Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending January 5, 2018:
  • Equity markets kick-off 2018 with a bang
  • Global bond yields tick higher ...
  • ... as world economies post strong economic data
  • Loonie on fire on expectations of January rate hike
  • Brent and WTI inch towards new highs
  • Natural gas prices retreat despite record demand
  • Canadian energy services stocks finally show signs of life.
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MARKET OVERVIEW
CURRENCIES & BONDS

This week's Canadian economic data from Statistics Canada:

  • The Canadian economy added 79,000 new jobs last month, mostly part-time, sending the unemployment rate to 5.7%, the lowest since 1976. Gains were focused in Quebec and Alberta, while Ontario was roughly unchanged. This is the third consecutive monthly increase.
  • Canada's global trade deficit widened to $2.5 billion in November, up $1.6 billion from the previous month. Imports were up 5.8% while exports rose 3.7%.
  • The Industrial Product Price Index (IPPI) rose 1.4% in November, mainly attributed to a 6.3% increase in energy products, including gasoline (+7.9%), light fuel oils (+9.5%) and diesel (+8.6%).
  • Higher energy prices also caused a 5.5% increase in the Raw Materials Price Index (RMPI). Excluding energy, IPPI and RMPI are up 0.5% and 0.4% y/y, respectively.

Expectations for another rate hike later this month helped propel the loonie above 80 cents for the first time since last September.

Notable US economic news this week:

  • Recently released minutes of the December FOMC meeting revealed concerns that tax cuts south of the border will stimulate inflation and boost consumer spending, raising the prospects for more rate hikes in 2018.
  • ADP reported a gain of 250,000 private-sector jobs in December, the highest since March of last year.
  • Government non-farm payroll data was less positive, showing just 148,000 new jobs in December. Wage growth remains unchanged at 2.5% y/y while the unemployment rate was also unchanged at 4.1%.

European yields and currencies perked up this week as the European Central Bank (ECB) cut its monthly bond purchases from €60 to €30 billion. Strong data out of the Eurozone and other global economies helped boost bond yields around the world this week.

OIL & GAS PRICES (USD)

Moody's Investors Service says it expects oil prices to range between US$40 and US$60 per barrel in 2018, with rising oil and gas supplies from the US keeping a lid on prices, even though demand is increasing.

Below-average temperatures across North America's most populated centres have translated into record natural gas demand south of the border, with a record 143 billion cubic feet reached on New Year's Day. Natural gas prices jumped higher earlier in the week, but gave back all gains by Friday. The "weather bomb" knocked-out power across New England, including a nuclear power plant, also giving a boost to heating oil prices. 

Commercial crude oil stockpiles declined 7.4 million barrels last week, with drawdowns seen throughout the US except for the West Coast. Production out of the Lower 48 rose 25,000 bbl/day, reversing declines from the previous week and now back to the record highs of mid-December.

Refinery utilization rose again to 96.7% across the US, with Gulf Coast refineries operating at almost 98% of capacity.

Baker Hughes reported a decline in rig counts for the first week of the new year. The number of rigs in service in the US declined by 5 to 742 while Canada added 36 rigs, reversing some of the big declines of last week.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

JAN 4, 2018

FRIGID COLD WEATHER AND HIGH REFINERY RUNS BLAMED ON CONTINUED GAINS IN PRODUCT STOCKPILES

 
What's moving energy markets this week:

FACTOR
IMPACT
SUMMARY
GEOPOLITICS
▲ BULLISH
Concerns over anti-government protests in Iran this week, the largest since 2009, have helped put a floor underneath oil prices. Iran produces about 4 million bbl/day although output has so far not been affected.
USD INDEX
NEUTRAL
The US dollar was roughly unchanged this week, as strengthening global currencies continue to drag on the greenback.
SUPPLY
NEUTRAL
Damaged pipelines in the North Sea and Libya both returned to service this week. After being unchanged for the past 2 weeks, Baker Hughes reported a small decline in US rig counts.
DEMAND
▼ BEARISH
Arctic weathers across the US is dragging on gasoline demand, causing another weekly gain in product stockpiles.
SENTIMENT
▲ BULLISH
Hedge funds remain overwhelmingly long, as the ratio of long to shorts remains at multi-year highs. The Crude Volatility Index declined to multi-year lows earlier this week. Although bullish on the surface, oil prices are at risk of sharp correction if sentiment suddenly shifts.
EQUITY MARKETS

The first trading week of the year brings a number of new record highs, as the world's largest economies all reported strong economic data. Japan's Nikkei hit a 26-year high while Chinese markets reached 6-year highs this week. The Dow Jones Industrial Average topped 25,000 this week, a new all-time high. The TSX and FTSE also hit record highs.

SECTORS

US markets are decidedly offensive, with only staples and utilities stocks ending the week flat to lower. Canadian markets were boosted by continued strength in the health care sector.

ENERGY SECTOR PERFORMANCE

Analysts for BlackRock think 2018 should be a good year for energy stocks. The firm says 2017 was a challenging year with most stocks underperforming underlying oil prices. BlackRock joins UBS, JP Morgan, RBC Capital Markets and Goldman Sachs in their bullish call, with a preference for global oil majors.

Meanwhile over at Credit Suisse, that bank is telling its clients to buy beaten-down oil field services stocks, one of the worst performers of 2017. Credit Suisse analysts note the service sector will benefit from rising production out of US onshore and offshore fields, predicting several years of strong growth.

An abnormally wide discount on Canadian light and heavy crude continues to drag on the Canadian energy sector, underperforming US energy counterparts. Energy services stocks were the best performers on the TSX, and also had a good showing this week south of the border. Most global oil majors hit new highs in the NYSE this week, as well as select refiners.


TSX ENERGY STOCKS
TSX 300 ENERGY STOCKS

This week's notable Canadian energy news:

  • Suncor Energy (SU) provided a Q4/2017 update this week, calling the quarter "strong." The company has settled its commercial dispute with French energy major Total over unpaid bills at the Fort Hills Oil Sands Mine, which is expected to produce its first barrel of bitumen by the middle of January.
  • Suncor also announced the appointment of Dennis Houston to its Board of Directors. Houston spent nearly 36 years at ExxonMobil, last serving as its EVP of Refining and Supply.
  • Pembina Pipeline (PPL) also announced the appointment of several new senior managers, reporting to CEO Mick Dilger.
  • TransCanada (TRP) announced that its 1.5 Bcf/day Leach XPress project was placed into service on New Year's Day. TRP also announced the receipt of several FERC certificates for its 2.6 Bcf/day Mountaineer XPress and 0.8 Bcf/day Gulf XPress project, expected to be in service by the end of 2018. The three projects represent an investment of US$4.8 billion.
  • Shares of Peyto Exploration (PEY) tanked this week after analysts at GMP FirstEnergy warned the company's dividend is at risk.
  • Shares of California-based BNK Petroleum (BKX) soared this week after Harrington Global Limited announced the acquisition of 614,500  common shares for its Harrington Global Opportunities Fund at a price of $0.4650 per share. BNK was spun-off as an independent company after the sale of Bankers Petroleum in 2008.

New 52-week highs on the TSX include CNOOC (CNU), Husky Energy (HSE), Parex Resources (PXT) and Suncor Energy (SU). Crew Energy (CR) hit a new 52-week low.


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

This week's notable US energy news:

  • Andeavor (ANDV) announced the purchase of Rangeland Energy, owner and operator of several assets in the Delaware and Midland Basins, a crude oil pipeline and three oil storage terminals. The company says it plans to integrate Rangeland's midstream assets into its own network. Financial terms of the deal were not disclosed. Andeavor also announced plans to grow its earnings by 45% by 2020, a US$1.4 billion increase.
  • ONEOK (OKE) announced plans to build a US$1.4 billion NGL pipeline from the Rocky Mountain region to the company's existing infrastructure in Montana and Kansas. The 240,000 bbl/day line is expected to be completed by the end of 2019.
  • Pennsylvania's state regulators have ordered Sunoco (SUN) to halt construction of its US$2.5 billion Mariner East 2 NGL pipeline in the southern part of the state, citing "egregious and willful violations" of state laws. Sunoco says it will comply with the ruling and plans to restart construction "promptly." Mariner East 2 will carry propane, butane and ethane from the Marcellus Shale natural gas formation to an export terminal near Philadelphia.
  • American Midstream Partners (AMID) announced the start-up of its 40,000 bbl/day Cayenne Pipeline, owned jointly with Targa Resources (TRGP). Cayenne originates from the Venice gas processing plant, delivering NGLs to fractionation plants in Southern Louisiana.
  • Enterprise Products Partners (EDP) announced plans to add 300 MMcf/day of incremental capacity at its cryogenic natural gas processing facility under construction in Reeves County, Texas. The facility is expected to start up by the fall of this year, while the newly added third train will be operational by Q2/2019.
  • Oilfield services firm Weatherford International (WFT) has sold its US oil-well business to Schlumberger (SLB) US$430 million, and has abandoned plans for a joint venture. 
  • Following in the footsteps of Shell last week, BP (BP) says it expects to benefit from lower corporate tax rates on its US operation. The company will book a US$1.5 billion charge in Q4 reflecting deferral of tax assets and liabilities.

This week's global energy news:

  • ExxonMobil (XOM) announced yet another oil discovery off the coast of Guyana, the sixth since 2015.
  • Royal Dutch Shell (RDS.A) has abandoned plans to sell its A/S Dansk Shell unit to Dansk Olieselskab, but says its US$30 billion asset divestitures remains on track.
  • Petrobras (PBR) has agreed to pay US$2.95 billion to settle a US-based shareholder lawsuit on corruption charges. The settlement will be paid in three instalments and does not constitute an admission of guilt, wrongdoing or misconduct. Shareholders in Brazil are now seeking a similar payout.

New 52-week highs on the S&P 500 include, Andeaver (ANDV), Chevron (CVX), Concho Resources (CXO), ConocoPhillips (COP), EOG Resources (EOG), Helmerich & Payne (HP), Marathon Petroleum (MPC), Occidental Petroleum (OXY), Phillips 66 (PSX) and Valero Energy (VLO).

Several global oil majors hit new highs in the NYSE this week, including BP (BP), Royal Dutch Shell (RDS.A), Statoil (STO) and Total (TOT).


UPGRADES & DOWNGRADES

UPGRADES

  • Concho Resources (NYSE:CXO): Upgraded from Neutral to Buy at Bank of America.
  • Ensign Energy Services (TSX:ESI): Upgraded from Hold to Buy at TD.
  • EOG Resources (NYSE:EOG): Upgraded from Neutral to Buy at Citigroup.
  • Helmerich & Payne (NYSE:HP): Upgraded from Sell to Neutral at Citigroup.
  • Marathon Oil (NYSE:MRO): Upgraded from Neutral to Buy at Bank of America.
  • NewField Exploration (NYSE:NFX): Upgraded from Neutral to Buy at Bank of America.
  • Statoil (NYSE:STO): Upgraded from Sector Perform to Outperform at RBC.
  • Superior Energy Services (NYSE:SPN): Upgraded from Neutral to Positive at Susquehanna Bancshares.
  • Transocean (NYSE:RIG): Upgraded from Hold to Buy at Jefferies Group.
  • Western Gas Equity Partners (NYSE:WGP): Upgraded from Neutral to Buy at UBS.
  • Williams Partners (NYSE:WPZ): Upgraded from Hold to Buy at US Captial Advisors.

DOWNGRADES

  • Cabot Oil & Gas (NYSE:COG): Downgraded from Outperform to Sell at Raymond James and from Outperform to Underperform at Citigroup.
  • California Resources (NYSE:CRC): Downgraded from Buy to Hold at Societe Generale.
  • Callon Petroleum (NYSE:CPE): Downgraded from Buy to Neutral at RBC.
  • Chevron (NYSE:CVX): Downgraded from Buy to Neutral at Bank of America.
  • Oceaneering International (NYSE:OII): Downgraded from Hold to Underperform at Jefferies Group.
  • Occidental Petroleum (NYSE:OXY): Downgraded from Buy to Neutral at Bank of AMerica.
  • Range Resources (NYSE:RRC): Downgraded from Buy to Neutral at Bank of America.
  • SRC Energy (NYSE:SRCI): Downgraded from Outperform to Sector Perform at RBC.
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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