Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending February 9, 2018:
  • 2-year bull run comes to an end ...
  • ... as the VIX roars back to life
  • Money flows out of stocks and commodities ...
  • ... and into the greenback
  • EIA ups forecast for US oil output ...
  • ... and oil prices
  • 50% off sale on Western Canadian Select
  • Energy stocks slide 15% in 2 weeks
  • TD warns Western Canada "awash" in natural gas
  • International oil majors hit Q4 earnings out of the park.
CURRENCIES & BONDS

This week's Canadian economic data:

  • After a blow-out jobs report in December, StatsCan reported a decline of 88,000 jobs for the month of January, mostly part-time, and mostly in the provinces of Ontario and Quebec. The unemployment rate ticked higher last month, rising 0.1% to 5.9%.
  • The national trade deficit widened in to $3.2 billion in December, up from a $2.7 billion deficit in November. Imports and exports both rose 1.5% and 0.6%, respectively, led by higher imports and exports of energy products. Crude imports rose 23.9%, while imports of refined products rose 17.8%. Crude exports rose 7.4% in December while exports of natural gas rose 26.6%.

South of the border this week:

  • The US trade deficit widened to US$53.1 billion in December, up from US$50.4 billion the previous month, the worst showing since October 2008. Exports rose 1.8% while imports gained 2.5%.
  • US lawmakers once again narrowly averted another government shutdown, reaching agreement on a two-year budget deal. 
  • New jobless claims fell to a 45-year low this week while the ISM non-manufacturing index hit a 12-year high, helping US bond yields edge closer to a 4-year high, before retreating by the end of the week.

Bank of England Governor Mark Carney left rates unchanged this week but warned that investment in the UK has fallen to its lowest level in 50 years. The decline in sterling post-Brexit has spiked inflation closer to 3%, above the bank's 2% target. As the economy moves into excess demand, Carney says it will likely be necessary to raise rates gradually. The pound sterling initially rose on the news but ended the week 2% lower.

OIL & GAS PRICES

In this month's Short-Term Energy Outlook, the Energy Information Administration (EIA) says it expects Brent to average US$62 a barrel in both 2018 and 2019, revised higher from a previous forecast of US$57. The expected discount for WTI was unchanged at US$4 a barrel over the next 2 years.

The agency also says it expects natural gas prices to moderate due to rapidly rising output. Henry Hub spot prices are now expected to average US$3.20/MMBtu for the full year, up from a previous forecast of US$3.12, falling to US$3.08 in 2019.

Oil prices continue to decline from the highs of late January, ending the week about 10% lower. The spread between Brent and WTI continues to narrow, now sitting at about US$3.50 a barrel. The shrinking gap is being blamed for a drop in US crude exports.

The heavy oil discount touched US$30 a barrel earlier in the week (now a 50% discount to WTI), ending Friday at just under US$29.

CRUDE OIL FUTURES CURVES
BRENT
WTI
█ OIL PRICE (USD/BBL)   █ MONTH 3   █ MONTH 5 (VS NEAR MONTH)
MANAGED MONEY: FUTURES & OPTIONS
BRENT
WTI
█ OIL PRICE (USD/BBL)   █ LONG   █ SHORT █ NET LONG (1000 BBL CONTRACTS)

The EIA says the US produced 10.2 million bbl/day in January, revised higher by about 300,000 bbl/day from previous estimates. For the full year 2018, the agency now expects an average annual production of 10.6 million bbl/day, up from a previous forecast of 10.0 million bbl/day. For 2019, national output has also been bumped up to 11.2 million bbl/day.

After contracting about 180 million barrels in 2017, the EIA says it expects global inventories to rise by about 70 million barrels in both 2018 and 2019. The EIA also lowered its forecast for US oil demand growth this year from 470,000 to 450,000 bbl/day due to expectations for improved energy efficiency.

The number of oil rigs operating in the US rose by 26 this week to 791, the highest since April 2015. Canada lost 13 rigs, falling to a total of 221.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

FEB 7, 2018

Crude stockpiles start rising again as production surges

 
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
NEUTRAL
  • No new news on the geopolitical front this week.
USD INDEX
BEARISH
  • After sliding through the end of last year and into January, the greenback staged a decent rally this week, gaining 1.5%.
SUPPLY
BEARISH
  • The EIA once again revised its forecast for US oil output, now expected to average 10.6 million bbl/day this year, rising to 11.2 million in 2019.
DEMAND
BEARISH
  • US products consumption has remained relatively strong through the winter, holding just below 21 million bbl/day.
  • However, the EIA warned US consumption will be flat to lower at best, held back by improvements in energy efficiency.
SENTIMENT
BEARISH
  • After rising to record levels, net longs in futures and options have started to ease, particularly for WTI.
  • Oil prices are officially in bear market territory, now down 10% from the highs of late January.
  • WTI also broke through the US$60 support level on Friday.
  • The Crude Oil Volatility Index continues to rise, now up 50% from the lows of late December.
EQUITY MARKETS
    TSX SECTORS
52-WK
    S&P 500 SECTORS
52-WK

US markets hit bear market territory this week, declining 10% from the highs of late January. Despite several attempts to rally, markets ended the week about 5% lower as the Volatility Index (VIX) continues to spike higher. This is the second consecutive weekly decline.

Global markets also moved lower. Chinese markets were this week's worst performers, losing an average of about 10% for the week.

Declines were broadly based on both US and Canadian exchanges, with the biggest declines seen in energy stocks. The Healthcare sector was the only bright spot on the TSX, thanks to big gains in cannabis stocks.

ENERGY SECTOR PERFORMANCE
ENERGY SUB-SECTORS
    TSX ENERGY
    S&P 500 ENERGY
█ INTEGRATED  █ MIDSTREAM  █ E&P LG CAP █ E&P MD CAP  █ E&P SM CAP  █ SERVICES  █ REFINERS

The Canadian energy basket is now back to the lows of last September, down 16% from the highs of mid-January. The US energy sector is also down 14% for the same period.

CANADIAN ENERGY STOCKS

This week's Canadian energy news:

  • MEG Energy (MEG) announced the sale of its 50% stake in the Access Pipeline and Stonefell Terminal to Wolf Midstream for $1.52 billion plus capital commitments of $90 million for future expansions. MEG says it will use those funds to "pursue highly economic growth projects" in the oil sands.
  • Kinder Morgan Canada (KML) has warned the province of BC it is gearing up for a "technical and legal" review of the province's latest threat to cap bitumen exports. The company says the plans are in conflict with the federal review process already completed. Ottawa has confirmed the pipeline and its exports are within federal jurisdiction and it stands by its approval of the project.
  • Cenovus Energy (CVE) has hired Sayer Energy Advisors to help it sell a number of light oil and oil sands assets in Alberta. The light oil assets produce a small amount of oil and gas, while the oil sands assets are all non-producing. 
  • Perpetual Energy (PMT) says it exited 2017 production at about 12,300 boe/day, 54% higher than the previous year. Production and operating costs averaged $3.45/boe in Q4 and $4.52/boe for the full year, down 33% from 2016. Total proved reserves increased 22% to 42.8 million boe. The company has set a 2018 capital budget of $23 to $27 million, 30% lower than previously planned.
  • Crew Energy (CR) announced a 2018 capital budget of $80 to $85 million, while production is expected to average between 23,500 to 24,500 boe/day, weighted 24% liquids. The company also annouced a 14% increase in its proved plus probable reserves.
  • Frontera Energy (FEC) has suspended operations at its Cubiro oilfield in northeastern Colombia after its workers were threatened by the National Liberation Army. The field produces about 3,600 bbl/day.
  • Prairie Provident Resources (PPR) has revised its 2018 production guidance to range of 5,200 to 5,600 boe/day, weighted about 70% liquids. The company plans to spend $26 million in capital this year.
  • Parex Resources (PXT) announced a 45% increase in its proved plus probable reserves, rising to 196 million boe, weighted 99% liquids.
  • Bonterra Energy (BNE) also announced a 5% increase in its proved plus probable reserves, rising to 99.8 million boe, weighted 70% liquids.
  • Kelt Exploration (KEL) announced a 21% increase in its proved plus probable reserves, rising to 194 million boe. Full year production averaged 22,130 boe/day in 2017, up 6% from the previous year.

This week's fourth quarter earning results:

  • Suncor Energy (SU) reported record funds from operations for the fourth quarter of last year, rising to $3 billion. Total upstream production dipped slightly to 736,000 boe/day, as higher output from the Firebag in-situ facility and its Libyan operations offset declines in offshore oil fields. Full year 2018 production guidance was set at 740,000 to 780,000 boe/day, reflecting additional volumes out of Fort Hills and Hebron. Suncor's Board of Directors boosted its quarterly dividend 12.5% to $0.36 per share.
  • Funds from operations at MEG Energy (MEG) more than doubled in Q4 to $192 million, while revenues rose 38% to $755 million. Full yer production averaged 80,774 bbl/day but the company says it exited 2017 closer to 94,000 bbl/day. Operating costs declined to a record low of $6.84 per barrel. The company basically broke even in the fourth quarter bringing full year 2017 net earnings to $188 million.
  • ARC Resources (ARC) reported a net income of $74 million, up 52% from the previous quarter as funds from operations increased to $221 million. Q4 production averaged 133,409 boe/day, up 13% y/y. Full year 2017 production averaged about 123,000 boe/day, up 3.5% from 2016. The company also added another 145 million boe of proved plus probably reserves.
  • Trucking and logistics firm Mullen Group (MTL) reported a 15% increase in Q4 revenues, rising to $296 million. Total profits for the quarter were reported at $46 million, up 14% from the same time last year.

This week's market technicals:

BULLISH INDICATORS
   12-MONTH HIGHS:
  • none
   ALL-TIME HIGHS:
  • none
   GOLDEN CROSS:
  • none
BEARISH INDICATORS
   12-MONTH LOWS:
  • Cdn Natural Res (CNQ)
  • Advantage O&G (AAV)
  • Altagas (ALA)
  • ARC Resources (ARX)
  • Birchcliff Energy (BIR)
  • Bonavista Energy (BNE)
  • Enbridge (ENB)
  • Enbridge Income Fund (ENF)
  • Enerflex (EFX)
  • Gibson Energy (GEI)
  • Imperial Oil (IMO)
  • Inter Pipeline (IPL)
  • Keyera (KEY)
  • Mullen Group (MTL)
  • Pason Systems (PSI)
  • Pembina Pipeline (PPL)
  • Peyto Exploration (PEY)
  • Raging Rive (RRX)
  • Seven Gen (VII)
  • Tourmaline Oil (TOU)
  • TransCanada (TRP)
  • Whitecap Res (WCP)
   ALL-TIME LOWS:
  • Crew Energy (CR)
   DEATH CROSS:
  • Freehold Royalities (FRU)
  • Raging River (RRX)
US ENERGY STOCKS

This week's US energy news:

  • ExxonMobil (XOM) says it has completed construction and begun commissioning its new 1.5 million ton/year ethane cracker at its Baytown complex in Mont Belvieu, Texas. The ethylene will be used as feedstock for the company's Mont Belvieu plastics plant.
  • ExxonMobil also announced the addition of 2.7 billion barrels of proved oil and gas reserves in 2017, bringing total liquids from 53% to 57%. Most of those added barrels came from Abu Dhabi, Guyana, Mozambique and the Permian Basin in the US.
  • Midstates Petroleum (MPO) has sent a letter to Sandridge Energy's (SD) Board of Directors, asking them to consider a friendly all-stock merger. MPO says the combined company would have a market-cap of over US$1 billion and save US$70 million annually. Sandridge's Board of Directors has fired its CEO James Bennett in light of the company's "new strategic direction," sending a letter to its shareholders outlining its new vision. The company says it will review Midstates' merger proposal. Sandridge has been under pressure from activist investor Carl Icahn to shuffle its Board of Directors and re-write its bylaws.
  • CNOOC (CEO) announced the start-up of its Stampede Field, located in the deepwater Gulf of Mexico. The facility has a design capacity of 80,000 bbl/day of oil and 40 MMcf/day of natural gas. CNOOC says it plans to ramp up production through 2018. The field is jointly owned by Hess (HES), Chevron (CVX), Statoil (STO) and Unocal.
  • Cheniere Energy (LNG) has signed a 20+ year supply agreement with China National Petroleum (PTR) to purchase 1.2 million tonnes/year of LNG through 2043. The purchase price will be indexed to the price of Henry Hub price plus a fixed component.
  • WPX Energy (WPX) has agreed to sell its holdings in the San Juan basin for US$700 million. The buyer was not disclosed.
  • CNX Resources (CNX) announced a 21% increase in total proved reserves, rising to 7.6 trillion cubic feet equivalent, weighted about 6% liquids.
  • Rex Energy (REXX) says it produced 205.3 MMcfe/day in the fourth quarter, weighted 40% liquids. Full-year 2017 production was 184.5 MMcfe/day, down 5.5% from the previous year.
  • Marathon Petroleum (MPC) announced plans to redeem US$600 million in outstanding 2.7% senior notes due on Dec. 14, 2018.

This week's fourth quarter earnings:

  • Anadarko Petroleum (APC) reported a net income of US$976 million, versus a loss of US$515 million for the same time last year. The company booked a one-time gain of US$1.1 billion, mostly on changes to the US tax code, and cut its 2018 capital budget by US$100 million, to a new range of US$4.1 to US$4.5 billion. Anadarko also raised its quarterly dividend from US$0.05 to US$0.25 per share and increased share buy-backs by another US$500 million to US$3 billion.
  • Hess (HES) reported a net loss of US$2.68 billion for the fourth quarter, including a US$1.7 billion write-down on facilities in the Gulf of Mexico and a downward revision in long-term oil prices. Revenues declined 6.5% to US$1.3 billion.
  • Pioneer Natural Resources (PXD) posted a fourth quarter profit of US$655 million, much better than analysts were expecting. The company averaged 272,000 boe/day in 2017, up 16% from the previous year. Pioneer says it plans to divest its Eagle Ford Shale, South Texas, Raton and West Panhandle assets sometime this year, making the Pioneer a "Permian Basin pure play." Pioneer's 2018 capital spending budget has been set at US$2.9 billion.
  • Plains All American (PAA) reported a net income of US$191 million for the fourth quarter, up 52% from the same quarter last year. The company has allocated $1.4 billion in expansion capital for this year and says it plans more assets sales in 2018.
  • Oilfield services firm Patterson-UTI Energy (PTEN) reported a fourth quarter net income of US$195 million, including a one-time gain of US$219 million on US tax reform. Total revenues more than tripled to US$787 million.

This week's US midstream news:

  • Kinder Morgan (KMI), DCP Midstream (DCP) and Targa Resources (TRGP) announced a binding open season for its Gulf Coast Express Pipeline transporting 220,000 Dth/day of natural gas from the Waha area to Agua Dulce hub in Texas. The pipeline has an overall capacity of 1.98 Bcf/day at an estimated cost of US$1.85 billion.
  • NuStar Energy (NS) announced a US$738 million all-stock merger with NuStar GP Holdings (NSH). NuStar Energy says it plans to issue 23.6 million new shares to help finance the deal and cut its dividend from US$1.095 to US$0.60 per share. Upon closing, NSH becomes a wholly-owned subsidiary of NS. NS shares tanked on the news, reaching a new all-time low.
  • Sunoco (SUN) has agreed to pay a US$12.6 million fine in Pennsylvania over alleged environmental violations during the construction of its Mariner East 2 natural gas pipeline. The company says it disagrees with the judgement but will pay the settlement to avoid litigation and allow construction to resume. This is one of the largest penalties ever levied by the state's Department of Environmental Protection. Once completed, the US$2.5 billion expansion will expand capacity on Mariner East to 345,000 bbl/day of NGLs from the Marcellus and Utica shale to various locations in Pennsylvania. Sunoco is a subsidiary of Energy Transfer Partners (ETP).
  • CNX Resources (CNX) announced the drop-down of a 95% stake in its Shirley-Pennsboro gathering system to CNX Midstream Partners (CNXM) for US$265 million in cash. 

Across the pond this week:

  • Full year 2017 profits more than doubled at BP (BP) to US$6.2 billion on higher production and higher oil prices. Revenues rose to US$67.8 billion, up from US$51 billion for the same time last year and much better than analysts were expecting. Full-year production rose 10% to 3.6 million boe/day. CEO Bob Dudley called 2017 "one of the strongest years" in the company's recent history. Despite higher oil prices, BP is sticking to its capital spending plan of US$15 to US$17 billion annually through 2021.
  • Statoil (STO) posted a fourth quarter profit of almost US$4 billion, better than analysts' forecasts. The company increased its 2018 capital spending budget to US$11 billion, up from a previous estimate of US$9.4 billion. Q4 production averaged 2.134 million boe/day, bringing 2017 output to a new record high. Statoil also says it plans to raise its dividend by 4.5% to US$0.23 per share.
  • French energy major Total (TOT) reported an adjusted net profit of US$10.6 billion for the full year 2017, up 28% from the previous year. Production rose 4.6% to 2.566 million boe/day. Total says it is planning about US$2 billion in acquisitions this year and has finally begun restaffing after a three-year freeze. The Board of Directors has proposed increasing its dividend 10% and buy back up to US$5 billion shares through 2020. This year's capital spending program is expected to range between US$15 and US$17 billion.
  • Italian energy major Eni (E) announced the discovery of a gas formation off the coast of Cyprus, said to contain "excellent reservoir characteristics." The size of field has yet to be confirmed. The block is owned jointly with Total (TOT).

This week's market technicals:

BULLISH INDICATORS
   12-MONTH HIGHS:
  • none
   ALL-TIME HIGHS:
  • none
   GOLDEN CROSS:
  • none
BEARISH INDICATORS
   12-MONTH LOWS:
  • Apache (APA)
  • Baker Hughes (BHGE)
  • Chesapeake Energy (CHK)
  • EQT Corp (EQT)
  • Exxon Mobil (XOM)
  • Kinder Morgan (KMI)
   ALL-TIME LOWS:
  • Range Resources (RRC)
   DEATH CROSS:
  • none
UPGRADES & DOWNGRADES

UPGRADES

  • Anadarko Petroleum (NYSE:APC): Upgraded from Neutral to Outperform at Macquarie.
  • Chevron (NYSE:CVX): Upgraded from Equal Weight to Overweight at Barclays and from Underperform to Sector Perform at RBC.
  • Cimarex Energy (NYSE:XEC): Downgraded from Hold to Buy at SunTrust Banks.
  • Enerflex (TSX:EFX): Upgraded from Buy to Action List Buy at TD Securities.
  • Gibson Energy (TSX:GEI): Upgraded from Neutral to Outperform at Credit Suisse.
  • Husky Energy (TSX:HSE): Upgraded from Hold to Buy at TD Securities.
  • MEG Energy (TSX:MEG): Upgraded from Underperform to Market Perform at Raymond James.
  • Mullen Group (TSX:MTL): Upgraded from Sector Perform to Outperform at National Bank.
  • Southwestern Energy (NYSE:SWN): Upgraded from Neutral to Buy at B. Riley.
  • Suncor Energy (TSX:SU): Upgraded from Hold to Buy at TD Securities and from Neutral to Overweight JPMorgan Chase.
  • Total (NYSE:TOT): Upgraded from Market Perform to Outperform at Sanford C. Bernstein.

DOWNGRADES

  • Chevron (NYSE:CVX): Downgraded from Buy to Neutral at Goldman Sachs Group.
  • Concho Resources (NYSE:CXO): Downgraded from Buy to Hold at SunTrust Banks.
  • Contango Oil & Gas (NYSE:MCF): Downgraded from Buy to Neutral at Ladenburg Thalmann Financial Services.
  • ExxonMobil (NYSE:XOM): Downgraded from Overweight to Underweight at Barclays.
  • Kosmos Energy (TSX:KOS): Downgraded from Outperform Sector to Perform at RBC.
  • Marathon Petroleum (NYSE:MPC) Downgraded from Buy to Hold at Jefferies Group.
  • Pioneer Natural Resources (NYSE:PXD): Downgraded from Hold to Buy at SunTrust Banks.
  • Southwestern Energy (NYSE:SWN): Downgraded from Buy to Neutral at Ladenburg Thalmann Financial Services.

 

NEXT WEEK'S EVENTS

Monday:

  • OPEC Monthly Oil Market Report: February 2018
  • 2017/Q4 earnings: North American Tankers

Tuesday:

  • IEA Monthly Oil Market Report: February 2018
  • Credit Suisse 23rd Annual Energy Summit kicks-off in Vail, CO
  • Titanium Corp AGM
  • API Weekly Statistical Bulletin released at 4:30pm ET
  • Last trading day for WCS, Edmonton Condensate and Canadian Light (March contracts)

Wednesday:

Thursday:

Friday:

  • Baker Hughes Rig Count released @ 1:00pm ET
  • 2017/Q4 earnings: Enbridge, Spectra
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 (INCL. NEW HIGHS & LOWS) EXCLUDE DIVIDENDS
  • SECTOR & SUBSECTOR PERFORMANCE WEIGHTED BY MARKET CAP
  • GOLDEN CROSS: 10-WK SMA CROSSES ABOVE 40-WK SMA
  • DEATH CROSS: 10-WK SMA CROSSES BELOW 40-WK SMA
  • 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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