Weekly Energy Market Review
- Funds continue to flow out of treasuries
- Greenback posts first monthly gain since February
- Oil prices move into bull market territory
- Western Canadian Select ends the month 15% higher
- Gasoline prices end the month 10% lower
- Trader sentiment turns decidedly bullish
- Energy stocks stage spectacular comeback in September.
The loonie retreated this week after Bank of Canada (BoC) Governor Stephen Poloz told audiences there's "no predetermined path for interest rates from here," back-tracking from previous hints of intentions to raise rates again this year.
July GDP growth was unchanged in Canada from the previous month, blamed on a 3% decline in non-conventional extraction. Canadian 10-year yields ended the week slightly lower, sending the loonie back to 80 cents and wiping out all gains for the month of September.
US treasuries continued to correct this week, with both short and long-term interest rates ending the week higher. The yield curve (10-2 year) steepened considerably, reflecting an improved long-term outlook for the US economy. This week's notable US economic news:
- Second quarter GDP expanded 3.1%, slightly better than analysts were expecting. However, Hurricanes Harvey and Irma are expected to drag on Q3 GDP, before being boosted in Q4 by rebuilding efforts.
- Fed Chair Janet Yellen delivered a rather hawkish speech this week, noting it would be "imprudent" to keep rates low until inflation improves. Chances of another interest rate hike this year south of the border is over 70%.
A surprisingly strong showing for right-wing populist parties in last weekend's German election weakened the Euro. All global currencies declined against the US dollar. September marks the first positive month for the greenback (+0.3% m/m) since February.
Brent crude gained 10% for the month of September, slightly better than WTI and one of its best third quarters since 2004. Canadian Light ended the month almost 12% higher while Western Canadian Select (WCS) gained 15% from August.
Crude markets officially entered "bull market" territory this week, with Brent gaining almost 30% from the lows of last June while WTI is up 21% for the same period. The Brent/WTI differential narrowed to below US$6 this week, although Brent futures remain firmly in backwardation.
Oil prices averaged as follows for the month of September (USD/bbl, % change m/m):
- Brent: $55.67 +7.3%
- WTI: $49.88 +3.8%
- Canadian Light: $47.47 +5.0%
- WCS: $38.10 +0.4%
Gasoline prices retreated on news of rising stockpiles last week. Despite an active hurricane season in the Gulf Coast, gasoline prices are down about 10% for the month of September.
AECO spot prices continue to be very volatile, hitting zero several times this week due to construction outages on TransCanada's transmission line. For the month of September, AECO averaged US$1.32/MMBtu, down 3.3% from August. In contrast, Henry Hub ended the month 3.5% higher at an average of US$3.01.
US commercial crude stockpiles declined sharply in the Gulf Coast last week, as crude exports hit a record high of 1.5 million bbl/day. Production has recovered from the effects of Hurricanes Harvey and Irma, now back to the mid-2015 high of 9.55 million bbl/day.
US oil rig counts rose by 6 this week, the first increase in the past three weeks. In Canada, the number of oil rigs in service fell by 9 to 113.
A number of traders, investment banks and oil majors raised their forecasts for crude prices this week, warning of a pending supply shortage:
- Oil trader Trafigura warned a supply squeeze is in the cards for 2019, declaring an end to sluggish oil prices.
- Citigroup says it's time to start preparing for an oil shortage, as several OPEC producers (Libya, Nigeria, Venezuela, Iran and Iraq) are already pumping at capacity.
- S&P Dow Jones Indices thinks "fundamentals are changing and the market is rebalancing," potentially pushing oil prices over US$80 a barrel.
- US oil producer Hess says shale is not enough to meet future demands and more offshore investment is needed to avoid "another supply shock."
|GEOPOLITICS||Turkey's threat to cut off Kurdistan's 600,000 bbl/day export pipeline appears to be supporting the bullish case for oil prices this week. The pipeline is operating normally, at least for now.|
|USD INDEX||A weaker Euro, strong US Q3 GDP data and a rather hawkish speech by Fed Chair Janet Yellen all helped support the US dollar, gaining over 1% for the week and ending September 0.3% higher.|
|SUPPLY||US crude production is now back to the highs of mid-2015. US rig counts climbed higher this week, the first increase this month. OPEC reported a small increase in production, led by continued recovery in Libya and Nigeria.|
|DEMAND||No new news on the demand front this week.|
|SENTIMENT||Oil markets officially entered bull market territory, gaining over 20% from the lows of late June. Traders and investment banks have raised their expectations for oil prices through the remainder of this year but remain tepid on 2018 prices.|
The TSX had another spectacular week, ending the month almost 3% higher and now firmly in the black for 2017.
All US markets hit new record highs this week, once again led by small cap stocks. After lagging for much of 2017, small caps are firmly in the driver's seat, gaining over 6% in September. The S&P 500 also ended September almost 2% higher than the previous month.
Aside from Brazilian and Chinese markets, most global equity markets ended the week higher.
US markets remain decidedly offensive, with technology, industrial, material and financial stocks all reaching new record highs this week. Defensive sectors such as staples and utilities were the worst performers for the month of September, declining 1.1% and 3.0%, respectively.
A somewhat similar story for Canadian markets, with discretionary, technology, industrial and financial stocks posting good gains (note that the Canadian discretionary and technology sectors are relatively small). Materials continues to lag on falling copper and gold prices, ending the month 4% lower.
Another strong week for energy stocks, gaining about 1% on both sides of the border. For the month of September, the TSX energy sector is up almost 12% while the S&P 500 energy sector is up almost 10%.
Integrated and midstream stocks are leading the gains on the TSX. In contrast, most US energy sub-sectors ended the week higher, lead by large integrated players. Despite recent softness in crack spreads, independent refiners continue to trade at or near 12-month highs.
This week's notable Canadian energy news:
- Cenovus Energy (CVE) has agreed to sell its Suffield operations in southern Alberta to International Petroleum Corporation (IPC) for $512 million and up to $36 million in contingency payments. The company says it expects to announce a buyer for its Palliser and Weyburn properties before the end of this year. IPC says the acquisition more than triples its production and reserves. The assets produce an average of 24,000 boe/day at less than $10/boe.
- Cenovus also filed for a mixed shelf offering of up to US$7.5 billion in debt, shares and warrants. A spokesperson for the company called the offering a "housekeeping measure" and not necessarily a guarantee the securities will be sold.
- Veresen (VSN) and Encana (ECA) announced the start-up of the Tower rich gas processing plant earlier this week, one of three projects being constructed to support condensate production from the Montney basin in northeastern BC.
- Pembina Pipelines (PPL) announced plans to expand its Phase V pipeline by another 45,000 bbl/day thanks to strong demand and additional volume commitments. Capital costs for project has increased from $135 million to $385 million due to the added scope. The expansion is expected to be placed into service by the end of 2018.
- Seven Generations Energy (VII) has launched a tender offer for $700 million in 8.250% senior unsecured notes due in 2020 and priced an additional offering of 5.375% unsecured notes expiring in 2025.
- Calfrac Well Services (CFW) reached an agreement with its lenders to extend the maturity date on its notes from 2018 to 2020, contingent on reducing its maximum debt-to-EBITDA ratio to 3.0 and reducing the maximum funds available from $300 million to $275 million. Management says they are pleased with the extension and believe the revised conditions will provide sufficient liquidity.
- Pengrowth Energy (PGF) says it is not aware of any undisclosed public information that would explain for the recent increase in share prices and trading activity. PGF shares have increased almost 10% this past week while trading volumes have spiked to 30 times the normal average.
- Gibson Energy (GEI) has closed on the sale of its industrial propane business to a subsidiary of Superior Plus and also announced a refinancing plan for $250 million in senior unsecured notes.
New 52-week high on the TSX include NuVista (NVA), and Veresen (VSN).
This week's notable US and international energy news:
- After being taken out of service by Hurricane Harvey and being damaged by fire last Tuesday, Valero Energy's (VLO) 335,000 bbl/day Port Arthur refinery in Texas restarted operations earlier this week at reduced rates. A heavily damaged feed tank is being bypassed for now, and may take months to repair.
- American Midstream Partners (AMID) has commenced shipments from its 40,000 bbl/day Bakken crude gathering system near Watford City, ND into the Dakota Access Pipeline.
- Murphy Oil (MUR) was awarded four deepwater exploration blocks off the coast of Brazil. The blocks will be operated by its partners ExxonMobil (XOM) and Brazil's QGEP. Exxon was awarded 10 blocks in the same auction, marking a major expansion into the South American country.
- Exxon also announcedthe addition of 22,000 acres to its Permian Basin portfolio since last spring, in addition to 250,000 acres purchased in February. The lands are located in the "highly prolific, stacked oil pay zones" in the Delaware and Midland Basins, adding to the company's existing 6 billion barrels of oil equivalent in the Permian.
- Chevron's (CVX) pending US$2 billion sale of its Indian natural gas assets to a Chinese consortium has been put on hold while the country mulls a counter-offer. The company also announced the election of Michael Wirth as its new chairman and CEO this week, effective February 1, 2018. Wirth replaces outgoing CEO John Watson and currently serves as Executive VP of Midstream and Development.
- Chesapeake Energy (CHK) warned investors it expects a 15% decline in Q3 production due to disruptions in weather, asset sales and changes in capital allocation. The company plans to place 120 to 130 new wells into production in Q4, primarily in the Eagle Ford and Powder River Basin. Chesapeake also announced the private placement of US$740 million in senior notes, bearing 8% interest due in 2025 and has launched a tender offer for US$550 million in shorter duration notes.
- UK-major BP (BP) announced the start-up of its US$16 billion Khazzan gas field in Oman, sixth and largest project to be started up this year. BP has one more major start-up planned before year end, the Zohr field in Egypt.
- Total (TOT) has agreed to pay $1 million for an option to buy a 25% stake in an exploration block offshore Guyana, its first entry into the South American country. Junior Canadian energy firm Eco Atlantic Oil & Gas (TSX.V:EOG) says Total retains the option to buy the stake for $12.5 million pending the results of 3D seismic data.
Independent refiners continue to outperform the broader energy sector as Phillips 66 (PSX) and Valero (VLO) hit fresh new highs this week. Royal Dutch Shell (RDS.A) and Statoil (STO) ADRs also hit another 12-month high on the NYSE.
- Diamond Offshore (NYSE:DO): Upgraded from Neutral to Buy at UBS.
- Encana (TSX:ECA): Upgraded from Neutral to Outperform at Macquarie.
- Ensco International (NYSE:ESV): Upgraded from Neutral to Buy at UBS.
- Noble Corp (NYSE:NE): Upgraded from Neutral to Buy at UBS.
- Phillips 66 (NYSE:PSX): Upgraded from Sector Perform to Outperform at Howard Weil.
- Statoil (NYSE:STO): Upgraded from Underperform to Neutral at BNP Paribas.
- Transocean (NYSE:RIG): Upgraded from Neutral to Buy at UBS.
- Tullow Oil (NYSE:TLW): Upgraded from Sector Perform to Outperform at RBC.
- Andeavor (NYSE:ANDV): Downgraded from Sector Outperform to Sector Perform at Howard Weil.
- Total (NYSE:TOT): Downgraded from Outperform to Sector Perform at RBC.