Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending December 8, 2017:
  • Oil prices soften as OPEC trade fades
  • Heavy oil discount widens to over US$18/bbl
  • Natural gas prices tumble on higher inventories and warmer weather
  • Energy sectors drag markets lower
  • Canadian midstream stocks post a decent week ...
  • ... while independent refiners hit fresh record highs.
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MARKET OVERVIEW
CURRENCIES & BONDS

This week's notable Canadian economic data:

  • Canada's trade deficit narrowed to $1.5 billion in October, down from a $3.4 billion deficit reported for the previous month. Exports were up 2.7%, rising to $44.5 billion. Exports of refined products from Eastern Canada to the US remain strong, increasing another 18% in October. Total imports were down 1.6% to $45.9 billion.
  • The Bank of Canada (BoC) held its overnight lending rate unchanged at 1% this week, noting that interest rates will likely rise over time due to strength in the labour market, rising inflation and a robust global economy. The next BoC interest rate decision will be held on January 17, 2018.

Canadian bond yields took a tumble this week, with 10-year rates falling 2.1% to 1.86%. The loonie also declined back below 78 cents.

This week's notable US economic data:

  • The US economy added 228,000 jobs in November, much better than expected. The national unemployment rate held steady at 4.1% as more people enter the labour force. Hourly wages are now up 2.5% from the same time last year.
  • The US trade deficit widened to US$48.7 billion in October, the worst showing since January. Imports rose 1.6% while exports were unchanged.

The US dollar had a decent week, climbing over 1% as lawmakers south of the border averted another government shutdown and appear to be making progress on tax reform.

OIL & GAS PRICES (USD)

The spread between Canadian Light and WTI widened to almost US$4/bbl this week, more than double the normal average. The heavy oil discount also widened to over US$18/bbl. The WTI discount to Brent is now back above US$6. Backwardation on Brent futures has steepened while backwardation on WTI futures has eased through the first half of next year.

Goldman Sachs raised its oil price forecast on expectations of stronger demand growth, extension of OPEC's production caps, inventory drawdowns and backwardation in the futures curve. The investment firm has raised its 2018 Brent and WTI forecasts to US$62 and US$57.50, respectively, falling to US$59.50 and US$55 per barrel in 2019.

Milder temperatures and an inventory build south of the border helped drag natural gas prices lower this week, falling over 9% in the US, ending Friday at US$2.77/MMBtu. Alberta's AECO gas prices declined 13% for the week to $1.64/GJ. The spread between US and Western Canadian gas remains elevated at US$1.43 per MMBtu.

Strong crack spreads have helped drawdown crude inventories south of the border, resulting in a slow but steady rise in product inventories, particularly gasoline.

US crude production rose 25,000 bbl/day to another record high of 9.7 million bbl/day last week. Production is now up 1.2 million bbl/day since the fall of 2016. Rig counts have been rising steadily since early October, which should support continued growth in US crude output.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

DEC 6, 2017

EIA REPORTS BIG RISE IN PRODUCT INVENTORIES AS REFINERIES CRANK CRUDE THROUGHPUT

 
What's moving energy markets this week:

FACTOR
IMPACT
SUMMARY
GEOPOLITICS
▲ BULLISH
Potential for an oil-workers strike in Nigeria goosed oil prices late in the week, particularly Brent.
USD INDEX
▼ BEARISH
The US dollar had a good week, gaining over 1% on positive labour data and progress on tax reform.
SUPPLY
▼ BEARISH
US output increased to a record 9.7 million bbl/day last week, while Baker Hughes reported another increase in oil rig counts on Friday.
DEMAND
▲ BULLISH
After declining through the fall, China reported a healthy increase in crude imports for the month of November. Markets await two December oil markets reports next week, one from OPEC and another from the IEA.
SENTIMENT
▼ BEARISH
Oil bulls are showing signs of exhaustion, seeming to be easily spooked. Enthusiasm over OPEC's pact extension has largely faded. Brent and WTI remain below recent highs, while Canadian crude prices have broken down to the lows of October.
EQUITY MARKETS

US markets managed to eke out a small gain this week. Dow Transport stocks led the increases, breaking out to new record highs. Small cap stocks were the biggest drag this week. The NYSE, S&P 500, and DJIA hit fresh record highs during the week.

European markets had a great week thanks to a weaker Euro. Chinese markets tumbled this week, with the Hong Kong, Hang Seng and Shanghai markets ending the week about 1% lower.

SECTORS

Markets remained offsensive this week, with discretionary, technology, industrial and financial stocks leading gains on both the TSX and S&P 500

Energy stocks were the biggest drag this week, falling 2.8% in Canada and 0.7% south of the border. TSX energy stocks continue to underperform US counterparts.

ENERGY SECTOR PERFORMANCE

In their latest 2018 Global Oil & Gas Outlook, ratings agency Moody's says the energy sector will continue its "slow recovery," as companies continue to increase production. Looking on the bright side, Moody's says higher levels of activity among E&Ps will trickle down to midstream and energy service providers. However, the company warns not to get too excited about oil prices, forecasting declines into next year due to excessive supply. Moody's also thinks European majors are likely to reinstate their dividends as they return to positive free cash flow in 2018.

On the TSX, midstream stocks were the best performers, while producers and energy service providers ended the week in the red. In US markets, independent refiners had another spectactular week, with most hitting fresh new highs.


TSX ENERGY STOCKS
TSX 300 ENERGY STOCKS

In this week's 2018 budget and production guidance, Husky Energy (HSE) says it plans to increase capital spending to about $3 billion, almost $1 billion more than spent this year. Average upstream production is expected to be in the 320,000 to 335,000 boe/day range, roughly unchanged from 2017. Refinery throughput should increase 7% to a range of 360,000 to 370,000 bbl/day. The company is targeting 400,000 boe/day of total upstream output by 2021 and hinted it may reinstate its dividend.

The National Energy Board has ruled in favour of Kinder Morgan Canada (KML), allowing construction to continue at its Burnaby and Westridge terminals without obtaining two permits related to zoning bylaws and tree clearing from the City of Burnaby. The company also announced a $200 million stock offering to help fund its Trans Mountain Expansion Project. The 8 million shares will be priced at $25 a share.

Enbridge (ENB) announced plans to sell $400 million in preferred shares at a price of $25 a share. The units will yield 4.9% until March 2023. Proceeds will be used to partially fund capital projects, and reduce indebtedness.

This week's notable 2018 capital spending and production forecasts:

  • Gibson Energy's (GEI) Board of Directors has approved a 2018 capital budget of $120-$150 million, and may increase spending to over $200 million based on current commercial discussions.
  • Athabasca Oil Corp (ATH) has set a 2018 budget of $140 million, split evenly between its Light Oil and Thermal Oil divisions. Production is expected to increase 11% to a range of 38,500 to 41,000 boe/day, weighted 87% liquids.
  • Baytex Energy (BTE) announced a 2018 capital budget of $325-$375 million, while full-year production guidance was set at 68,000 to 72,000 boe/day. The company says it will exit this year at about 72,000 to 73,000 boe/day and plans to "minimize additional bank borrowings" next year.
  • Calfrac Well Services (CFW) announced a 2018 capital budget of $132 million, including $104 million of maintenance capital. The company says it has seen a strong improvement in the North American market this year, particularly in the US.
  • Ensign Energy Services (ESI) has set a 2018 capital budget of $64 million, down from $105 million spent this year. About $43 million will be spent on equipment maintenance next year, while $21 million is earmarked for fleet upgrades.
  • Western Energy Services (WRG) announced plans to spend $20 million next year, about $12 million to be spent on maintenance and $8 million on expansion.

New 52-week lows on the TSX include Advantage Oil & Gas (AAV), ARC Resources (ARX),  Bellatrix Exploration (BXE), Birchcliff Energy (BIR), Bonavista Energy (BNP), Enerflex (EFX)Keyera (KEY), Mullen Group (MTL), and Peyto Exploration & Development (PEY).


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

This week's notable US energy news:

  • ExxonMobil's (XOM) 365,000 bbl/day Beaumont refinery in Texas will likely be running at reduced rates through January, after a fire in late November damaged the facility's 110,000 bbl/day crude distillation unit. Repairs are ongoing, but the company did not give an exact timeline for return to normal.
  • Exxon also announced its first Mobil-branded retail gas station in Mexico. The company says it plans to open more than 50 stations in during the first quarter of next year.
  • Williams Partners (WPZ) has successfully placed into service its Virginia Southside II expansion project, the fifth of Transco’s “Big 5” expansions to be placed into service this year. This last expansion will increase Transco's capacity by almost 25% to 2.8 million dekatherms/day.
  • A World Bank panel has ordered the country of Ecuador to pay ConocoPhillips (COP) US$380 million in damages eight years after the government unlawfully seized two oil fields that produce 22,000 bbl/day. Ecuador already paid the company US$75 million earlier this month, with the balance expected to be paid next April.

This week's 2018 capital spending and production forecasts:

  • Kinder Morgan (KMI) says it expects to generate US$4.57 billion in distributable cash flow next year, up 3% from 2017. The company says that's enough to fund its dividend and capital spending program, leaving another US$500 million to potentially buy back shares and boost its dividend 25% annually through 2020. Capital spending on expansion projects is forecasted at US$2.2 billion next year, excluding Kinder Morgan Canada's (TSX:KML) portion.
  • Chevron (CVX) has set a 2018 capital budget of US$18.3 billion, about 4% less than this year. About US$15.8 billion will be spent on oil and gas exploration while US$2.2 billion will be allocated to refining, marketing and petrochemicals.
  • Phillips 66 (PSX) has set a 2018 capital budget of US$2.3 billion, including US$1.4 billion in growth capital and US$900 million for sustaining capital. The company says it will look to re-invest 60% of its cash flow back into the business and return 40% to shareholders. Included in the spending program is US$595 million earmarked for subsidiary Phillips 66 Partners (PSXP).

Around the world this week:

  • TechnipFMC (FTI) and partners Samsung Engineering and Spain's Tecnicas Reunidas have been awarded a US$4.2 billion contract from Bahrain Petroleum Company for expansion and modernization of its Sitra oil refinery from 267,000 to 360,000 bbl/day.
  • Total (TOT) has signed a 10-year agreement to supply 300,000 tons of LNG annually to French shipper CMA CGM, beginning in 2020. CMA CGM will use the LNG to power its container ships. Total also announced its first LNG shipment from its 16.5 million t/y Yamal LNG facility in Northern Russia.
  • Statoil (STO) has submitted an application for the massive Johan Castberg project in the Barents Sea. If approved, Johan Castberg would be the biggest subsea field currently under development, with an estimated price tag of US$5.9 billion. Production is planned for 2022.

Chevron (CVX), Marathon Petroleum (MRC), Phillips 66 (PSX) and Valero Energy (VLO) hit fresh new highs on the S&P 500.  Range Resources (RRC) reached a new 52-week low.


UPGRADES & DOWNGRADES

UPGRADES

  • Athabasca Oil (TSX:ATH): Upgraded from Underperform to Market Perform at BMO Capital.
  • Earthstone Energy (NYSE:ESTE): Upgraded from Neutral to Buy at Seaport Global Securities.
  • Marathon Oil (NYSE:MRO): Upgraded from Neutral to Overweight at Atlantic Securities.
  • MEG Energy (TSX:MEG): Upgraded from Buy to Hold at GMP Securities.
  • Repsol (NYSE:REPYY): Upgraded from Hold to Sell at Deutsche Bank.
  • Royal Dutch Shell (NYSE:RDS/A): Upgraded from Neutral to Outperform at Macquarie.
  • Tamarack Valley Energy (TSX:TVE): Upgraded from Market Perform to Outperform at BMO.

DOWNGRADES

  • Newfield Exploration (NYSE:NFX): Downgraded from Outperform to Market Perform at Wolfe Research.
  • Statoil (NYSE:STO): Downgraded from Neutral to Underperform at Bank of America.
  • Total (NYSE:TOT): Downgraded from Neutral to Underweight at JP Morgan.
  • Trinidad Drilling (TSX:TDG): Downgraded from Strong Buy to Outperform at Raymond James.
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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