Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending November 24, 2017:
  • US markets power to new record highs
  • USD retreats again and hits key support level
  • Yield curve continues to sink lower
  • WTI surges on shortage of Canadian heavy crude ...
  • ... sending futures into significant backwardation
  • Heavy oil discount widens to almost US$18
  • Extension of OPEC/Russia supply cut already priced into energy markets.
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MARKET OVERVIEW
CURRENCIES & BONDS

This week's notable Canadian economic data:

  • Higher gas prices helped retail sales edge up 0.1% in September to $49.1 billion. Ex-energy, retail sales declined 0.2%.
  • Wholesale sales declined 1.2% in September, with most sectors seeing declines except automotive products and building materials.
  • After a 2.4% decline in August, the number of Employment Insurance (EI) recipients declined another 2.2% in September to 509,900. Declines were led by western provinces whereas Atlantic Canada saw increases.
  • The OECD issued yet another warning on Canadian debt loads, as consumer debt now tops 100% of GDP, putting the country at risk of an economic shock. South Korea, the UK and US rank second, third and fourth with consumer debt averaging 93%, 86% and 79% of GDP, respectively.

The Euro took a tumble earlier in the week on news that German chancellor Angela Merkel may seek another election next year instead of trying to form a three-way coalition government. Positive economic data from the Eurozone helped the currency recover its losses, ending Friday over 1% higher.

US attempts at tax reform moved a small step forward this week as President Trump promised Americans "big, beautiful fat tax cuts" hopefully before Christmas. Economists peg the chances of rate hike in December at about 90%. Current Fed Chair Janet Yellen announced plans to leave the Fed once new Chair Jerome Powell is sworn in. The US yield curve continues to flatten, hitting a 10-year low of 0.59% this week.

OIL & GAS PRICES (USD)

The heavy oil discount has been hit hard by a continued outage of the 590,000 bbl/day Keystone pipeline, disrupting shipments from Canada into the Cushing storage hub and Gulf Coast. The differential between WTI and WCS has now risen to US$17.65 a barrel, a 25% increase from pre-outage levels. News of an extended shutdown boosted WTI prices over 4% this week to almost US$59/bbl, the highest since the summer of 2015. The WTI futures curve is now firmly in backwardation, even in near-month contracts. The WTI discount to Brent has now narrowed to less than US$5. Backwardation on the Brent futures curve also deepened this week.

Reuters is reporting that Saudi Arabia will seek a 9-month extension to its agreed production caps, which currently expire in the spring of 2018. The Russians are sending mixed signals on the deal, aimed at reducing global inventories closer to their 5-year average. A path forward is expected to be announced next week during OPEC's "ordinary" meeting on November 30. Veteran crude trader Andy Hall will also be in attendance, providing the cartel with his view on growing supply out of the US.

The CME Group announced plans to begin listing Dubai crude futures, a popular benchmark from the Middle East. Dubai will begin trading in December as a differential to WTI.

US oil rig counts increased by 9 to 747 while the number of Canadian rigs in service declined by 2 to 107.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

NOV 22, 2017

CRUDE OIL INVENTORIES SEE BIG DRAWDOWNS IN GULF COAST AND MIDWEST AHEAD OF KEYSTONE SHUTDOWN

 
What's moving energy markets this week:

FACTOR
IMPACT
SUMMARY
GEOPOLITICS
NEUTRAL
Not much change on the geopolitical front this week as turmoil in Venezuela continues to hamper the country's oil output and the threat of renewed sanctions on Iran still remains on the table.
USD INDEX
▲ BULLISH
A strengthening Euro pulled the US dollar lower by another 1% this week, falling back to key support levels from mid-October.
SUPPLY
NEUTRAL
Outage of the 590,000 bbl/day Keystone pipeline has backed-up supply at Hardisty and should start to reduce stockpiles at Cushing. US oil production hit another record high of 9.66 million barrels last week. After declining through much of the fall, US rig counts seem to have turned a corner, rising 12% this week. An extension of OPEC and Russia's supply cut has already been priced into energy market.
DEMAND
▼ BEARISH
No new news on the demand front this week.
SENTIMENT
▲ BULLISH
WTI has clearly broken out of an 18-month trading range, hitting a 2½-year high on Friday. Trading sentiment remains overwhelmingly bullish.
EQUITY MARKETS

US markets all powered to new record highs this week, powered higher by technology heavy-weights and small-cap stocks. Almost all global markets, including the TSX, ended the week high except for China's Shanghai exchange, which suffered a sizeable decline on Thursday.

SECTORS

Markets were decisively offensive this week, with technology and discretionary stocks leading gains on both the TSX and S&P 500.

ENERGY SECTOR PERFORMANCE

TSX energy was the only sector that ended the week in the red, despite higher oil prices. Integrated Canadian energy stocks ended the week mostly lower. On US markets, refining stocks took a hit from rising oil prices and narrowing crack spreads.


TSX ENERGY STOCKS
TSX 300 ENERGY STOCKS

Suncor Energy (SU) has closed on the sale of a 49% interest in its East Tank Farm Development project for $503 million.

Several prominent TransCanada (TRP) shareholders are urging the company to move ahead with the construction of Keystone XL despite numerous pending lawsuits and the potential for disruptive protests. The state of Nebraska approved the project earlier this week, but that approval only applies to the Alternative Mainline Route, which is about 5 miles longer than the company's preferred route. TransCanada says it is investigating impacts to cost and schedule but is expected to make an announcement at its investor day event next Tuesday.

TransCanada also warning its customers that deliveries on its 590,000 bbl/day Keystone pipeline will be reduced by at least 85% through the end of November, as it works to repair the line after a buried section of pipe leaked about 5,000 barrels of crude in Marshall County, South Dakota last week. The company has yet to set a date for restart but traders are speculating the line could be down for several weeks.

RMP Energy (RMP) has officially changed its name to Iron Bridge Resources. Effective Monday November 27, the company will begin trading under the new stock ticker IBR.

TransCanada Pipelines (TRP) hit a new high on the TSX this week. New 52-week lows include Advantage Oil Gas (AAV), Birchcliff Energy (BIR), and Peyto Exploration & Development (PEY).


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

Stone Energy (SGY) and privately-held Talos Energy announced plans to merge into one company, valued at about US$2.5 billion including debt. The company will be named Talos Energy and will trade on NYSE under the ticker symbol TALO. Both companies are primarily focused on exploration and production in the Gulf of Mexico.

BP (BP) has agreed to sell several assets in the North Sea to UK-based Serica Energy for about US$400 million spread out over the next four years. The assets include the Bruce, Keith and Rhum fields, three platforms and associated subsea infrastructure. Serica will takeover operation of the facilities.

Petrobras (PBR) is looking to raise up to US$6.8 billion in the spin-off of its fuel distribution unit, BR Distribuidora. PBR will initially IPO a 25% stake, which could potentially grow to 33.75% if there's sufficient demand. The IPO is planned for sometime in December.

Cabot Oil & Gas (COG) and Valero Energy (VLO) reached new 52-week highs on the NYSE this week. Williams Cos (WMB) hit a new 52-week low.


UPGRADES & DOWNGRADES

UPGRADES

  • Energen (NYSE:EGN): Upgraded from Equal Weight to Overweight at Barclays.
  • Suncor Energy (TSX:SU): Upgraded from Hold to Buy at Edward Jones.

DOWNGRADES

  • Royal Dutch Shell (NYSE:RDS/A): Downgraded from Buy to Hold at HSBC.
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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