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Weekly Energy Market Review

Weekly Energy Market Review

Energy Market Summary for the week ending September 22, 2017:
  • Funds continue to flow out of treasury markets
  • US dollar shows signs of life
  • Energy stocks power TSX higher
  • WTI (finally) holds above US$50
  • Brent futures curve in steep backwardation ...
  • ... and inches closer to new 12-month high
  • Independent refiners continue to outperform ...
  • ... while interest-rate sensitive midstream stocks continue to lag.
QUICK LINKS
MARKET OVERVIEW
CURRENCIES & BONDS

Money continued to rotate out of US treasuries this week. The US Federal Reserve surprised bond markets by announcing plans to raise interest rates one more time this year and potentially three times next year. Estimated long-term rates were also lowered from 3.0% to 2.75%, further flattening the yield curve. However, Fed Chair Janet Yellen stressed that rate hikes are very much data dependant, and not cast in stone. The US plans to start unwinding US$4.2 trillion in treasuries this October, in tranches of US$10 billion every 3 months.

Yields increased across the board this week, including the US, Germany, the UK and Japan. Canada's 10-year rate gained almost 3%, closing the week at 2.26%. 

This week's notable Canadian economic data from Statistics Canada:

  • Higher transportation and shelter costs sent the August Consumer Price Index higher by 1.4% from the previous month, now up 1.2% y/y. Higher gasoline prices were blamed for most of the increase in transportation costs.
  • Wholesale sales increased 1.5% in July to $62.5 billion, driven by building materials and food. Saskatchewan, Alberta and BC saw the biggest increases while sales declined in Atlantic provinces.
  • Retail trade rose 0.4% to $49.1 billion in July, driven by strong auto sales. Sales at gasoline stations contracted another 0.3%, for the third consecutive month.
  • The number of Employment Insurance (EI) recipients across Canada increased 1.3% to 536,600 in July, the first increase in 8 months. StatsCan says the increase was partly attributed to shorter wait times for beneficiaries, reduced from two weeks to one. Gains in EI recipients were led by Manitoba, Ontario, BC and the Atlantic provinces. Alberta data was roughly unchanged.
OIL & GAS PRICES (USD)

Commercial crude oil stockpiles increased by 4.6 million barrels last week, mostly in the Gulf Coast. However, product stockpiles (gasoline and distillates) declined 6.6 million barrels, slightly more than expected. Production out the Gulf of Mexico and Texas Eagle Ford shale has largely recovered from the effects of Hurricane Harvey.

US rig counts continue to fall, declining by another 5 rigs this week to 744. Canada added 10 oil rigs this week, to a total of 122.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

SEP 20, 2017

Oil output returns to pre-hurricane levels while product stockpiles continue to fall

 

The Brent futures curve continues to move into backwardation, where future contracts are priced lower than the current spot price. The WTI discount to Brent remains almost twice the normal average (about US$6/bbl), which should accelerate US exports and increase demand for WTI.

Heating oil prices moved higher again this week due to refinery disruptions during Hurricane Harvey, creating concerns on pending shortages during upcoming winter months.

What's moving energy markets this week:

FACTOR
IMPACT
SUMMARY
GEOPOLITICS
NEUTRAL
No change on the geopolitical front this week.
USD INDEX
▼ BEARISH
The US dollar moved higher for the second week in a row on renewed intentions by the Federal Reserve to raise rates again this year and potentially three times in 2018.
SUPPLY
NEUTRAL
At this week's OPEC meeting in Vienna, the cartel says the global supply glut is easing, but no decisions on production quotas will be made until early next year. Saudi Arabia's crude exports declined to 6.69 million bbl/day in July. Total US production has returned to pre-hurricane rates of 9.5 million bbl/day.
DEMAND
▲ BULLISH
Gulf Coast refinery utilization was still only 73% at the end of last week but is expected to return to more normal levels (>90%) by the end of the month, which should ease US crude inventories.
SENTIMENT
▲ BULLISH
WTI remained firmly above US$50 for most of the week while Brent prices inch closer to a new 52-week high. The Brent futures curve is firmly in backwardation, while the WTI contango has narrowed considerably. A sharp rally in the price of energy stocks indicates expectations for higher oil prices ahead.
EQUITY MARKETS

The TSX had a spectacular week, gaining almost 2%, now back above its 200 day moving average.

US markets mostly powered to new record highs this week, this time led by small cap stocks. The Nasdaq was the only exception, pulling back slightly by the end of the week.

European markets largely ended the week higher. The FTSE also recovered some of last week's losses. The Nikkei was this week's best performing market, gaining 2% and closing in on record highs.

SECTORS

Definitely a risk-on market south of the border this week as most offensive sectors powered higher. Industrials, materials and financials hit new record highs while defensive players (staples, healthcare and utilities) all declined. High-flying technology stocks also lagged this week, but remains the best performing sector for the year.

Offensive stocks also led gains on the TSX, led higher by industrials, energy and financials. Industrial and discretionary stocks hit record highs this week.

ENERGY SECTOR PERFORMANCE

Energy stocks continue their upward climb, having rebounded nicely from the lows of August. Gains were broadly based across most sub-sectors. US independent refiners outperformed the broader market while interest-rate sensitive midstream players generally ended the week lower.


TSX ENERGY STOCKS
TSX 300 ENERGY STOCKS

This week's notable Canadian energy news:

  • Keyera Corp (KEY) has closed on the private placement of $400 million in 10-year senior unsecured notes at 3.68%. The company says proceeds will be used to repay short-term debt and for general corporate purposes.
  • The National Energy Board has approved TransCanada's (TRP) new long-term pricing contracts for its Canadian Mainline natural gas deliveries from Western Canada into Ontario. The toll will be reduced from $1.86 to $0.77 per GJ as of November 1, 2017.
  • North America Energy Partners (NOA) announced two winter-season earthworks contracts at two different oil sands mines for a total value of $90 million. 
  • Veresen (VSN) has filed another application for its Jordan Cove LNG Project in Oregon and Pacific Connector Gas Pipeline with US federal regulators (FERC). The company also announced that its Alberta Ethane Gathering System has entered into a 20-year take-or-pay contract for about 95% of its existing capacity, effective January 1, 2019.
  • Western Energy Services (WRG) has entered into an agreement with AIMCo (Alberta Investment Management Corporation) for a $215 million loan and $11.375 million in the private placement of 9.1 million shares, as well as another $11.375 million in bought deal financing. Upon completion of the deal, AIMCo will own 10% of Western Energy. Net proceeds will be used to redeem outstanding unsecured notes.
  • Villagers in the Peruvian Amazon have shut down about 50 oil wells operated by Toronto-based Frontera Energy (FEC) over pollution and indigenous rights concerns in the Corrientes River basin. The oil field produces about 9,500 bbl/day.
  • Cenovus Energy (CVE) was this week's best performer, gaining over 15% on rumours of a pending sale of its Suffield natural gas properties.

New 52-week high on the TSX include NuVista Energy (NVA) and Paramount Resources (POU).


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

This week's notable US energy news:

  • Chevron (CVX) and Phillips 66 (PSX) announced the start-up of a new petrochemical facility in Old Ocean, Texas. The US$6 billion plant has the capacity to produce 500,000 tons/year of plastic resin.
  • Phillips 66 Partners (PSXP) has purchased its parent company's 25% interest in the Dakota Access and Energy Transfer Crude Oil pipelines, as well as a 100% interest in Merey Sweeny, owners of coke processing units at Phillips 66's Sweeny Refinery for US$2.4 billion. PSPX says proceeds will be used to fund future acquisitions. The MLP also announced the private placement of US$1.05 billion in convertible preferred and common shares.
  • Energy Transfer Partners (ETP) received regulatory approval to resume construction of the Rover Pipeline Project in Ohio. ETP says they are working towards an in-service date of Q1/2018.
  • After being offline for two weeks for Hurricane Harvey, Valero Energy's (VLO) 335,000 bbl/day refinery in Port Arthur, Texas was shutdown again this week due to a small fire. No injuries were reported and the extent of the damage was not disclosed.
  • A subsidiary of Valero Energy (VLO) has scrapped plans to buy two petroleum storage and distribution terminals in Richmond, California owned by Plains All American Pipeline (PAA). The deal was opposed by California regulators.
  • Williams Partners (WPZ) announced the start of construction on the greenfield section of its Atlantic Sunrise pipeline project, an expansion of the existing Transco natural gas network. The US$3 billion line is expected to be placed into service by the middle of next year.
  • Anadarko Petroleum's (APC) board of directors has authorized a US$2.5 billion share buyback program to be purchased through the end of 2018, representing about 10% of all outstanding common shares. APC was the best performer in the US energy patch this week, gaining over 12%.
  • Chevron Corp (CVX) and Total (TOT) have signed an agreement to cooperate on 7 Chevron-operated projects in the deepwater Gulf of Mexico. Total's stake in the projects will vary from 25% to 40%. Terms of the deal were not disclosed.
  • Total has also reportedly sold its Italian retail gas business to Pennsylvania-based UGI Corp (UGI). Terms of the deal have yet to be disclosed. 
  • Transocean (RIG) says it plans to retire six ultra-deepwater floaters, which will result in a US$1.4 billion impairment charge in the third quarter of this year.
  • Bankrupt offshore driller Ocean Rig (ORIG) executed a previously-announced 1-for-9200 reverse stock split, effective September 21, 2017.

New 52-week highs on the S&P 500 this week include Andeavor (ANDV), Phillips 66 (PSX) and Valero Energy (VLO). Statoil (STO), Royal Dutch Shell (RDS.A) and Total (TOT) ADRs also hit fresh new highs this week.


UPGRADES & DOWNGRADES

UPGRADES

  • Chinook Energy (TSX:CKE): Upgraded from Underperform to Market Perform at Raymond James.
  • BP (NYSE:BP): Upgraded from Market Perform to Outperform at BMO.
  • Inter Pipeline (TSX:IPL): Upgraded from Market Perform to Outperform at BMO.
  • Keyera (TSX:KEY): Upgraded from Market Perform to Outperform at BMO.
  • Magellan Midstream Partners (NYSE:MMP): Upgraded from Neutral to Buy at Citigroup.
  • Precision Drilling (TSX:PD): Upgraded from Neutral to Overweight at Piper Jaffray.
  • RMP Energy (TSX:RMP): Upgraded from Neutral to Outperform at Macquarie.

DOWNGRADES

  • Canacol Energy (TSX:CNE): Downgraded from Buy to Hold at Canaccord Genuity. 
  • Range Resources (NYSE:RRC): Downgraded from Market Perform to Underperform at Wolfe Research.
  • Resolute Energy (NYSE:REN): 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
  • Weekly Energy Market Review

    Weekly Energy Market Review

    Weekly Energy Market Review

    Weekly Energy Market Review

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