, their refinery profits depend on upgrades, said Denis Borisov, director at Ernst & Young’s oil and gas center in Moscow.

A hypothetical refinery in central Russia may have a negative margin in three years if fuel oil accounts for more than 20 percent of its production, Borisov said today by e-mail. It now makes up 27 percent on average, he said.

The tax plan is a “complex construct,” which cuts the budget by 200 billion rubles in 2015 and then brings in 50 billion to 70 billion rubles a year, Finance Minister Anton Siluanov said in June. The ministry has since cut the estimates for additional state profit in 2016 and 2017 to a range of 4 billion to 10 billion rubles a year, one of the officials said.

“The discussion over the new tax regime for the oil industry is gathering steam and, with half a dozen different proposals, the final shape is starting to crystallize,” Alexander Donskoy, an oil analyst at VTB Capital, said by phone.

Oil Glut Absorbed by Asia Spells End to Brent’s Collapse

By Grant Smith Aug 21, 2014 10:42 PM GMT+0700

Brent crude’s biggest price-rout in more than a year is coming to an end as the flow of West African crude to Asia helps disperse a glut, banks including Societe Generale SA (GLE), BNP Paribas SA (BNP) and DNB ASA (DNB) said.

A “price floor is forming” close to $100 a barrel for Brent, used to value more than half the world’s oil, as the surplus of Nigerian supplies is whittled away, Societe Generale said in a report today. The incentive for sending cargoes from the region to buyers in Asia is at its strongest in four years, data from PVM Oil Associates Ltd. show. Chinese and Indian refiners bolstered purchases of West African crude to the highest in at least three years, a Bloomberg News survey of traders indicates.

“We might be around the bottom for this price cycle,” Torbjoern Kjus, an analyst at DNB in Oslo, said by phone today. “Nigerian barrels moving to Asia again, to me that’s the first sign that the market’s starting to re-balance.”

A “glut” of oil in the Atlantic basin has shielded prices against the turmoil in Iraq, the International Energy Agency said on Aug. 12. Brent crude plunged 11 percent in the past two months as surging shale output in the U.S. dulls the biggest oil consumer’s need for imports, leaving an excess of supplies from producers such as Nigeria and Angola. Signs of recovery in OPEC member Libya, which is restoring exports choked off during a year of political feuds, amplified the drop.

Clearing Overhang

“The overhang of Nigerian supply has almost cleaned up and West African crude differentials have stabilized,” Mike Wittner, Societe Generale’s head of oil market research in New York, said in today’s report. These are “key steps towards stabilizing Brent,” he said.

Chinese refiners bought 40 cargoes of West African crude to load in September, equating to about 1.27 million barrels a day, according to a Bloomberg survey of nine traders. It’s the most since Bloomberg started tracking the data in August, 2011. Companies in India bought 27 cargoes for this month, the most on record, the survey showed.

Brent for October settlement fell 0.2 percent to $102.09 a barrel on the London-based ICE Futures Europe exchange at 4:08 p.m., close to its lowest in 14 months. The front-month Brent contract fell 5.6 percent in July, the biggest monthly drop since April, 2013.

The benchmark’s narrowing premium over the Middle East reference price, Dubai crude, is encouraging refiners in Asia to opt for supplies valued using Brent, such as Nigerian exports, Societe Generale and BNP Paribas said.

Speedier Sales

“We are confident that the temporary light-oil physical glut is removed from the Atlantic Basin at these levels, because a number of Brent-related crudes have cheapened,” Harry Tchilinguirian, BNP’s head of commodities strategy in London, said by e-mail today.

The Brent-Dubai exchange of futures for swaps, or EFS, shrank to 87 cents a barrel on Aug. 12, the lowest since June 2010, data from brokers PVM Oil Associates shows. It traded for 96 cents today.

“First reports are hinting at Nigerian crudes for September loading beginning to clear quite nicely and that they are doing so at a faster rate than expected,” David Wech, an analyst at consultants JBC Energy GmbH in Vienna, said in a report yesterday. Consequently, there is a “bottom in sight” for Brent prices.

Cheaper Brent-related crudes are also encouraging traders to ship North Sea oil to other regions for storage, according to DNB’s Kjus. Mercuria Energy Group Ltd. has chartered a tanker, currently anchored off the coast of England, to ship crude for storage at Saldhana on the west coast of South Africa, according to two oil traders with knowledge of the matter.

Labor Day Weekend to See Most U.S. Drivers in Six Years

By Moming Zhou and Mark Shenk Aug 21, 2014 7:27 PM GMT+0700

The most Americans in six years will travel by car over the Labor Day holiday weekend, and they’ll be paying the least for gasoline since 2010 as refineries produce ample amounts of the fuel, AAA predicts.

About 29.7 million people plan to drive 50 miles or more from home during the five days ending Sept. 1, up from 29.3 million last year and the most since 2008, Florida-based AAA, the biggest U.S. motoring organization, said in a statement.

“We’re going into the Labor Day with the lowest gasoline prices for most motorists since 2010 for the holiday,” Michael Green, a Washington-based AAA spokesman, said by phone yesterday. “This really helps make travel more affordable and leave travelers with more money to spend on other things while on their trips.”

Drivers will account for more than 80 percent of the estimated 34.7 million people who will celebrate the holiday with a getaway, AAA said. That’s 1.3 percent more than in 2013 and also the most since 2008.

The average price of regular gasoline at the pump was $3.436 a gallon yesterday, the lowest since February, according to AAA data. That’s down from $3.533 a year ago.

Brent oil, the international benchmark that’s the basis for imported crude and fuel prices, has dropped this month as Iraqi security forces and U.S. aircraft stepped up attacks against Islamic State militants. Russian energy exports continue to flow amid heightened tension between that nation and Ukraine.

Fuel Processing

U.S. refineries processed 16.5 million barrels a day of crude in the four weeks ended Aug. 1, Energy Information Administration figures show. That’s the highest in data going back to May 2005.

“We have violence in the Middle East, are at the height of the driving season and still have falling gasoline prices,” Green said. Refiners have “produced more than enough gasoline to meet demand.”

Production of the fuel reached 9.84 million barrels a day in the week ended June 13, the highest level in government data going back to 1982.

U.S. crude production will reach 8.46 million barrels a day this year and 9.28 million in 2015, the highest annual average since 1972, the EIA said in its monthly Short-Term Energy Outlook on Aug. 12. Most of the output is light, sweet crude, or oil with low density and sulfur content, which yields a high proportion of gasoline.

“The more U.S. crude production rises, the more light crude will be available, boosting the yield of gasoline,” Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC, said by phone yesterday.

About 2.65 million Americans will travel by air, an increase of 1 percent from last year, AAA said. The projections by AAA are based on research and forecasts from IHS Global Insight.

Permian Shale Boom Upending Values of Heavy and Light Crude Oil

By Dan Murtaugh Aug 21, 2014 6:53 PM GMT+0700

Skyrocketing oil production in the Permian Basin has reversed a decades-old price relationship between heavy and light crude in the U.S.’s largest oil patch.

West Texas Sour traded at a $5-a-barrel premium to West Texas Intermediate in Midland, Texas, yesterday after reaching $10 on Aug. 19, the highest level in Bloomberg data dating back to 1989. WTS has averaged a 97-cent premium this year after averaging a discount in every year back to 1989.

WTS has historically been cheaper because it’s heavier and higher in sulfur than WTI. The quality difference has meant that pipeline companies move the two grades out of the basin in separate batches.

New shale wells in the Permian have pushed production beyond pipe capacity. Most of the new crude is light, so it’s harder for producers to find space in those batches, Sandy Fielden, director of energy analytics at consultant RBN Energy LLC, said in an interview yesterday.

“There’s more WTI coming out that’s trying to get to pipelines, so it’s more stressed,” Fielden said after a presentation at a conference hosted by RBN and Turner Mason & Co.

The pipeline constraints have made both WTS and WTI in Midland discounted to the U.S. benchmark, which is WTI priced in Cushing, Oklahoma. WTS was $8 a barrel below the benchmark yesterday, compared with $13 below for WTI in Midland. Midland is the pricing point for Permian crudes.

Heavier crudes are generally less valuable than light because they yield higher portions of low-value products like gas oil and residual oil.

Pipeline Specifications

In the case of WTS, though, its heavier nature may have a benefit, Fielden said. Some shale production in the Permian is an ultra-light crude called condensate. Condensate is too light to meet pipeline specifications, so some people may be buying WTS to blend the two into a pipeline-approved oil.

Permian production is expected to rise to 1.72 million barrels of oil a day in September, almost double the output from five years ago, according to the Energy Information Administration. Output could climb to 3.4 million barrels a day by 2024, Keith Skaar, vice president of exploration at Midland-based Element Petroleum Operating LLC, said July 15.

U.K. Natural Gas Options Trading Signals Ukraine Supply Concerns

By Isis Almeida Aug 21, 2014 5:27 PM GMT+0700

Options traders are bracing for higher European natural gas prices as the worsening conflict between Russia and Ukraine threatens to disrupt supplies of the fuel this winter.

Three of the four most-active natural gas options are calls giving the holder the right to buy U.K. gas futures in January, February and March at levels at least 20 percent above current prices, ICE Futures Europe data showed. The number of outstanding calls, known as open interest, for all months traded is the highest since ICE listed the contracts in 2011.

More than 2,000 people have died since April in fighting between Ukraine forces and pro-Russian separatists, which risks interrupting gas supplies to the European Union this winter. Russia supplies about 30 percent of Europe’s gas, half of which goes through Ukraine. Disputes between the nations last disrupted flows to Europe in 2009 amid freezing January weather.

“Upside risk in gas is widespread due to geopolitical factors which have been plaguing the market so far this year,” Tobias Davis, a gas broker at GFI Securities Ltd. in London, said by phone yesterday. “Open interest in calls reflects this intrinsic risk. I would expect the landscape to remain unchanged until these factors subside.”

Investors held 9,250 options to buy U.K. gas at 75 pence a therm ($12.50 a million British thermal units) in January as of Aug. 19, exchange data compiled by Bloomberg showed. An identical amount is outstanding for calls with the same strike prices expiring in February and March.

Open Interest

U.K. gas for delivery in January has climbed 25 percent from this year’s low in April to close yesterday at 62.45 pence a therm on ICE. February futures were at 62.52 pence a therm and March traded at 60.67 pence. The U.K. gas market is Europe’s biggest and acts as a regional benchmark.

Call open interest for all months was 200,850 contracts on ICE, the most since 2011. The amount of outstanding puts, or options giving the right to sell futures, was 149,095.

The option with the biggest open interest is a put giving holders the right to sell September gas for 40 pence a therm.

U.K. next-month gas prices have rallied 16 percent after trading at the lowest in four years in July. A mild winter left storage sites across the 28-nation European Union at their fullest for this time of year since 2008. The Ukraine risk premium built into British gas prices is about 5 pence to 7 pence a therm, according to Pira Energy Group, a New York-based research company.

Ukraine passed a bill last week that enables the country to impose sanctions on Russia for its support of separatists in the east. Curbs may include banning transit of Russian gas, which would force European countries to buy the fuel at Ukraine’s eastern border.

“No one wants to be short in a market where long lines of unidentified Russian trucks are piling up on the Ukraine border and the Ukrainian government is making counter-threats to cut off Russian gas in transit,” Pira Energy said in a report e-mailed yesterday. “Ukraine fears mask broadly weak European fundamentals.”

Iran Speaks More Softly But Keeps Building Bigger Sticks

By Tony Capaccio Aug 21, 2014 11:00 AM GMT+0700

While Iran’s military has toned down its rhetoric about military capabilities and exercises, it continues a low-profile buildup of weapons in and near the Strait of Hormuz, according to a classified Pentagon assessment.

“Iran’s military strategy is defensive” and designed to “deter an attack, survive an initial strike, retaliate against an aggressor and force a diplomatic solution” while avoiding major concessions, says the unclassified executive summary of a congressionally mandated Pentagon report submitted to lawmakers on July 7.

Since the August 2013 election of President Hassan Rouhani, the Iranian government “has adjusted some of its tactics” to achieve core objectives such as preserving the rule of Supreme Leader Ayatollah Ali Khamenei, according to the summary, which was obtained by Bloomberg News.

“Of note, Tehran’s strategic messaging about its military capabilities through the mass media has been less strident since Rouhani took over,” it said. “Widespread publicity of major military exercises, previously the norm, has been minimal” in state-run media such as the Mehr and Islamic Republic news agencies.

Defense Secretary Chuck Hagel wrote in his cover letter transmitting the classified report that it contains analysis of Iran’s conventional, unconventional and nuclear weapons capabilities “and intelligence gaps the Department currently has” with Iran.

The deadline for negotiations between Iran and the five permanent members of the United Nations Security Council -- China, France, Russia, the U.K. and the U.S. -- plus Germany over curtailing its disputed nuclear program in exchange for relaxing economic sanctions has been extended to Nov. 24.

‘Consistently Suspicious’

Kenneth Katzman, a Middle East analyst for the nonpartisan Congressional Research Service, said in an e-mail that the Pentagon’s previous Iran reports “have been consistently suspicious and assuming the worst in Iran’s intentions and capabilities.”

“This assessment is more nuanced, giving Iran some credit for adjusting its approach so as to minimize international suspicions,” he said.

Katzman said he was struck by the Pentagon’s characterization of Iran’s military doctrine as defensive.

“I have never seen DoD or any U.S. agency come down so sharply on” whether Iran is “defensive or aggressive.”

“This definitely has a much different and more benign tone that the preceding reports did,” Katzman said.

Quiet Build-Up

Even so, the new assessment says, “Tehran is quietly fielding” increasing numbers of anti-ship ballistic missiles, “small but capable submarines,” coastal missile batteries and attack craft.

Iranian officials periodically have threatened to disrupt the Strait of Hormuz in response to U.S.-led economic sanctions on its nuclear program and Israel’s threat to launch a strike against it.

About 20 percent of the world’s traded oil is shipped daily through the Strait, which is 21 miles (34 kilometers) wide at its narrowest point.

Separately, Iran possesses “a substantial inventory of missiles capable of reaching targets throughout the region, including Israel.”

In addition, the summary says: “Iran’s covert activities appear to be continuing unabated in countries such as Syria and Iraq. Despite Iran’s public denials, for example, other information suggests Iran is increasingly involved, along with Lebanese Hizballah, in the Syria conflict.”

“The Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF) remains a key tool of Iran’s foreign policy and power projection, in Syria and beyond,” it continues. “IRGC-QF has continued efforts to improve its access within foreign countries and its ability to conduct terrorist attacks.”

Enbridge Avoids U.S. Review With Plan to Boost Oil Sands

By Jim Snyder and Rebecca Penty Aug 22, 2014 6:32 AM GMT+0700

Enbridge Inc. (ENB) said it found a way to ship more Alberta oil to the U.S. that doesn’t require a Keystone XL-like review: switching crude from one pipeline to another before it crosses the border.

The State Department, responsible for approving cross-border energy projects like the Alberta Clipper and the proposed Keystone XL line to the U.S. Gulf Coast, said in a statement that Enbridge can go forward with its plan under authority granted by previously issued permits.

The plan drew criticism today from environmental groups, including the National Wildlife Federation, opposed to new imports from Canada’s oil sands because mining and processing the fuel releases more climate-warming carbon than other types of crude.

“The president’s promise to decide Keystone XL based on its climate impacts is completely meaningless if the State Department is simultaneously permitting other tar sands pipelines behind closed doors,” Sierra Club attorney Doug Hayes said in a statement.

In filings with the State Department, Enbridge said the plan was necessary to meet the needs of Alberta’s oil producers as a planned expansion of its Alberta Clipper line that requires U.S. approval is delayed.

Alberta Clipper

The Calgary-based company plans to construct a link between the Alberta Clipper and an adjacent pipeline known as Line 3. By transferring oil from the Clipper to Line 3 before it crosses the border and then back again after the oil is in the U.S., Enbridge doesn’t need a U.S. presidential permit that is required for new lines.

“Very little work is required,” Terri Larson, a company spokeswoman, said.

The transfer of oil from Alberta Clipper would happen in Gretna, Manitoba, 1.5 miles (2.4 kilometers) north of the U.S. border. The oil would get transferred back about 16 miles south of the border and be transported onto Superior, Wisconsin.

The Alberta Clipper line is now operating and can carry as much as 450,000 barrels of oil a day into the U.S. In November 2012, Enbridge applied to the State Department to expand the capacity to 880,000 barrels a day. That proposal remains under a State Department review.

According to documents submitted to the department and made public this week, Enbridge considers the transfer of the oil from the Alberta Clipper to Line 3 a temporary solution until the expansion application is approved. It told the department the transfer would permit it to increase Alberta Clipper’s capacity to 570,000 barrels a day by later this year.

TransCanada Corp. (TRP), another Calgary-based pipeline company, applied in 2008 to the State Department for permission to construct the Keystone XL pipeline to link Alberta’s oil sands to the U.S. Gulf Coast. The project has galvanized environmental groups who say it will worsen climate change.

The State Department’s review has been put on hold pending the outcome of a court case before the Nebraska Supreme Court challenging that pipeline’s path in that state. The court will hear the case on Sept. 5. A ruling may not come until next year.

USGC fuel oil stocks 4 million barrels more than Singapore, spread remains $5/b

Houston (Platts)--21Aug2014/125 pm EDT/1725 GMT

US Gulf Coast residual fuel oil stocks are more than 4 million barrels higher than Singapore inventories -- the largest difference since March -- while the markets' HSFO spread has remained above the $5/barrel mark for more than two weeks.

The Gulf Coast and Singapore markets are closely related. About one-third of all US fuel oil exports went to Singapore in 2013, the most of any country. Products move between the two markets depending on arbitrage opportunities, typically by going around the Cape of Good Hope in South Africa.

Singapore heavy distillate stocks, which include cracked and straight run fuel oil and low sulfur waxy residue, rose 2.5% to 16.952 million barrels in the week to Wednesday, according to data published late Wednesday from International Enterprises Singapore, a government agency that is part of Ministry of Trade and Industry.

US Energy Information Administration data published Wednesday showed Gulf Coast fuel oil stocks rose 3% to 21.030 million barrels during the most-recent reporting week. That put stocks in the largest US market 4.078 million barrels higher than Singapore inventories, the largest difference since Gulf Coast stocks reached more than 5.2 million barrels above Singapore stocks in the week ended March 5, data show.

Singapore stocks have averaged about 534,000 barrels more than Gulf Coast stocks over the past five years; however, Gulf Coast stocks have averaged about 2.3 million barrels more than Singapore stocks in 2014.

Gulf Coast fuel oil stocks account for about 60% of total US stocks, and Gulf Coast exports account for 80% of total US fuel oil exports.

The 10-day moving average of Gulf Coast 3%s residual fuel oil's discount to Singapore HSFO stood at about $5/b Wednesday and has been above the $5/b mark for 16 trading days. Typically, Gulf Coast HSFO is about $5.50/b less than Singapore HSFO.

A recent cargo for 130,000 mt of fuel oil going from the USGC to Singapore was fixed at $2.95 million, or about $3.57/b, according to a fixture report.

There are seven tankers carrying a combined 13 million barrels of dirty petroleum products from the USGC bound for Singapore and due to arrive August 24-September 18, according to Platts cFlow vessel-tracking software. The tankers are Sirius Star, Desimi, Stena Superior, Sifnos, Dalian Venture, Aquila and Wafrah.

Contango between 1st, 3rd-month cash Dubai crude breaks above $1/b

Singapore (Platts)--21Aug2014/712 am EDT/1112 GMT

The contango between first and third month cash Dubai crude broke above $1/barrel Thursday for the first time since 2010 as the sour Middle Eastern crude market has followed structural weakness in the Brent market and demand for sour Middle Eastern crude from Asian refiners has been lackluster due to a raft of competing grades on offer.

On Thursday, the contango between first- and third-month cash Dubai was assessed at $1.21/b, a widening of 29 cents/b on the day to the widest since September 14 2010 when it was at $1.25/b.

The underlying market weakness was also seen in the spot market for official selling price crudes, with traders pointing to Qatar Marine trading around an 80 cents/b discount to the grade's OSP, with Mitsui was heard to have sold a October loading cargo of the grade to Shell.

Murban, Abu Dhabi's flagship light sour crude meanwhile was heard to have traded at a 93 cents/b discount to its OSP, with Fuji Oil heard buying a cargo from Unipec.

On Wednesday Total sold an October-loading cargo of Das Blend at a $1/b discount to Glencore, in the Platts Market on Close assessment process.

Physical Med/NWE gasoline spread hits 11-month low on softer Med, bullish NWE

London (Platts)--21Aug2014/713 am EDT/1113 GMT

The physical gasoline Med/NWE spread -- the differential between FOB Mediterranean cargoes and FOB Rotterdam Eurobob gasoline barges, was assessed at an 11-month low Wednesday as the Mediterranean weakened amid increased availability in the region while the Northwest European market strengthened on the back of increased buying interest.

The Med/NWE spread was assessed at minus $21/mt Wednesday, down sharply from minus $3/mt in Tuesday's assessment. This is the widest the spread has been since September 16, 2013, when it was assessed at minus $23/mt, Platts data shows.

The FOB Mediterranean gasoline cargo market was assessed Wednesday at $921/mt, with a $6.50/mt premium to the front-month Mediterranean gasoline swap. This compares to Tuesday's assessment of $931.25/mt, with a $18/mt premium to the front-month swap.

Sentiment in the Mediterranean market turned bearish in recent days as regional demand subsided and more cargoes became available, market sources said. The softening of the market came after a period of tightness during July and the first half of August due to refinery run cuts in the region.

Conversely, the Northwest European gasoline market saw a bullish upturn Wednesday, on the back of increased buying interest in the region as the market corrected from earlier lows.

"I think some of it is a correction...[the previous level] was below the real value," said a Northwest European gasoline trading source.

FOB Rotterdam Ebob barges were assessed at $942/mt Wednesday, with a $15/mt premium to the equivalent front-month swap. On Tuesday, they were assessed at $934.25/mt, with a $9/mt premium to the front-month swap.

USGC fuel oil stocks 4 million barrels more than Singapore, spread remains $5/b

Houston (Platts)--21Aug2014/125 pm EDT/1725 GMT

Gulf Coast fuel oil stocks account for about 60% of total US stocks, and Gulf Coast exports account for 80% of total US fuel oil exports.

A recent cargo for 130,000 mt of fuel oil going from the USGC to Singapore was fixed at $2.95 million, or about $3.57/b, according to a fixture report.

Oil complex settles higher on strong US jobs data

New York (Platts)--21Aug2014/549 pm EDT/2149 GMT

The oil complex turned a corner during mid-afternoon US trade Thursday, with NYMEX October crude settling 51 cents higher at $93.96/b.

ICE October Brent settled up 35 cents at $102.63/b. In products, NYMEX September RBOB rallied 3.49 cents to settle at $2.7475/gal. September ULSD rose 1.17 cents to finish at $2.8375/gal.

"I've heard that cash markets are strong in gasoline," Oil Outlooks President Carl Larry said. "I think that the economic numbers have looked good,vand it seems that the market is still struggling with refinery issues and the looming refinery maintenance."

Despite US Energy Information Administration data Wednesday pegging US Gulf coast crude runs last week at an all-time high of 8.74 million b/d, Platts data had shown that at least four fluid catalytic cracking units across three major USGC refiners had issues last week.

Adding to the bullish supply picture is the expectation that Irving's 300,000 b/d Saint John, New Brunswick, refinery is getting ready to go offline in September, Larry said.

Despite the rally, RBOB is likely being held in check by the impending arrival of up to 13 tankers, currently en route to the US Atlantic Coast from Europe. While it is unlikely that all tankers are carrying gasoline or blending components, the flurry of cargoes is set to arrive by the end of August, just in time for Labor Day.

US jobs data Thursday was bullish, with both initial and continuing jobless claims coming in below economists' expectations. Initial jobless claims came in at 298,000 this week. The market also got a boost from strong existing home sales data, which rose to 5.15 million in August from 5.03 million in July.

The Philadelphia Federal Reserve Manufacturing Index rose to 28 for August, up from 23.9.

But economic data had been bearish coming into the US trading day.

Chinese manufacturing data failed to live up to expectations, with preliminary HSBC Manufacturing PMI for China coming in at 50.3 -- a three-month low, according to Smith -- missing a forecasted 51.5.

A reading above 50, however, still points to expansion within the sector.

While Germany's manufacturing PMI data fell, it did beat economists' expectations. Larger Eurozone PMI data missed however, coming in 50.8.

BRENT COULD BOTTOM NEAR $100/B

NYMEX crude was also facing bearish supply pressure, analysts said. US Energy Information Administration oil data released Wednesday showed crude stocks at NYMEX delivery hub Cushing, Oklahoma, rose 1.76 million barrels to 20.16 million barrels last week. This puts Cushing stocks at their highest since the week ended July 11.

"Yesterday's build at Cushing is putting downward pressure on WTI, while Brent is seeing downside as flows in Libya improve and flows in Iraq remain largely unaffected," Smith said.

That said, ICE Brent could be nearing bottom as a weakened physical market has seen bargain hunting among Asian refiners, Citi Futures Perspectives energy analyst Tim Evans said.

"[W]e're also hearing more market chatter that the Brent market may bottom out in the $100 area as cash market demand from Asia for West African barrels may help sop up some of the Brent regional surplus," Evans said.

Force majeure on El Paso Natural Gas' Havasu Lateral shuts in 650,000 Mcf/d

Houston (Platts)--21Aug2014/338 pm EDT/1938 GMT

A force majeure on El Paso Natural Gas' Line 1104, the Havasu Lateral in western Arizona, caused 650,000 Mcf/d of gas capacity to be shut in Thursday.

The company, a subsidiary of Houston-based Kinder Morgan, announced the force majeure Wednesday afternoon after discovering a leak on the line. In a notice on its bulletin board, EPNG said it would take the capacity on the Havasu Line to zero until further notice.

Thursday morning, the company said operations personnel were on site and materials were en route to the site of the leak.

Volumes on the El Paso lateral run from the EPNG North mainline at Franconia Junction, Arizona, to the South mainline at Wenden, Arizona, to serve southern California demand.

As a result of the force majeure, TransColorado outflows to Blanco increased 27%, or 70,000 Mcf/d, day on day, from 254,000 Mcf/d to 323,000 Mcf/d, Stephanie Seales, Rockies analyst for Platts unit Bentek Energy, said in a report.

Deliveries to EP Blanco increased 31,000 Mcf/d to 172,000 Mcf/d, and deliveries to Transwestern increased 39,000 Mcf/d to 193,000 Mcf/d day on day, Seales said.

"However, additional uptick in outflows will be constrained by TransColorado's compressor, in Montezuma County, [Colorado], which has an observed capacity of 366,000 Mcf/d," she said.

TransColorado cash prices have risen 6 cents/MMBtu since the force majeure was announced.

Lithuania inks NBP-linked LNG deal with Norway's Statoil

London (Platts)--21Aug2014/959 am EDT/1359 GMT

Lithuanian gas company Litgas Thursday signed a five-year deal with Norway's Statoil to import 540 million cubic meters/year of gas as LNG through the country's planned Klaipeda LNG facility, the Lithuanian government said.

The price will be linked to the UK NBP spot gas price.

The LNG project, based on a floating storage and regasification unit leased from Norway's Hoegh LNG, is expected to start operations from the end of the year.

Lithuania currently relies on pipeline imports of gas from Russia's Gazprom and sees LNG imports as a chance to diversify supply and strengthen its position in price negotiations with Gazprom.

"This historic agreement means that from the beginning of 2015, for the first time we will have a permanent alternative source of natural gas imports," Lithuanian Prime Minister Algirdas Butkevicius said in a statement on the Lithuanian government website.

"This is a big and important step in strengthening Lithuania's energy security and creating conditions that allow us to further reduce our gas prices," he said.

Russia typically charges customers for gas under a contract formula linked to the price of oil. But in recent years spot gas prices have generally been trading at a significant discount to oil-linked contracts, leading major importers such as French and German utilities to seek to renegotiate their Russian import deals.

Lithuania uses around 3 billion cubic meters/year of gas.

It was announced earlier this year in May that Statoil was in exclusive negotiations for the deal, having been picked from a shortlist of five companies.

Japan's Idemitsu finds natural gas, condensate offshore southern Vietnam

Tokyo (Platts)--21Aug2014/1224 am EDT/424 GMT

Japan's Idemitsu Kosan said Thursday it has discovered natural gas and condensate at its operated 05-1b and 05-1c blocks offshore southern Vietnam.

The discoveries were made at its fourth exploration well drilled by its wholly owned upstream arm Idemitsu Oil & Gas with partners JX Nippon Oil & Gas Exploration and Inpex subsidiary Teikoku Oil (Con Son) Co., the company said.

Idemitsu and its partners spudded the fourth well at the blocks located around 300 km southeast of Ho Chi Minh City in February. The companies discovered an accumulation of gas and condensate after carrying out drill stem tests in May and August, the company said.

Idemitsu added a detailed reservoir evaluation will be done in conjunction with further evaluation of other potential prospects in the blocks. In October 2004, the partners jointly entered into a production sharing contract with state-owned Petrovietnam for 05-1b and 05-1c blocks and were awarded an investment license by the Vietnamese government.

Idemitsu Oil & Gas and JX Nippon Oil & Gas Exploration each hold 35% stakes in the blocks with the balance held by Teikoku Oil (Con Son) Co.

Texas city settles royalty suit with gas producer Chesapeake

Houston (Platts)--20Aug2014/532 pm EDT/2132 GMT

The city of Arlington, Texas, has agreed to settle a dispute over natural gas royalties with Chesapeake Energy for $700,000 in cash plus a commitment by the company to change its practices for calculating future royalties.

"It wasn't just on past payments but the concern, of course, was future payments," Arlington City Attorney Jay Doegey said in an interview Wednesday. "That's what the rest of the lawsuit was for, not only what they hadn't paid us before, but what they were going to pay us in the future."

The Arlington City Council on Tuesday voted 8-0 to approve the settlement with Oklahoma City-based Chesapeake and with Total E&P USA, a subsidiary of French-owned Total, which holds a 25% interest in the Chesapeake leases in the city.

"We are pleased to have reached a mutually acceptable agreement with the city of Arlington and look forward to continuing our partnership," Chesapeake spokesman Gordon Pennoyer said in an emailed statement.

Platts was unable to reach a Total representative for comment.

The suit involved royalty payments for several gas leases covering 1,900 acres of city-owned parks and other properties, said Shayne Moses, an attorney who represented the city in the case.

The city's formal claims against the companies included underpayment of royalties, unauthorized cost deductions and gas sales to affiliates transacted outside lease agreement procedures, Mosos said.

The settlement, which must be approved by the court, resolves almost all the claims in the suit. "There're a few minor monetary claims that we still need to work through, but they should be fairly easy to resolve at this point," Moses said.

The producer also is involved in similar legal disputes filed by other large land owners in the Barnett Shale play of North Texas, including the city of Fort Worth, and school districts in Arlington and Fort Worth. In late 2012, Chesapeake agreed to pay Dallas/Fort Worth International Airport $5.3 million and revise the terms of its leasing agreement to settle a suit the airport had brought over alleged royalty underpayments.

Doegey said city officials become concerned over the Chesapeake royalty payments because they seemed lower than royalty payments being made by other exploration-and-production companies for similar properties in the region.

The Chesapeake royalty payments were "consistently lower, even though our lease terms were similar," he said.

In its initial suit against the producer, the city claimed its damages were in excess of $1 million.

The case is being litigated in the 141st State District Court of Tarrant County and involves lease agreements between the city and the producer from the years of 2006 to 2012.

NYMEX September gas futures settle 5.4 cents lower on storage, weather

Washington (Platts)--20Aug2014/352 pm EDT/1952 GMT

NYMEX September natural gas futures settled Wednesday at $3.823/MMBtu, down 5.4 cents, as traders look toward a strong weekly storage injection and temperature outlooks shift slightly cooler.

Aaron Calder, senior analyst at Gelber & Associates, said natural gas reversed direction Wednesday "after temperature models did the same thing last night. The strong ridge that was forecast yesterday has regressed back to its original strength and mild temperatures are expected to dominate the first part of September."

Calder also said traders are "pricing in [Thursday's] injection which is estimated to be much larger than normal once again" and will be "influenced by last week's mild temperatures and will likely be a continuation of the type of injections we've seen throughout August."

A Platts consensus of analysts expects the US Energy Information Administration to report an injection in the range of 81-85 Bcf. Such a build would be higher than both the 58 Bcf reported last year as well as the 48 Bcf five-year average.

"$3.75[/MMBtu] has proven to be a good support level. Winter is coming and with it the unknown. The market is on less bearish ground after the storage number" came in lower than expected last week, said Jay Levine, broker at Enerjay.

"I think last week's storage number put just a bit of a question mark in the bears' playbook. The market is not thinking it, but we are still in summer. Late summer heat could throw the market a curveball, although right now we're in a comfortable zone and not in a rush to go anywhere," Levine added.

The contract traded Wednesday between $3.792/MMBtu and $3.888/MMBtu.

PDVSA sells four fuel oil cargoes to PetroChina for August: source

Houston (Platts)--21Aug2014/337 pm EDT/1937 GMT

Venezuela's PDVSA sold three cargoes of intermediate fuel oil with 380 CST and one 3% sulfur fuel oil cargo to PetroChina for August loading, a source familiar with PDVSA's operations said Thursday.

The first intermediate fuel oil cargo loaded August 19-21 with China as its destination. The second is loading August 26-28 for delivery to China. The third is also going to China, loading August 28-30. All of the cargoes are expected to carry 1.8 million barrels of fuel oil.

The 3%S fuel oil cargo loaded August 14-16 and is being delivered to Singapore, the source said.

All the cargoes will load either at Freeport, Bahamas or Bonaire, in the southern Caribbean, the source said. PDVSA has storage at these ports.

PetroChina traditionally buys several million barrels of 3%S fuel oil from PDVSA, destined for Singapore or China, sources said.

PDVSA in June exported three cargoes of intermediate fuel oil with 380 CST, two to China and one to Singapore, according to a previous program. One 3%S fuel oil cargo was delivered to Singapore, the program said.

Window Product Destination

August 14-16 FO-3%S Singapore

August 19-21 IFO-380 CST China

August 26-28 IFO-380 CST China

August 28-30 IFO-380 CST China

Hawaii and US island territories turn to LNG to expand fuel diversity: EIA

Austin, Texas (Platts)--19Aug2014/302 pm EDT/1902 GMT

Hawaii and several US island territories increasingly view imported LNG as a viable option for expanding their fuel diversity, the US Energy Information Administration said Tuesday.

LNG use is expanding because relatively low US natural gas prices and the use of standardized cryogenic shipping containers mean small amounts of LNG can be trucked, railed, and shipped like other containerized cargo, the report said.

"Once received by ship, the LNG is connected to portable regasification units adjacent to ... power plants or industrial facilities. The containers are typically filled on the mainland at utility peak-shaving units or, more recently, at small-scale liquefaction plants built to serve transportation, industrial, and marine uses," the agency said.

In the past, LNG has not been an option for most islands because it is typically shipped in bulk carriers in quantities far larger than many island economies could absorb.

In addition, LNG usually requires expensive regasification and distribution infrastructure.

But with the availability of new shipping technology, utilities in Hawaii and industrial users in Puerto Rico are testing the economics of small-scale LNG imports, the report said.

Hawaii in April accepted its first shipment using a standardized cryogenic container, taking about 7,100 gallons (0.67 million cubic feet) of LNG from California-based Clean Energy Fuels, EIA said. The fuel was regasified and sent into Hawaii Gas' local distribution lines.

The LNG was the first non-synthetic gas ever put into the system. Hawaii Gas typically makes a synthetic gas from a naphtha feedstock produced in one of the state's two refineries.

EIA added that Hawaiian Electric is year accepted bids on delivering LNG in standardized containers to eight plants on Hawaii's five main islands. The utility, which is requesting 800,000 mt/year of LNG, has yet to announce a winning bid and is evaluating the economics of switching from diesel and residual fuel oil at some of its plants, the report said.

In Puerto Rico this fall, two privately owned bottling plants will begin receiving containerized LNG shipments. The LNG will be procured through third-party suppliers from southeastern US peak-shaving plants, shipped from Jacksonville, Florida, the report said.

Puerto Rico has one independent power plant operating on natural gas, imported as LNG at a terminal adjacent to the plant. The Puerto Rico Electric Power Authority has also converted a nearby petroleum-fired generating station to use LNG imported to that terminal and is planning to convert a second petroleum-fired station if federal approvals are received for a separate floating off-shore LNG receiving terminal, EIA said.

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News 22nd August 2014

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