Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending March 23, 2018:
  • Markets suffer meltdown as Trump takes on China
  • Loonie gets a boost on inflation fears
  • Oil prices attempt another breakout ...
    ... as Brent breaks through US$70/bbl
  • Heavy oil discount narrows (slightly) to US$23.40
  • Backwardation steepens on oil futures curves
  • TD prefers light oil miners ...
    ... over heavy oil SAGD producers
  • Pipeline stocks get slaughtered, again.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
BULLISH
USD INDEX
BULLISH
  • The US dollar declined again this week, but stopped short of breaking down to new lows.
SUPPLY
BULLISH
DEMAND
NEUTRAL
  • No new news on the demand front this week.
SENTIMENT
BULLISH
  • Net longs rose again this week, indicating much bullishness among traders.
  • Oil prices are now on the verge of breaking out to multi-year highs, with Brent finally managing to climb above US$70 a barrel.
CURRENCIES & BONDS

This week's notable Canadian economic data:

  • Canada's consumer price index (CPI) rose 0.6% in February, bringing the annualized rate from 1.7% to 2.2%. Gains are being led by higher energy costs (+5.3% y/y), particularly gasoline (+12.6% y/y).
  • Retail sales rose 0.3% in January to $49.9 billion, much less than economists were expecting. Weak auto sales were blamed for softness in the data.
  • After contracting 0.2% in December, wholesale sales rose 0.1% in January to $63.3 billion. Higher sales of food, machinery and equipment offset declines in building materials and auto parts.
  • The number of Canadians collecting Employment Insurance (EI) benefits fell by 5,800 in January to 494,200. Declines were led by Quebec, BC and the Atlantic provinces. Ontario and Alberta were roughly unchanged for the month. The number of EI recipients has been falling steadily since October 2016.

Canadian bond yields and the Canadian dollar both rallied this week on higher inflation numbers, despite weak retail and wholesale sales. 

The US Federal Reserve raised the fed funds rate to 1.50-1.75% this week. The US dollar declined after policy makers signalled intentions to raise rate another two times this year, one less than originally telegraphed. The FOMC says inflation remains tepid, outside of food and energy products.

The Trump Administration had another busy week, signing a US$1.3 trillion spending bill and threatening to impose tariffs on US$30 billion worth of Chinese imports. China has threatened to retaliate with its own tariffs and is considering scaling back the purchase of US treasuries. China is by far America's largest foreign creditor, holding US$1.2 trillion in US bonds, or about 19% of all foreign holdings.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
70.45
65.88
67.73
61.53
42.48
44.82
42.53
40.88
39.64
30.41
70.53
66.14
67.73
61.53
44.22

Morgan Stanley reiterated its call for US$75 Brent in the third quarter, noting that much of the global inventory cushion is gone, leaving oil markets more susceptible to geopolitical risk.

According to TD Securities, investors are much better off sticking to the big integrated oil sands miners, particularly Canadian Natural Resources (CNQ) and Suncor (SU). The bank says breakeven costs have come up considerably since the end of last year due to the widening heavy oil discount. TD is assuming a WTI-WCS discount of US$21.75/bbl in 2018, falling to US$19 for next year and beyond. The firm is maintaining its long term WTI and NYMEX gas forecast at US$65/bbl and US$3.25/MMBtu.

Backwardation steepened again this week in both the Brent and WTI futures curves, which should support ongoing declines in inventories. The heavy oil discount narrowed another US$1 this week to US$23.40.

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)

US commercial crude oil inventories fell 2.6 million barrels last week, the first decline in four weeks. Product inventories also declined, but slightly less than analysts were expecting.

According to Baker Hughes, US drillers added 4 oil rigs, for a total of 804. In Canada, the number of oil rigs in operation continues to decline due to spring breakup, falling another 51 rigs this week to 93.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

MAR 21, 2018

Gulf Coast inventories begin to ease while Cushing reports build of 1 million bbls

 
EQUITY MARKETS
    TSX SECTORS
52-WK
    SPX SECTORS
52-WK

Global markets were spooked on fears of a trade war between the US and China. Most US markets posted their steepest weekly decline in two years, falling to four month lows.

The Dow and S&P 500 sit right at their 200-day moving averages, a critical technical support level. Declines were led by large-cap technology names. Energy stocks were the least worst performers this week, helped by higher oil prices.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

Midstream stocks remain the worst performers due to rising rates and changes to US tax laws for MLPs. E&Ps had a very good week relative to the rest of the market.

CANADIAN ENERGY NEWS

This week's notable Canadian energy news:

  • Cenovus Energy (CVE) warned its first quarter production will be curtailed due to a wide discount on heavy oil, pipeline constraints and a slow ramp-up of crude-by-rail volumes. The company says it expects to produce 350,000 to 360,000 bbl/day in the first quarter but left full year guidance unchanged at 364,000 and 382,000 bbl/day.
  • The BC government is offering a number of tax breaks and incentives for new LNG projects on the West Coast, including cheaper power contracts and repealing the former government's LNG tax. BC is hoping Royal Dutch Shell (RDS.A) will give the green light for its $40 billion LNG Canada project, owned jointly with partners PetroChina (PTR), South Korea's KOGAS and Mitsubishi Corp. Shell has pushed back its timeline for a final investment decision, although an announcement is hoped for sometime this fall.
  • Gibson Energy (GEI) announced the sale of its US energy services businesses for $125 million. The company says the move allows them to better focus on its core oil infrastructure business.
  • Enerplus (ERF) announced plans to repurchase up to 17.1 million of its common shares over the next 12 months, representing about 7% of its total outstanding shares. The company says its current share price "does not adequately reflect their underlying value" making share buybacks "a compelling capital allocation opportunity."
  • Engineering and design firm Stantec (STN) announced the acquisition of Norwest Corporation, a privately-held consulting firm specializing in the energy and mining sectors. Norwest will be integrated into Stantec's Energy & Resources business unit. Terms of the deal were not disclosed.
  • TransCanada (TRP) announced the successful completion of its second binding Open Season on new expansion capacity planned for its NOVA Gas Transmission (NGTL) system. The expansion allows for another 1 Bcf/day at the Empress/McNeill Export Delivery Point starting in November 2021. The company says its Open Season was oversubscribed and the average contract term was for 22 years. TransCanada also says it successfully negotiated a $455 million settlement with shippers on the network for 2018 and 2019. The company has now filed an application with the National Energy Board for approval of those commercial terms.  
  • Hedge fund FrontFour Capital Group has sent an open letter to all Obsidian Energy (OBE) shareholders, announcing intentions to nominate four directors at the next AGM. FrontFour owns 6.2% of the company's outstanding shares and would like to see Obsidian divest its non-core assets and reduce G&A expenses. The activist investor also says it plans to vote against a planned 1-for-3 share consolidation, insisting share prices can be improved without a reverse stock split. Obsidian says it is disappointed with FrontFour's actions.
  • Pembina Pipeline (PPL) announced the issuance of $700 million of senior unsecured medium-term notes. Proceeds will be used to repay short-term indebtedness, capital spending and general corporate purposes.
US ENERGY NEWS

This week's notable US energy news:

  • ExxonMobil (XOM) says it is mulling a 450,000 t/yr expansion of its US Gulf Coast polypropylene production capacity in order to meet growing demand for high-performance plastics. A final investment decision is expected later this year with start-up planned as early as 2021.
  • Credit ratings agency DBRS is warning Enbridge (ENB) that US subsidiary Enbridge Energy Partners (EEP) is at risk of being downgraded, as revenues could fall by as much as US$100 million this year due to recent changes made to tax credits for master limited partnerships (MLPs). Last week, US regulators ruled that MLPs will no longer be able to claim an income tax allowance for interstate pipelines.
  • Calgary-based NOVA Chemicals has signed a non-binding MOU to develop an ethylene export terminal somewhere in the US Gulf Coast, in partnership with Energy Transfer Partners (ETP). If approved, the terminal could begin operation by the middle of 2020, exporting 800,000 tons of ethylene annually. NOVA is owned by the UAE's national wealth fund.
  • Cheniere Energy (LNG) accuses federal regulators of exaggerating risks to the public when it ordered the shutdown of two tanks back in February at its Sabine Pass LNG terminal in Louisiana. The company says the public was not at risk when two of its tanks were found leaking into a containment ditch. Cheniere is permitted to continue LNG exports from its other three tanks. Each tanks can store up to 3.4 billion cubic feet of natural gas.
  • Jacobs Engineering (JEC) announced a pre-feasibility contract for Kuwait Petroleum Corp. to evaluate how to best expand domestic refining capacity and long-term strategic plans for downstream production, stretching out as far as 2040. Jacobs says the study could eventually lead to a detailed engineering contract. Terms of the deal were not disclosed.
  • SandRidge Energy (SD) has rejected Midstates Petroleum's (MPO) all-stock offer, calling the bid "highly dilutive." Midstates says it is exploring its options with respect to the deal.
  • BP Midstream (BPMP) reported fourth quarter revenues of US$27.6 million, up from US$21.5 million for the same quarter last year.

Across the pond this week:

  • French energy major Total (TOT) has signed two new 40-year concession agreements with the UAE government and the Abu Dhabi National Oil Company. Total has been granted a 20% interest in the new Umm Shaif & Nasr concession and 5% in the Lower Zakum concession for US$1.45 billion. The new blocks will add 80,000 bbl/day of production this year.
  • Apache Corp (APA) announced a "significant" discovery at its 100%-owned Garten block in the UK North Sea. Recoverable resources are estimated at more than 10 million barrels of light oil. This is the company's fourth discovery in the region in three years.
  • Australian regulators have approved ConocoPhillip's (COP) development of the Barossa gas condensate field in the eastern Timor Sea. Barossa will supply natural gas to the Darwin LNG facility, starting in 2023.
  • State-owned PetroVietnam has ordered Spain's Repsol (REPYY) to suspend drilling off its southeast coast, bowing to pressure from neighbouring China. Repsol has estimated that the prospect, located in the South China Sea, contains 45 million barrels of oil and 172 billion cubic feet of natural gas. Repsol and partners stand to lose as much as US$200 million in sunk costs. This is the second time Repsol has been ordered to suspend drilling in the region.
  • Royal Dutch Shell (RDS.A) announced the sale of its 19.6% stake in Iraq’s West Qurna 1 oil field to a Japan's Itochu Corporation for US$406 million. Upon closing of the deal, Shell will be completely divested of West Qurna 1.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
GAINERS
• Advantage Oil & Gas (AAV)
• Birchcliff Energy (BIR)
• Crew Energy (CR)
• Gibson Energy (GEI)
• Tourmaline Oil (TOU)
• Anadarko Petroleum (APC)
• Concho Resources (CXO)
• ConocoPhillips (COP)
• EOG Resources (EOG)
• Marathon Oil (MRO)
12-MO
HIGHS
• Enerplus (ERF) • Marathon Petroleum (MPC)
ALL-TIME
HIGHS
• None • None
GOLDEN
CROSSES
• None • None
BEARISH INDICATORS
TSX
S&P 500
TOP 5
LOSERS
• Cenovus Energy (CVE)
• Enbridge (ENB)
• Ensign Energy Services (ESI)
• Inter Pipeline (IPL)
• TransCanada (TRP)
• Baker Hughes (BHGE)
• Cabot Oil & Gas (COG)
• EQT Corp (EQT)
• Kinder Morgan (KMI)
• Williams Co (WMB)
12-MO
LOWS
• Enbridge (ENB)
• Ensign Energy Services (ESI)
• Imperial Oil (IMO)
• Inter Pipeline (IPL)
• Mullen Group (MTL)
• Exxon Mobil (XOM)
• Kinder Morgan (KMI)
ALL-TIME
LOWS
• None • None
DEATH
CROSSES
• Canadian Natural Resources (CNQ)
• Crescent Point (CPG)
• Andeavor (ANDV)
• Devon Energy (DVN)
• Exxon Mobil (XOM)
• Williams Co (WMB)
ANALYST RATINGS

UPGRADES

  • Birchcliff Energy (TSX:BIR): Upgraded from Buy to Action List Buy at TD Securities.
  • DCP Midstream Partners (NYSE:DCP): Upgraded from Neutral to Buy at BofA.
  • Dominion Midstream Partners (NYSE:DM): Upgraded from Underweight to Equal Weight at Morgan Stanley.
  • Gibson Energy (TSX:GEI): Upgraded from Underperform to Neutral at CIBC.
  • Kinder Morgan (NYSE:KMI): Upgraded from Neutral to Buy at BofA.
  • MPLX (NYSE:MPLX): Upgraded from Equal Weight to Overweight at Morgan Stanley.
  • Occidental Petroleum (NYSE:OXY): Upgraded from Hold to Buy at Deutsche Bank.
  • ONEOK (NYSE:OKE): Upgraded from Hold to Buy at Jefferies Group.
  • PraireSky Royalty (TSX:PSK): Upgraded from Hold to Buy at TD Securities.
  • Royal Dutch Shell (NYSE:RDS.A): Upgraded from Hold to Buy at Societe Generale.

DOWNGRADES

  • Buckeye Partners (NYSE:BPL): Downgraded from Overweight to Equal Weight at Morgan Stanley.
  • Raging River Exploration (TSX:RRX): Downgraded from Action List Buy to Buy at TD Securities.
  • TC Pipelines (NYSE:TCP): Downgraded from Neutral to Underperform at BofA.
  • TransCanada (TSX:TRP): Downgraded from Outperform to Market Perform at Wells Fargo.
NEXT WEEK'S EVENTS

Monday:

Tuesday:

Wednesday:

Thursday:

  • January GDP by industry released by StatsCan @ 8:30am ET
  • February industrial product and raw materials prices released by StatsCan @ 8:30am ET
  • EIA Weekly Natural Gas Storage Report released @ 10:30pm ET
  • Baker Hughes Rig Count released @ 1:00pm ET (holiday schedule)
  • Last trading day for Brent (May contract) and RBOB gasoline (April contract)

Friday:

  • US/Cdn markets closed for Good Friday
UPDATED: EVERY WEEKEND
NOTES:
  • CRB = THOMSON REUTERS/CORECOMMODITY CRB INDEX
  • 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 PERFORMANCES 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
  • FUTURES & OPTIONS CONTRACTS FROM ICE/CFTC (WEEKLY DATA FOR PREVIOUS TUESDAY)
  • CHARTPACKS COURTESY STOCKCHARTS.COM
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