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Weekly Energy Market Review

Weekly Energy Market Review

Energy Market Summary for the week ending September 1, 2017:
  • Cenovus shares spike on pending sale of Pelican Lake
  • Hurricane Harvey throws a wrench into energy markets
  • Heavy oil discount widens while condensate prices spike
  • Gas prices begin to retreat as products delivery returns to normal
  • Energy stocks post decent gain despite lower oil prices.
QUICK LINKS
MARKET OVERVIEW
CURRENCIES & BONDS

This week's notable Canadian economic data:

  • Second quarter GDP expanded 4.5% y/y, much better than analysts were expecting. The gains were attributed to strong consumer spending, particularly auto sales, and higher energy exports. The first 6 months of 2017 are now the strongest since 2002.
  • For the month of June, real GDP expanded 0.3%, the eighth consecutive monthly increase. Gains were led by construction, both residential and commercial, as well as retail trade. Mining and energy posted another monthly decline. Support for mining and oil & gas also contracted 1.4%, the second consecutive monthly decline.
  • Weekly non-farm payrolls were largely unchanged in the month of June at an average of $974 nation-wide. Canadian wages are up 1.8% over the past 12 months. Alberta wages are up 1.3% from the same time last year to $1,132 per week and appear to have stabilized since bottoming out during the summer of 2016.
  • The Industrial Product Price Index (IPPI) posted a surprise 1.5% m/m decline in July, the second consecutive monthly decline and the largest drop since December 2014. The Raw Materials Price Index (RMPI) also ended the month 0.6% lower, the third consecutive monthly decline. In both cases declines were widespread across most sectors. Year-over-year, IPPI is still up 1.3% while RMPI is up 4.5%.
  • The Canadian Federation of Independent Business (CFIB) says business confidence continues to deteriorate, falling again in August for the third month in a row. Largest drops were seen in Ontario and BC, blamed on rising labour costs while confidence in Alberta was roughly unchanged. Business owners in Saskatchewan and Newfoundland remain the most pessimistic. 
  • The Conference Board of Canada's Consumer Confidence Index rose to 121.8 in August, the highest reading since November 2007.

The rather positive economic data boosted the loonie 0.6% this week. The chances of an interest rate hike by the Bank of Canada next week are now pegged at about 50%. Canadian 10-year bond yields rose to 1.92% on Friday, sending bond prices lower.

In the US, second quarter GDP came in at 3.0%, much better than expected thanks to strong consumer spending. The ISM manufacturing index also came in above expectations at 58.8. However, only 156,000 new jobs were added in August, much lower than the 180,000 jobs economists were expecting.

The US dollar ended the week and month of August roughly unchanged. The greenback has been steadily declining from the highs of last December but seems to have bottomed out. US treasuries were the best performing asset class in August, as long duration bond yields continue to trend lowering, flattening the US yield curve.

The Euro touched a two-year high on Tuesday but declined through the rest of the week. After rising through the first half of this year, Japanese 10-year bond yields are back at 0%.

OIL & GAS PRICES (USD)

Hurricane Harvey distorted energy markets this week, not only in the US but also around the world:

  • WTI declined as 25% of US refining capacity (about 4.4 million bbl/day) was temporarily taken offline. Although most Gulf Coast refiners are in the process of restarting operations, it is expected that crude stockpiles will show a build next week. Imports and exports into the Gulf Coast were also halted, widening the Brent-WTI spread to over US$5 a barrel.
  • The Canadian heavy oil discount (the differential between WTI and Western Canadian Select) widened from less than US$10 a barrel pre-Harvey to almost US$13 by the end of the week. TransCanada has temporarily shut-in the southern leg of its Keystone Pipeline that runs from Cushing, OK to refineries in Texas and Louisiana. Canada exports about 2.6 million barrels of heavy crude to the US daily, about 500,000 bbl/day shipped to the Gulf Coast region. Imports of diluent have also been curtailed, driving condensate prices more than $2 above par with WTI. Western Canada's heavy oil producers import about one-third of their diluent needs from the US.
  • A partial shutdown of the 3 million bbl/day Colonial Pipeline coupled with numerous refinery outages caused wholesale gasoline prices to spike to over US$2/gallon this week, the first time since 2015. Colonial delivers refined products from the Gulf Coast to markets along the US eastern seaboard, providing one-third of the region's refined products. The September gasoline contract expired on Thursday and future months contracts are already forecasting a return to "normal" prices.

Crude stockpiles in the US declined for the ninth week in a row while production dipped ahead of Hurricane Harvey. US rig counts were unchanged at the end of this week, while 13 rigs were taken out of service in Canada.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

AUG 30, 2017

LOWER 48 OUTPUT DIPS AHEAD OF HURRICANE HARVEY

 
What's moving energy markets this week:

FACTOR
IMPACT
SUMMARY
GEOPOLITICS
NEUTRAL
Status quo on the geopolitical front, with no material news out of Venezuela and on-going empty threats between the US and North Korea.
USD INDEX
▼ BEARISH
Strong Q2 economic data out of the US and a weaker Euro helped boost the greenback slightly this week.
SUPPLY
▲ BULLISH
At its peak, Hurricane Harvey crimped up to 10% of the total US shale production and taken 25% of output from the US Gulf of Mexico offline. Coupled with a levelling-off of rig counts, US crude production is expected to taper off over the next few weeks. OPEC and Russia have also begun discussions on extending their production quotas for another 3 months, to the end of June 2018.
DEMAND
▼ BEARISH
Hurricane Harvey has severely crimped demand for crude in the Gulf Coast, and will likely result in stockpile increases over the next few weeks. Concerns are also being flagged over reduced consumption in heavily-populated areas such Houston as clean-up distracts from a normally busy Labour Day Weekend. This weekend also marks the end of the summer driving, as demand typically wanes into the fall and winter.
SENTIMENT
NEUTRAL
No change in sentiment as oil prices remain stuck in a trading range. Price swings due to Hurricane Harvey are largely being seen as temporary in nature, with no long-term impact to supply or demand.
EQUITY MARKETS

Global equity mostly ended the week positive, including Canadian and US exchanges.

TSX posted its first monthly gain since April. The S&P 500, NASDAQ and the Dow ended August higher, helped by a strong showing from technology stocks.

SECTORS

Materials stocks were the best performers on the TSX as gold and copper prices continued to rise this week. Chemical prices also spiked this week as several Gulf Coast petrochemical facilities were taken offline.

Utilities stocks underperformed this week, likely in response to rising short term interest rates. Financial stocks also lagged this week on a flattening of the yield curve.

ENERGY SECTOR PERFORMANCE

Despite lower oil prices, energy stocks posted a nice gain this week on both US and Canadian exchanges.

For the month of August, the energy sector posted another monthly loss, falling over 4% on the TSX and almost 6% on the S&P 500. Energy stocks are now down about 20% from the highs of last December.


TSX ENERGY STOCKS
TSX 300 ENERGY STOCKS

Cenovus Energy (CVE) is close to finding a buyer for its Pelican Lake assets, put up for sale earlier this year. Canadian Natural Resources (CNQ) and Cona Resources (CONA) are the final bidders for the heavy oil assets, estimated to be worth about $1 billion

Painted Pony Exploration (PONY) provided an update this week on its 2017 capital budget and 2018 development plans. The company has reduced its 2017/18 capital spending plans by $72 million to ensure it can maintain its "current financial flexibility in a lower than anticipated commodity price environment." Production guidance for 2017 and 2018 has been revised to about 45,000 and 70,000 boe/day, respectively.

Trinidad Drilling (TDG) has purchased RigMinder for US$30 million, comprised of US$25 million in cash and US$5 million in TDG shares. Trinidad says the acquisition will provide its customers "with a fully integrated rig performance solution" by integrating drilling data collection along with the company's proprietary control system.

Kinder Morgan Canada (KML) received regulatory approval to begin expansion of its Westridge Marine Terminal, required as part of the Trans Mountain Expansion Project (TMEP). Construction on the marine terminal is expected to begin in September and last about 30 months.

TransCanada (TRP) has temporarily shut-in the southern leg of its Keystone Pipeline that runs from Cushing, OK to refineries in Texas and Louisiana.

Birchcliff Energy (BIR) has closed on the sale of its Worsley Charlie Light Oil Pool for about $100 million.

Baytex Energy's (BTE) operations in the Eagle Ford were temporarily suspended due to Hurricane Harvey but the company expects production to resume this week.

Connacher Oil & Gas (CLLZF) reported a second quarter loss of $15.5 million this week, as the company continues to bleed cash while it sits under creditor protection. Q2 production at its Great Divide SAGD facility rose over 40% y/y to 12,060 bbl/day. This past quarter marks the fourth consecutive quarter of positive netbacks thanks to higher oil prices, lower operating costs and improved reliability.

This week's new 52-week lows on the TSX include AltaGas Income (ALA), Crescent Point Energy (CPG), Ensign Energy Services (ESI), Gran Tierra Energy (GTE), Inter Pipeline (IPL), Precision Drilling (PD), Peyto Exploration & Development (PEY), Parex Resources (PXT), Raging River Exploration (RRX), ShawCor (SCL), Secure Energy Services (SES), Tourmaline Oil (TOU), Western Energy Services (WRG) and Whitecap Resources (WCP).


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

Marathon Petroleum (MPC) has dropped down its ownership in a number of pipelines and midstream assets to its MPLX (MPLX) for US$1.05 billion. The assets include Marathon's stake in the Explorer Pipeline, the Lincoln Pipeline, the Southern Access Extension Pipeline and the Louisiana Offshore Oil Port.

Andeavor (ANDV) announced the opening of its first ARCO-branded gas station in Mexico. The company plans to open 200 to 400 stations in the Baja California and Sonora regions over the next few years. ANDV stock hit a one-year high this week.

ExxonMobil (XOM) closed on its acquisition of Singapore's Jurong Aromatics Corporation. The deal boosts Exxon's aromatics production capacity in the region to over 3.5 million tonnes per year.

Dow Chemical (DOW) signed a non-binging agreement to boost its stake in Saudi Aramco's Sadara Chemical from 35% to 50%. The Sadara complex is comprised of 26 integrated facilities capable of producing more than 3 million tonnes of product per year. Terms of the deal were not disclosed.

Energy Transfer Partners (ETP) has received regulatory approval to start-up Phase 1A of its Rover Pipeline, which runs from Cadiz to Defiance, Ohio.

Williams Partners (WPZ) announced the receipt of all remaining federal and state-level permits for the construction of its $3 billion Atlantic Sunrise Pipeline Project. The line is expected to be operational in mid-2018.

Shares of Seadrill (SDRL) shot up almost 70% this week on rumours of a buyout from state-owned China Merchant Group. The quasi-bankrupt company will likely need to file for Chapter 11 if no deal can be reached.

This week's new 52-week high on the S&P 500 include Andeavor (ANDV), and Cabot Oil & Gas (COG).

This week's new 52-week lows on the S&P 500 include Apache (APA), Anadarko Petroleum (APC), Chesapeake Energy (CHK), Concho Resources (CXO), EOG Resources (EOG), Hess (HES), Helmerich & Payne (HP), Noble Energy (NBL) and Pioneer Natural Resources (PXD).


UPGRADES & DOWNGRADES

UPGRADES

  • Cimarex Energy (NYSE:XEC): Upgraded from Hold to Buy at US Capital Advisors.
  • PBF Energy (NYSE:PBF): Upgraded from Sell to Hold at Tucker Pickering.
  • Petrobras (NYSE:PBR): Upgraded from Sell to Hold at Deutsche Bank.
  • Hess Midstream Partners (NYSE:HESM): Upgraded from Equal Weight to Overweight at Morgan Stanley.
  • Plains All American Pipeline (NYSE:PAA): Upgraded from Market Perform to Outperform at BMO and from Outperform to Buy at Raymond James Financial.
  • Transocean (NYSE:RIG): Upgraded from Equal Weight to Overweight at Capital One Financial and Neutral to Buy Clarkson Captial.

DOWNGRADES

  • American Midstream Partners (NYSE:AMID): Downgraded from Outperform to Sector Perform at RBC.
  • Painted Pony Energy (TSX:PONY): Downgraded from Outperform to Market Perform at Raymond James Financial.
  • Rice Energy (NYSE:RICE): Downgraded from Buy to Hold at US Capital Advisors.
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
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