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Weekly Energy Market Review

Weekly Energy Market Review

Energy Market Summary for the week ending October 20, 2017:
  • US markets power to record highs on hopes for tax reform
  • Greenback catches a small bounce
  • Canadian dollar retreats on soft economic data
  • Oil prices remain stuck in a trading range
  • Banks raise expectations for crude into 2018
  • Brent, WTI and WCS discounts keep widening
  • Midstream and service stocks post another ugly week.
QUICK LINKS
MARKET OVERVIEW
CURRENCIES & BONDS

This week's notable Canadian economic data:

  • The Consumer Price Index (CPI) rose 1.6% y/y in September, driven higher by a 14.1% increase in gas prices blamed on refinery disruptions due to Hurricane Harvey. Excluding gasoline, CPI is up 1.1% y/y.
  • August retail sales declined 0.3% m/m in August to $48.9 billion, blamed mostly on lower sales at grocery stores. Gasoline sales posted their first gain (+3.1%) in four months.
  • After two consecutive months of declines, manufacturing sales increased 1.6% m/m to $53.5 billion. Gains reflected a 3.2% increase in petroleum and coal products. Higher energy prices offset lower sales volumes.
  • The number of people receiving Employment Insurance benefits declined by 9,600 in August, down 1.8% from July and 8% lower than the same time last year. All provinces saw declines except Saskatchewan.

The chances of a hike by the Bank of Canada next week has fallen to 15% from nearly 50% just a month ago. Bond yields were roughly unchanged while the loonie declined about 1%.

Strong economic data out of the US boosted yields once again this week. Initial claims for unemployment benefits dropped to their lowest level since March 1973. The US dollar gained strength again this week, and is now up about 2.5% from the lows of early September.

Most global currencies declined against the greenback. The New Zealand kiwi was one of the worst performers, sinking 3% on unexpected election results. The yen retreated 1.5% ahead of this Sunday's election.

OIL & GAS PRICES (USD)

This week's notable oil price forecasts:

  • Merrill Lynch remains bullish on oil prices in the short-term, but says the long-term view is more complicated. Commodity strategist Francisco Blanch increased his 2018 price forecast for WTI from US$47 to US$48.50 a barrel. Brent is expected to average US$61 next year, peaking at US$70 by the summer driving season. Blanch expects the next OPEC meeting to be "fruitful."
  • Goldman Sachs tried to goose oil markets this week by warning that instability in Kurdistan and the potential for renewed sanctions in Iran should all lead to higher oil prices. If sanctions are restored, Goldman expects several hundred thousand barrels of Iranian exports would be immediately at risk. The investment firm has a 2018 forecast of US$58 a barrel for Brent.
  • Oil trader Trafigura says oil prices will be "well above US$60" by the end of next year due to strengthening demand and a weakening US dollar.

The WTI discount to Brent remains elevated at over US$6 a barrel. The Canadian heavy oil discount also widened to over US$12 this week.

Huge drawdowns in crude stockpiles were reported last week as Hurricane Nate took 1 million bbl/day of production offline in the Gulf of Mexico, sending Gulf Coast refineries to the storage tanks. Gasoline stockpiles continue to rise on higher production and lower demand.

Baker Hughes reported another drop in oil rig counts this week, falling by 7 to 736 in the US and declining by 5 in Canada to 112.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

OCT 18, 2017

HURRICANE NATE DRAINS STOCKPILES IN THE GULF COAST

 

The head of Russia's Rosneft warns that rising output from US shale could destabilize oil markets in 2018. Speaking at a conference in Verona this week, Igor Sechin says that OPEC's coordinated production cuts have not led to a meaningful "stabilization" in global inventories. Sechin doesn't expect oil prices to rise much further from here, calling the rebalancing of oil markets "fragile."

According to Reuters, OPEC is likely to extend the current production caps to the end of next year, nine months beyond the current expiry date. Last November, OPEC and Russia agreed to take 1.8 million bbl/day off oil markets. The next "informal" OPEC meeting is in late-October, although a formal decision is not expected until next year.

What's moving energy markets this week:

FACTOR
IMPACT
SUMMARY
GEOPOLITICS
▲ BULLISH
Fighting in Kurdistan and the threat of renewed sanctions in Iran temporarily boosted oil prices earlier in the week.
USD INDEX
▼ BEARISH
The US dollar gained strength again this week, now up 2.5% from the lows of early September.
SUPPLY
▲ BULLISH
Supply out of Kurdistan was temporarily disrupted earlier in the week. The US also reported a 1 million bbl/day drop in production last week due to Hurricane Nate. All expectations are for OPEC to maintain their production caps through the end of next year.
DEMAND
▲ BULLISH
No changes on the demand front as 2018 forecasts remain relatively robust.
SENTIMENT
NEUTRAL
Both Brent and WTI remain stuck in a trading range as the bulls and bears battle it out. Oil prices seem unable to break through the highs of late September.
EQUITY MARKETS

Hopes for tax reform south of the border sent US markets to fresh round of record highs, led higher by the large cap stocks.

The TSX ticked slightly higher this week and remains about 65 points away from all-time highs.

SECTORS

Markets are decidedly offensive in the US as financials, materials, health care, industrials and the technology sectors hit record highs.

Canadian markets are following a similar pattern with industrials, financials and discretionary stocks also near record-highs. Lower commodity prices sent materials stocks lower for the week.

ENERGY SECTOR PERFORMANCE

Not a good week for energy stocks on either side of the border. Midstream and energy services stocks were particularly hard hit.


TSX ENERGY STOCKS
TSX 300 ENERGY STOCKS

Cenovus Energy (CVE) announced the sale of its Palliser crude oil and natural gas assets in southeastern Alberta to Torxen Energy and Schlumberger (NYSE:SLB) for $1.3 billion. The Palliser block consists of oil and gas wells, surface facilities, a pipeline network, and 800,000 acres of oil and gas development rights producing about 54,000 boe/day. CEO Brian Ferguson says his company is on track to divest up to $5 billion in assets by the end of this year.

Pengrowth Energy (PGF) has sold most of its remaining non-core assets in Alberta for "nominal cash consideration" and the assumption of abandonment and reclamation liabilities. The assets include 270 facilities with 1,600 wells, producing about 5,500 boe/day.

Kinder Morgan Canada (KML) reported a net income of $42.4 million in the third quarter, more than double the same time last year. The company also warned its Trans Mountain Expansion project could be pushed back by nine-months due to delays in obtaining regulatory permits.

Ratings agency Moody's downgraded Enbridge Income Fund (ENF) this week from Baa2 to Baa3 with a negative outlook. Moody's says the downgrade is due to the company's high debt-load and "ongoing execution risk" for the Line 3 Replacement project.

Western Energy Services (WRG) has closed on a previously announced deal with Alberta Investment Management Corporation (AIMCo) for a $215 million loan and the private placement of 9.1 million common shares at $1.25 per share. WRG also announced an increase to its revolving credit limit.

CES Energy (CES) announced the refinancing of its existing 7.375% senior notes with $300 million in 6.375% senior notes due in 2024.

Altagas (ALA) announced a 2% increase in its third quarter revenues, rising to $502 million, while net income rose 26% to $48 million. The company also increased its dividend by 4.3%.

This week's 52-week lows include Advantage Oil and Gas (AAV), ARC Resources (ARX), Enbridge Income Fund Holdings (ENF), Parkland Fuel (PKI) and Peyto Exploration (PEY).


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

This week's notable third quarter earnings releases:

  • Kinder Morgan (KMI) reported a 1.5% decline in third quarter revenues, falling to US$3.3 billion, blamed in part on outages caused by Hurricane Harvey. Net income rose to US$334 million, versus a US$227 million loss for the same time last year. Combined oil production was down 1% while NGL sales declined 9%. The company says it continues to strengthen its balance sheet and is fully funded through internal cash flows.
  • The new Baker Hughes (BHGE) released its first quarterly results this week since merging with GE's oil field services division back in July. Orders increased by more than 18% while revenues from oil field services rose 4% to US$2.6 billion. Revenues were roughly unchanged at US$5.4 billion. Overall, the company reported a net loss of US$104 million. Baker Hughes also warned of a challenging market ahead.
  • Schlumberger (SLB) posted better-than-expected Q3 results this week, helped by a pick-up in drilling activity in the US shale-patch. Net profit rose to US$545 million, up from US$176 million for the same time last year. Revenues rose almost 13% y/y to US$7.9 billion.

This week's notable dividend increases:

This week's 52-week lows include Baker Hughes (BHGE), FMC Technologies (FTI) and Schlumberger (SLB). In contrast, Chevron (CVX), Marathon Petroleum (MPC) and Statoil (STO) ADR hit 52-week highs.


UPGRADES & DOWNGRADES

UPGRADES

  • Energy Transfer Equity (NYSE:ETE): Upgraded from Neutral to Buy at Goldman Sachs.
  • Chevron (NYSE:CVX): Upgraded from Market Perform to Outperform at Cowen and Co, Market Perform to Outperform at Wolfe Research and from Neutral to Outperform at Macquarie.
  • FMC Technologies (NYSE:FTI): Upgraded from Hold to Buy at Gabelli.
  • Halcon Resources (NYSE:HK): Upgraded from Neutral to Buy at Seaport Global Securities and from Accumulate to Buy at Johnson Rice.
  • Oasis Petroleum (NYSE:OAS): Upgraded from Sell to Neutral and Goldman Sachs
  • Phillips Partners (NYSE:PSXP): Upgraded from Sell to Neutral at Goldman Sachs.
  • Resolute Energy (NYSE:REN): Upgraded from Neutral to Buy at Goldman Sachs.
  • Suncor Energy (TSX:SU): Upgraded from Market Perform to Outperform at Wolfe Research.

DOWNGRADES

  • Andeavor (NYSE:ANDV): Downgraded from Buy to Hold at Jefferies Group.
  • Anadarko Petroleum (NYSE:APC): Downgraded from Outperform to Market Perform at Wolfe Research.
  • Chevron (NYSE:CVX): Downgraded from Outperform to Market Perform at BMO and from Buy to Hold at Societe Generale.
  • Enbridge (TSX:ENB): Downgraded from Buy to Hold at GMP Sercurites.
  • Energy Transfer Partners (NYSE:ETP): Downgraded from Buy to Neutral at Goldman Sachs.
  • Kinder Morgan (NYSE:KMI): Downgraded from Buy to Neutral at Goldman Sachs.
  • PetroBras (NYSE:PBR): Downgraded from Buy to Hold at Societe Generale.
  • Phillips 66 (NYSE:PSX): Downgraded from Hold to Underperform at Jefferies Group.
  • Targa Resources (NTSE:TRGP): Downgraded from Buy to Neutral at Goldman Sachs.
  • Valero Energy (NYSE:VLO): Downgraded from Buy to Hold at Jefferies Group.
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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