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Weekly Energy Market Review

Weekly Energy Market Review

Energy Market Summary for the week ending September 8, 2017:
  • Markets sink lower as money moves into treasuries
  • US bond yields tumble to pre-Trump election levels
  • Greenback breaks down while global currencies surge higher
  • Bank of Canada raises rates, sending CAD to 2½ year high
  • Brent-WTI spread continues to widen
  • Wholesale gasoline prices continue to ease
  • Low oil prices and soaring loonie bad for Canadian energy stocks
  • US energy sector stages small rebound post-Harvey.
QUICK LINKS
MARKET OVERVIEW
CURRENCIES & BONDS

The Bank of Canada raised its overnight lending rate from 0.75% to 1.0% this week. The Bank says recent economic data has been "stronger than expected," including solid employment numbers, income growth, as well as strong consumer spending and business investment. The BoC says it remains cognizant of sky-high household debt across the county as it moves to tighten monetary policy. The next interest rate update will be held on October 25, 2017.

This week's notable Canadian economic data:

  • Canada added 110,000 part-time jobs in August, offset by 88,000 full-time job losses. For the past 12-months, the country has added 213,000 full-time and 161,000 part-time jobs. The unemployment rate fell from 6.3 to 6.2%, matching the lows of October 2008. Alberta added 34,000 jobs but an increase in the labour participation rate kept the unemployment rate unchanged at 8.1%.
  • Industrial capacity utilization rose to 85% in the second quarter, thanks to a strong showing from the energy sector. Utilization rates have been rising steadily from a low of 79% hit in the second quarter of 2016.

The ECB has agreed to begin curtailing their €60 billion/month bond asset repurchase program, sending the Euro back to the highs of January 2015. Details of the tapering program will be released next month. The Japanese yen also spiked 2.3% this week, generally viewed as a bad omen for global equity markets.

The US dollar fell to a quasi three-year low this week despite a deal to extend the debt-ceiling to December. Chances of another rate hike by the Federal Reserve has fallen to just 22% as an active hurricane season is expected to dampen Q3 GDP growth and temporarily spike unemployment rates. US 10-year bond yields continued to deteriorate this week, falling to 2.06%, the lowest since last year's US election.

OIL & GAS PRICES (USD)

Gulf Coast refineries, crude oil production facilities and pipelines are slowly returning to normal after Hurricane Harvey ripped through Texas last weekend. The hurricane caused US crude oil stockpiles to rise by almost 5 million barrels for the week, as export terminals in the Gulf Coast were shutdown and over 4 million bbl/day of refining capacity was taken offline.

The spread between Brent and WTI continues to widen, now over US$6 a barrel. The Brent futures curve also moved into a slight backwardation, the first time since 2014.

The heavy oil discount eased slightly this week to just under US$12. Wholesale gasoline prices also continue to retreat from the highs of last week.

Baker Hughes reported a decline of three oil rigs in the US this week, falling to 756. The number of rigs operating in Canada was unchanged at 102.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

SEP 7, 2017

Hurricane Harvey throws a wrench into weekly US inventory data

 
What's moving energy markets this week:

FACTOR
IMPACT
SUMMARY
GEOPOLITICS
NEUTRAL
Little change on the geopolitical front this week. The US is threatening to impose a ban on crude oil sales to North Korea, which would have no material impact to oil prices.
USD INDEX
▲ BULLISH
The US dollar continues to sink lower, falling to an almost 3-year low before recovering slightly on Friday.
SUPPLY
▲ BULLISH
Crude production out of the US Lower 48 was hit hard last week due to Hurricane Harvey, falling almost 800,000 bbl/day. BP's 250,000 bbl/day Thunder Horse platform was evacuated due to Hurricane Irma. Production out of Libya is expected to return to normal (about 1 million bbl/day) after being disrupted for several weeks.
DEMAND
▼ BEARISH
Hurricanes Irma and Harvey are expected to dent US gasoline demand, as residents forgo their travel plans in lieu of rebuilding efforts. Gulf Coast refineries are returning to normal but not yet at full capacity. About 1 million bbl/day of refining capacity remains offline as of Friday.
SENTIMENT
▼ BEARISH
WTI topped US$49 a barrel this week, but broke down again on Friday as traders hit the sell button.
EQUITY MARKETS

North American markets declined across the board this week, led lower by the TSX and the Nasdaq. Japan's Nikkei was the worst performing developed market, declining 2.1% for the week, in part due to a strengthening yen.

SECTORS

Financial stocks were the worst performers on both sides of the border as long bond yields continue to fall and yield curves continue to flatten. A pullback in copper prices also hit the Canadian materials sector.

ENERGY SECTOR PERFORMANCE

Most Canadian energy stocks ended the week lower. Declines were led by energy producers. This week's biggest laggers were Crew Energy (CR), Advantage Oil & Gas (AAV), Peyto Exploration (PEY) and MEG Energy (MEG).

The US energy sector had a comparatively better week, gaining an average of 1.3%.


TSX ENERGY STOCKS
TSX 300 ENERGY STOCKS

Canadian Natural Resources (CNQ) has agreed to buy Cenovus Energy's (CVE) Pelican Lake heavy oil operations for $975 million. Cenovus says other asset sales are still in the works, including Suffield, Palliser and Weyburn. Proceeds from the sale will go towards repaying its $3.6 billion bridge loan. Pelican Lake produces about 19,600 boe/day. 

TransCanada (TRP) has extended open season by about 1 month on its Keystone XL pipeline due to the aftermath of Hurricane Harvey. The company has also temporarily parked its application for Energy East as it reviews recent regulatory changes imposed by the National Energy Board.

Pengrowth Energy (PGF) announced the sale of its remaining Swan Hills assets in North Central Alberta for $150 million in cash. The assets produce about 5,000 boe/day. The company will update its 2017 guidance after the deal closes in the fourth quarter.

Secure Energy Services (SES) announced plans to construct a light oil feeder pipeline system and receipt terminal in the Kindersley-Kerrobert region of Saskatchewan. The new system is expected to cost $75 million and should be in service by the end of 2018.

Shareholders at Paramount Resources (POU) unanimously approved (98%) the company's pending merger with Trilogy Energy (TET). Over 92% of Trilogy shareholders also approved the merger. The deal is expected to close on September 12, subject to court approvals. Under terms of the deal, Trilogy shareholders will receive one POU share for every 3.75 TET shares held.

Toronto-based Polar Asset management reported a 10% passive stake in Bellatrix Exploration (BXE) as of the end of August.

This week's new 52-week lows on the TSX include Advantage Oil Gas (AAV), Enbridge (ENB) and Western Energy Services (WRG).


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

Valero Energy (VLO) and Magellan Midstream Partners (MMP) have agreed to jointly build a 135 mile products pipeline from Houston to Hearne, Texas. Valero also plans to build two new terminals, one in Hearne and another in Williamson County, Texas, as well as a new pipeline connecting the two facilities. Magellan plans to spend US$375 million while Valero's portion is expected to cost US$380 million. 

Magellan also announced the start of construction on a new 250,000 bbl/day pipeline, carrying crude and condensate from the Delaware Basin to Magellan's existing Longhorn pipeline, which connects to refineries and marine terminals in Houston and Texas City. Magellan expects the project to cost US$150 million.

Marathon Petroleum (MPC) updated shareholders on its strategic plans this week, which does not include plans to divest its Speedway retail business. Marathon says it returned US$1.55 billion to shareholders in the first half of this year alone and plans to buy back US$1 billion worth of shares in 2017.

Nabors Industries (NBR) announced a deal to acquire Robotic Drilling Systems, an equipment provider for onshore and offshore drilling. Robotic Drilling is currently owned by a consortium that includes Odfjell Drilling, Statoil (STO), Investinor and Westcon. Terms of the deal were not disclosed.

French-energy major Total (TOT) has divested its remaining 15% interest in the Gina Krog field in Norway to Kuwait Foreign Petroleum Exploration Company (KUFPEC). KUFPEC purchased another 15% stake from Total last year. Both stakes were sold for US$617 million.

Royal Dutch Shell (RDS.A) announced the opening of their first service station in Mexico, located just outside Mexico City. The new outlet is part of the company's plans to invest around US$1 billion in the country over the next decade.

CNOOC (CEO) has signed a production sharing agreement with South Korea's SK Innovation for Block 17/08, located in the Pearl River Mouth Basin in the South China Sea.

Brazil's Petrobras (PBR) has filed for an IPO of a 90% stake in its wholly owned subsidiary Transportadora Associada de Gas (TAG). TAG operates a 4,500 km natural gas pipeline in northern Brazil. The IPO is part of its on-going debt restructuring and balance sheet deleveraging.

Statoil's ADR (STO) hit a 52-week high on the NYSE this week on news that the company purchased a stake in two South African offshore exploration blocks, one from ExxonMobil (XOM) and another from OK Energy.

Whiting Petroleum (WLL) announced a reverse stock split, aiming at boosting their share price and reducing the number of outstanding shares. The reverse split will be anywhere from 1-for-2 to 1-for-6, to be determined by its Board of Directors. The reverse split will be put to a shareholder vote in the fourth quarter. WLL stock hit a fresh new low on the NYSE this week.

Cabot Oil & Gas (COG) hit a 52-week high on the NYSE this week while Range Resources (RRC) hit a new 52-week low.


UPGRADES & DOWNGRADES

UPGRADES

  • Exxon Mobil (NYSE:XOM): Upgraded from Sell to Neutral at UBS.
  • RMP Energy (TSX:RMP): Upgraded from Underperform to Market Perform at Raymond James.

DOWNGRADES

  • Chesapeake Energy Corp (NYSE:CHK): Downgraded from Buy to Hold at Tudor Pickering.
  • EP Energy (NYSE:EPE): Downgraded from Outperform to Sector Perform at Tudor Pickering.
  • Major Drilling Group (TSX:MDI): Downgraded from Buy to Hold at TD Securities.
  • Marathon Petroleum (NYSE:MPC): Downgraded from Buy to Hold at Bank of America and from Outperform to Market Perform at Wells Fargo.
  • Range Resources (NYSE:RRC): Downgraded from Buy to Neutral at Goldman Sachs.
  • Rice Energy (NYSE:RICE): Downgraded from Buy to Neutral at Goldman Sachs.
  • Rice Midstream Partners (NYSE:RMP): Downgraded from Buy to Neutral at Goldman Sachs.
  • Statoil (NYSE:STO): Downgraded from Buy to Hold at Tudor Pickering.
  • Whiting Petroleum (NYSE:WLL): Downgraded from Hold to Sell at Tudor Pickering.
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

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