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Weekly Energy Market Review

Weekly Energy Market Review

Energy Market Summary for the week ending October 6, 2017:
  • Yields move higher on decent economic news
  • US dollar continues to strengthen
  • Global markets take another leg up
  • Tropical Storm Nate drags oil prices lower on Friday
  • Energy sector breaks a winning streak
  • Service stocks remain in the doghouse
  • Higher crack spreads sends independent refiners to new highs.
QUICK LINKS
MARKET OVERVIEW
CURRENCIES & BONDS

This week's notable Canadian economic data:

  • Canada's trade deficit unexpectedly widened by $400 million in August to $3.4 billion. Exports declined for the third consecutive month, blamed on lower sales of consumer goods, industrial chemicals and basic materials. Imports were roughly unchanged for the month.
  • Canada added 10,000 new jobs in September, mostly in Ontario. Alberta lost 9,900 part-time positions but gained 2,300 full-time jobs. The national unemployment rate remains unchanged at 6.2% while Alberta's jobless rate fell from 8.1% to 7.9% due to a decline in the labour force. 

US employment growth slammed into reverse in September, a first since 2010 blamed on the aftermath of Hurricanes Harvey and Irma. Wage growth was higher than expected, rising 2.9% y/y. After declining steadily since the 2008 recession, the labour force participation rate is also showing signs of improvement. The US unemployment rate fell to a 16-year low of 4.2%.

The rather positive economic data sent the US dollar and bond yields higher this week. 

An independence vote in Catalonia spooked the Euro earlier in the week. The British pound suffered its worst week in a year on renewed Brexit concerns, falling almost 2.5%.

OIL & GAS PRICES (USD)

US crude exports surged to yet another record high last week as the wide WTI discount to Brent continues to increase demand for US crude. Total crude imports declined slightly but imports from Canada continue to recover, now back to 3.56 million bbl/day.

Baker Hughes reported another decline in oil rig counts this week, falling by two in the US and one in Canada.

The Canadian Light discount to WTI narrowed to less than US$1/bbl on Friday, likely due to the outage of CNRL's 172,000 bbl/day Horizon Upgrader. Horizon is offline for a 45-day planned maintenance turnaround.

Natural gas prices declined again this week, blamed on an unusually warm fall in the Midwest and East Coast.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

OCT 4, 2017

US crude exports surge to record highs as wide WTI discount drives up foreign demand

 

According to Platts, OPEC's September output increased by 10,000 bbl/day from August to 32.66 million bbl/day. Libya and Iran reported production increases, while declines were seen in Venezuela, Angola and Nigeria. Last November, OPEC members agreed to cap production at 31.92 million bbl/day.

After recovering through September, an armed brigade briefly took Libya's 230,000 bbl/day Sharara oil field down again this week. Force majeure was eventually lifted and exports resumed by the end of the week.

Russian oil output was 10.91 million bbl/day in September, unchanged from the previous month but 3% lower than the same time last year. The shortfall was blamed on maintenance outages at Sakhalin-1, operated by ExxonMobil. However, output from state-owned Rosneft and Lukoil both increased about 1% during the month of September.

CIBC says that oil prices are in for a "choppy but sideways ride," sticking to their long term forecast of US$55 to US$60 a barrel for the rest of this decade.

What's moving energy markets this week:

FACTOR
IMPACT
SUMMARY
GEOPOLITICS
NEUTRAL
President Trump has threatened to let the current Iranian deal expire on October 15, potentially re-instating sanctions on the country. Russia has warned Turkey it will not tolerate a closure of Kurdistan's oil export pipeline.
USD INDEX
▼ BEARISH
The USD continued to strengthen this week on better-than-expected economic data and a further weakening of the Euro and Pound.
SUPPLY
▲ BULLISH
Russian President Vladimir Putin raised hopes that OPEC's production quotas will be extended to the end of 2018. Iran's oil minister says cartel members all remain open to extending the cuts. Tropical Storm Nate has taken about 1.2 million bbl/day of production offline in the Gulf of Mexico.
DEMAND
▼ BEARISH
Concerns over more refinery disruptions in the Louisiana Gulf Coast once again put a dent in oil prices and widened the WTI discount to Brent. The region has a refining capacity of about 3.3 million bbl/day.
SENTIMENT
▼ BEARISH
After reaching record bullish territory early in the week, market sentiment turned sour on Friday, sending WTI back below the US$50.
EQUITY MARKETS

A new week brings a fresh new round of all-time highs for US markets. The German DAX, EuroNext 100 large caps and FTSE All World Index also managed to eke out record highs this week.

SECTORS

Most sectors ended the week in the green, once again led by offensive stocks and materials. Energy stocks performed well for most of the week but sold off on Friday on news of more refinery outages ahead of Tropical Storm Nate.

ENERGY SECTOR PERFORMANCE

Both the Canadian and US energy sectors broke their winning streak this week, declining for the first time in over a month. Midstream and integrated stocks were relatively unscathed while producers suffered the largest declines. Energy services stocks also had a rather ugly week. Independent refiners posted another good performance on higher crack spreads.


TSX ENERGY STOCKS
TSX 300 ENERGY STOCKS

After "careful review of changed circumstances", TransCanada (TRP) officially announced the cancellation of its $16 billion Energy East Pipeline and Eastern Mainline projects. The company will take a $1 billion non-cash impairment charge on the project.

AltaGas (ALA) announced the completion of commissioning at its Townsend 2A natural gas processing facility in northeastern BC, slightly ahead of schedule and slightly under-budget. The company also issued $450 million in senior unsecured notes, expiring in 2027 and 2047.

Pembina Pipelines (PPL) and Veresen (VSN) officially closed on their $9.4 billion merger, despite concerns from the Canadian Competition Bureau. Pembina also increased its dividend by almost 6%. Veresen stock was delisted from the TSX this week.

Birchcliff Energy (BIR) announced the start-up of its 80 MMcf/day Phase V expansion of the Pouce Coupe natural gas processing plant, increasing capacity to 260 MMcf/day. Birchcliff also closed on a previously announced asset sale and reaffirmed its 2017 production guidance at 67,000 to 68,000 boe/day, weighted 21% liquids.

Encana (ECA) announced the start-up of its Sunrise facility last week, under budget and one month ahead of schedule. 

This week's new 52-week lows in the TSX energy patch include Advantage Oil Gas (AAV), Birchcliff Energy (BIR) and Peyto Exploration (PEY).


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

Kinder Morgan (KMI), DCP Midstream (DCP) and a subsidiary of Targa Resources (TRGP) have partnered up on the Gulf Coast Express Pipeline Project, designed to transport 1.92 Bcf/day of natural gas from the Permian Basin to the Texas Gulf Coast. If all goes according to plan, the line should be in service in the second half of 2019. Ownership is split 50/25/25 between KMI, DCP and Targa. Kinder Morgan has agreed to build and operate the line.

UK mining giant Glencore (LSE:GLEN) has agreed to buy a 75% percent stake Chevron Corp's (CVX) South African division and 100% of subsidiary Chevron Botswana for US$973 million. The assets include a refinery in Cape Town, 850 retail gas stations and various midstream and infrastructure facilities. The deal is expected to close in the middle of 2018, subject to regulatory approval.

Marathon Oil (MRO) says third quarter production will not be affected by outages caused by Hurricane Harvey, reiterating its 2017 full year guidance at 345,000 to 360,000 boe/day, excluding Libya.

The Norwegian government has approved Statoil's (STO) application to develop the Snefrid Nord gas project in the Norwegian Sea. The US$150 million project will be operated by Statoil and is jointly held by Wintershall, OMV and ConocoPhillips (COP). The field holds an estimated 5 billion cubic feet of natural gas.

Royal Dutch Shell (RDS.A) has cancelled plans to sell its Thai operations to Kuwait's national oil company, citing difficulties in getting timely approvals from the Thai government. The US$900 million deal was announced last January as part of Shell's massive US$30 billion divestiture program.

Anadarko Petroleum (APC) announced a "consolidation of its leadership structure" this week, reshuffling several executive VPs for its onshore, deepwater and exploration divisions.

Matador Resources (MTDR) announced the issuance of 8 million shares worth an estimated $210 million. Proceeds will fund the purchase of 9,800 gross acres in the Delaware Basin and additional midstream initiatives planned for Q1 2018.

TransOcean (RIG) is offering US$750 million in senior unsecured notes due January 2026 bearing an interest rate of 7.5%. Net proceeds with be used to buy back shorter duration notes and general accounting purposes.

Independent refiners, including Andeavor (ANDV), Marathon Petroleum (MPC), Phillips 66 (PSX) and Valero Energy (VLO), continued their winning streak this week hitting fresh 12-month highs. ADRs BP (BP) and Royal Dutch Shell (RDS.A) also hit new intra-week highs.


UPGRADES & DOWNGRADES

UPGRADES

  • BP (NYSE:BP): Upgraded from Reduce to Hold at Kepler Capital Markets.
  • FMC Technologies (NYSE:FTI): Upgraded from Neutral to Buy at Citigroup.
  • Phillips 66 (NYSE:PSX): Upgraded from Neutral to Buy at Goldman Sachs.

DOWNGRADES

  • Baytex Energy (TSX:BNP): Downgraded from Outperform to Sector Perform at AltaCorp Capital.
  • Bonavista Energy (TSX:BNP): Downgraded from Outperform to Sector Perform at AltaCorp Capital.
  • Crew Energy (TSX:CR): Downgraded from Buy to Hold at TD Securities.
  • Ensign Energy Services (TSX:ESI): Downgraded from Buy to Hold at TD Securities.
  • Marathon Petroleum Corp (NYSE:MPC): Downgraded from Buy to Neutral at Goldman Sachs.
  • Pengrowth Energy (TSX:PGF): Downgraded from Sector Perform to Underperform at AltaCorp Capital, from Hold to Reduce at TD Securities and from Hold to Sell at Canaccord Genuity.
  • PrairieSky Royalty (TSX:PSK): Downgraded from Buy to Hold at TD Securities.
  • Rex Energy (NYSE:REXX): Downgraded from Outperform to Sector Perform at RBC.
  • Valero Energy (NYSE:VLO): Downgraded from Overweight to Neutral at JP Morgan Chase.
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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