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Weekly Energy Market Review

Weekly Energy Market Review

Energy Market Summary for the week ending October 13, 2017:
  • Treasuries stage a comeback on renewed geopolitical tensions
  • CAD retreats on sketchy outlook for NAFTA
  • Concerns over Iran spike oil prices higher
  • Global markets power to new record highs, again
  • TSX closes in on old highs, without the help of energy stocks.
QUICK LINKS
MARKET OVERVIEW
CURRENCIES & BONDS

The International Monetary Fund (IMF) raised its forecast for Canadian GDP growth from 2.5% to 3.0%, making Canada the best performing G7 country. Canadian 10-year bond yields declined almost 4% this week on growing concerns over lack of progress with NAFTA re-negotiations.

Latest FOMC meeting minutes released this week reaffirmed the Fed's commitment to raise interest rates again in December, spiking 1-year bond yields. September PPI numbers (Producer Price Index) also moved higher due to higher gasoline prices, sparked by refinery outages during Hurricane Harvey.

Despite the hawkish economic news, jitters over geopolitical tensions in Iran and North Korea sent longer duration bond yields tumbling on Friday, sending the yield curve back to its old lows.

The US dollar retreated this week, sending global currencies higher.

OIL & GAS PRICES (USD)

Gasoline inventories unexpectedly rose again last week, despite lower production and higher exports. After declining through much of 2017, gasoline stockpiles have risen over 5 million barrels since the middle of September.

Crude stockpiles at the Cushing storage hub are also slowly creeping higher, climbing another 1.3 million barrels last week. Cushing has seen an inventory build of 7.5 million barrels since late summer.

Baker Hughes reported another decline in oil rig counts this week, falling by 5 in the US. Rig counts were unchanged in Canada.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

OCT 12, 2017

Another hurricane cuts production in the Lower 48

 

After a feeble start to the week, oil prices spiked higher on Friday after President Trump threatened to pull the US out of the Iranian nuclear agreement. Congress now has 60-days to decide whether to re-instate sanctions. Sanctions imposed on Iran in 2006 prevented the country from selling its oil on international markets. The country's crude output has increased by 1 million bbl/day since sanctions were lifted in January of 2016.

In this month's Short-Term Energy Outlook, the US Energy Information Administration (EIA) has revised its 2017 Brent forecast to US$52 a barrel, $1 higher than its previous forecast, rising to US$54 in 2018, revised higher by US$2. The WTI discount to Brent was also revised higher from US$2 to US$3.50/bbl.

US crude production averaged 9.3 million bbl/day in September, an increase of about 250,000 bbl/day from August. The EIA says crude production was dented by Hurricane Harvey and revised their 2017 average production forecast from 9.3 to 9.2 million bbl/day. Next year's forecast was unchanged at 9.9 million bbl/day, surpassing the 1970 record of 9.6 million bbl/day. Henry Hub natural gas prices are expected to average US$3.03/MMBtu in 2017, rising to US$3.19/MMBtu next year.

BMO revised their 2017 WTI forecast from US$48.40 to US$49.60 a barrel, rising to US$50 in 2018 and US$53.20 in 2019. Expectations for AECO prices have been lowered from $2.53 to $2.19 per thousand cubic feet, rising to $2.59 next year and $2.56 in 2019.

In this month's Monthly Oil Market Report, OPEC says the global economy continues to improve, revising their demand growth forecast to 1.5 million bbl/day in 2017, and 1.4 million bbl/day in 2018. In contrast, supply is expected to grow 0.7 million bbl/day this year. OPEC expects oil prices to remain in the US$50 to US$55 range next year.

The International Energy Agency (IEA) says global output rose to 97.5 million bbl/day in September, driven by higher production out of Libya and Iraq. OECD stockpiles declined slightly in August but continue to build in China. The agency says "markets look broadly balanced," assuming OPEC can hold output steady at these levels.

Saudi Arabia says November output will be 9.77 million bbl/day, the lowest since early 2015 and 1 million bbl/day lower than the same time last year. Saudi Aramco has also cut November crude sales by another 560,000 bbl/day.

What's moving energy markets this week:

FACTOR
IMPACT
SUMMARY
GEOPOLITICS
▲ BULLISH
Renewed tensions between the US and Iran helped lift oil prices on Friday.
USD INDEX
▲ BULLISH
The US dollar retreated this week, despite clear signals from the Fed of their intention to raise interest rates in December.
SUPPLY
▼ BEARISH
The IEA flagged concerns over too much supply going into 2018, unless OPEC output remains constant. OPEC maintains oil markets are balanced but pleaded with US counterparts to keep a lid on production.
DEMAND
▲ BULLISH
The IMF delivered a rather bulish forecast for global GDP growth. Both OPEC and the IEA agree global demand remains robust.
SENTIMENT
▼ BEARISH
Record bullish positions in crude futures markets disappeared this week, as fund managers increased short positions for the first time since August. Long positions in gasoline and heating oil are also near record-highs, indicating perhaps a short-term top.
EQUITY MARKETS

US markets managed to eke out small gains this week, sending the S&P 500, NYSE and Dow Jones to new highs. Germany's DAX, Euronext 100 and FTSE All World Index also reached record highs.

Japan's Nikkei was this week's stand-out market, climbing 2.2% to a 21-year high. The TSX is about 100 points away from the highs of last February.

SECTORS

Lower bond yields helped boost defensive stocks on Canadian and US exchanges this week. The heavily-weighted energy sector dragged on the TSX again this week, falling over 1%. US energy stocks ended the week roughly unchanged.

ENERGY SECTOR PERFORMANCE

Interest-rate sensitive midstream stocks were the best performers in the TSX energy sector this week. Independent refiners were once again the best performing sub-sector in the US, with most at or near 12-month highs.


TSX ENERGY STOCKS
TSX 300 ENERGY STOCKS

This wee's notable Canadian energy news:

  • Pengrowth Energy (PGF) says it has prepaid all of its outstanding notes dated 2018 and finalized agreements to amend existing financial covenants to the end of September 2019. The company says the new terms provides the flexibility to restructure its remaining debt and develop a financing strategy for the continued development of its Lindbergh SAGD facility.
  • Keyera (KEY) announced a 20-year midstream agreement with Chevron to process and store about 50% of NGL volumes produced at Chevron's Kaybob Duvernay operations near Fox Creek, Alberta. Keyera says they may need to expand its Fort Saskatchewan fractionation plant if Chevron commits more volumes.
  • Kinder Morgan Canada (KML) has wrapped up hearings on the federal government's approval of its TransMountain Expansion Pipeline this week. There is no fixed deadline for the courts to render a decision although construction has already commenced on public lands.
  • The Saskatchewan government has cleared Husky Energy (HSE) to restart the pipeline that leaked into the North Saskatchewan River in the summer of 2016. Saskatchewan's Justice Ministry has yet to decide if any charges will be laid.

Desjardins Securities analyst Justin Bouchard pointed out this week that money has flowed into higher quality stocks "with an increased preference for larger, more conservatively levered, lower-cost and better-managed companies." Bouchard says Canadian Natural Resources (CNQ), Suncor Energy (SU) and Husky (HSE) have widely outperformed MEG Energy (MEG), Cenovus (CVE), BlackPearl Resources (PXX) and Athabasca Oil Corp (ATH), while Imperial Oil (IMO) has been held back by "operational issues" at Kearl. Top picks among large caps include Suncor and CNRL, while Keyera (KEY) and Pembina Pipeline (PPL) where also highlighted as "favourites" in the midstream space. Desjardins says smaller, higher-cost, more leveraged companies will outperform if oil prices rally from here.

New 52-week lows on the TSX this week include Advantage Oil Gas (AAV), Birchcliff Energy (BIR), Peyto Exploration & Development (PEY), and Tourmaline (TOU). Freehold Royalties (FRU) reached a new 12-month high.


S&P 500 ENERGY STOCKS
S&P 500 ENERGY STOCKS

This week's notable US energy news:

  • Phillips 66 (PSX) announced plans to buy back US$3 billion of its shares, marking US$12 billion in share buybacks since the third quarter of 2012.
  • Williams Partners (WPZ) struck a deal with Southwestern Energy Company (SWN) to expand its services to the Appalachian Basin of West Virginia. Williams will provide gas processing, fractionation, and liquids handling services for various properties owned by Southwestern.
  • Anadarko Petroleum (APC) announced plans to invest US$200 million to develop a field off the northern coast of Peru.
  • Chevron (CVX) announced the start-up of its Wheatstone LNG facility in Western Australia, with a first cargo shipment expected in the next few weeks. The US$34 billion two train LNG facility has a nameplate capacity of 8.9 million metric tons per year for export to customers in Asia.
  • Cheniere Partners (CPQ) announced the completion of its fourth LNG train at Sabine Pass in Cameron Parish, Louisiana. First commercial delivery is expected in March 2018.
  • Targa Resources (TRGP) announced plans to issue US$750 million in senior unsecured notes due in 2028 at an interest rate of 5%.

Other notable news from around the world:

  • A plan by PetroBras (PBR) to sell various assets to Total (TOT) has been blocked by a Brazilian federal court. The US$2.2 billion deal was opposed by local labour unions.
  • Statoil (STO) struck oil in the outer Moray Firth on the UK Continental Shelf. The field is estimated to hold anywhere between 25 and 130 million barrels of oil, but the company says more work is required to narrow down that number.
  • Royal Dutch Shell's (RDS.A) Brazilian subsidiary has sold a 16.8% stake in Comgas, Brazil's largest natural gas distributor, for approximately US$380 million. Reuters is also reporting the company is looking to divest its 17% stake in the 127,000 boe/day Mukhaizna oil field in Oman for as much as US$200 million.
  • Statoil (STO), Total (TOT) and Eni (ENI) have put their stakes in UK's Teesside Oil Terminal up for sale. The terminal is operated by ConocoPhillips (COP), who is not looking to sell their stake. 
  • Total (TOT) and Italian energy firm ERG (MI:ERG) are rumoured to be close to selling their jointly-owned gas stations to a subsidiary of Gruppo API.

New 52-week highs on the S&P 500 include Andeavor (ANDV), Chevron (CVX), Marathon Petroleum (MPC) and Phillips 66 (PSX). ADRs BP (BP) and Royal Dutch Shell (RDS.A) also hit new highs again in the NYSE.


UPGRADES & DOWNGRADES

UPGRADES

  • Concho Resources (NYSE:CXO): Upgraded from Hold to Buy at Jefferies Group.
  • Devon Energy (NYSE:DVN): Upgraded from Hold to Buy at Jefferies Group.
  • Range Resources (NYSE:RRC): Upgraded from Underweight to Overweight at Barclays.
  • Shawcor (TSX:SCL): Upgraded from Sector Perform to Outperform at National Bank.
  • TransOcean (NYSE:RIG): Upgraded from Neutral to Buy at Citigroup.
  • Whitecap Resources (TSX:WCP): Upgraded from Hold to Buy at Desjardins.

DOWNGRADES

  • Advantage Oil & Gas (TSX:AAV): Downgraded from Outperform to Market Perform at BMO.
  • American Midstream Partners (NYSE:AMID): Downgraded from Buy to Neutral at Citigroup.
  • ARC Resources (TSX:ARX): Downgraded from Outperform to Sector Perform at National Bank Financial.
  • Bonavista Energy (TSX:BNP): Downgraded from Outperform to Sector Perform at National Bank Finacial.
  • Bonterra Energy (TSX:BNE): Downgraded from Market Perform to Underperform at BMO.
  • Chesapeake Energy (NYSE:CHK): Downgraded from Hold to Sell at Jefferies Group.
  • Crescent Point Energy (TSX:CPG): Downgraded from Buy to Hold at Desjardins.
  • Diamond Offshore Drilling (NYSE:DO): Downgraded from Neutral to Sell at Citigroup.
  • Husky Energy (TSX:HSE): Downgraded from Buy to Hold at Desjardins.
  • Mullen Group (TSX:MTL): Downgraded from Outperform to Sector Perform at Scotiabank.
  • Newfield Exploration (NYSE:NFX): Downgraded from Outperform to Market Perform at BMO.
  • Noble Energy (NYSE:NBL): Downgraded from Buy to Hold at Jefferies Group.
  • Paramount Resources (TSX:POU): Downgraded from Outperform to Market Perform at BMO.
  • Peyto Exploration & Development (TSX:PEY): Downgraded from Outperform to Market Perform at BMO.
  • Schlumberger (NYSE:SLB): Downgraded from Outperform to Market Perform at BMO.
  • Storm Resources (TSX:SRX): Downgraded from Outperform to Market Perform at Raymond James.
  • Tourmaline Oil (TSX:TOU): Downgraded from Outperform to Market Perform at BMO.
UPDATED: EVERY WEEKEND
NOTES:
  • CRB = THOMSON REUTERS/CORECOMMODITY CRB INDEX
  • FTSE ALL WORLD INDEX = MARKET CAP WEIGHTED INDEX OF 47 COUNTRIES
  • TLT = iSHARES 20+ YEAR TREASURY BOND ETF
  • XBB = iSHARES CANADIAN UNIVERSE BOND INDEX ETF
  • SHARE PRICE CHANGES EXCLUDE DIVIDENDS
  • CANADIAN EXCHANGE RATES REPRESENT END-OF-DAY CLOSE
  • SOURCES:
  • COMMODITY PRICES REFLECT NEAR MONTH CONTRACT FROM THE NYMEX/CME GROUP
  • EQUITY PRICES & SECTOR PERFORMANCE PROVIDED BY NYSE & TMX GROUP
  • CHARTPACKS COURTESY STOCKCHARTS.COM
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