Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending March 29, 2018:
  • January GDP hit by shutdowns in the oil sands
  • Cdn oil and condensate prices stage a good recovery in March
  • Barclays not bullish on future oil prices
  • Goldman makes the case for Big Oil stocks
  • Saudi Arabia and Russia ponder long term romance.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
NEUTRAL
  • No new news on the geopolitical front this week.
USD INDEX
NEUTRAL
  • The US dollar gained almost 1% this week but remains stuck in a very narrow trading range.
SUPPLY
BULLISH
  • Saudi Crown Prince Mohammed bin Salman says his kingdom and Russia are considering moving from a short-term production pact to 10-20 year agreements, in an effort to reduce volatility.
  • The EIA reported yet another gain in US crude oil production, with output out of the Lower 48 rising to 9.9 million bbl/day, while total US production reached 10.43 million bbl/day. However, the number of oil rigs in service appears to have levelled out at about 800 since early February.
DEMAND
NEUTRAL
  • No new news on the demand front this week.
SENTIMENT
NEUTRAL
  • Oil prices remain stuck in a narrow trading range, with Brent holding about US$70 and WTI near US$65 a barrel.
CURRENCIES & BONDS

This week's Canadian economic data:

  • The industrial product price index (IPPI) rose by 0.1% in February, despite a 1.8% decline in energy prices. Ex-energy, IPPI rose 0.3%.
  • Following a 3.4% gain in January, the raw materials price index (RMPI) declined 0.3% in February, again led lower by crude oil prices. Excluding crude, RMPI rose 0.9% for the month.
  • Average weekly earnings were reported $996 in January, unchanged from the previous month. Compared to the same time last year, weekly earnings are now up 3.2%.
  • Real GDP contracted 0.1% in January, blamed mostly on unplanned maintenance shutdowns in the oil sands. A slowdown in the real-estate sector also contributed to the declines.

In contrast, fourth quarter GDP in the US grew at an annualized rate of 2.9%, up from a previous estimate of 2.5%. The US dollar gained almost 1% this week but remains stuck in a very narrow trading range. Long term rates posted sharp declines this week, bringing the yield curve to a 10-year low of 0.47%.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
70.27
64.94
65.64
60.54
43.04
44.82
42.53
40.88
39.64
30.41
70.53
66.14
67.73
61.53
44.22

Barclays is forecasting an average WTI price of US$58 a barrel in the second quarter, falling to US$51 in the third and fourth quarters. Brent crude is expected to drop from US$62 to US$57 by the end of the year. The bank says geopolitical risks are boosting prices in the short term but the markets will return to being oversupplied in the latter half of 2018.

China began trading yuan-denominated crude oil contracts in Shanghai this week, allowing foreigners to buy and sell Chinese commodities, a first for the country. Trading houses Glencore and Trafigura participated in the initial offering, as did most of China's national oil companies. The country hopes its crude oil contracts will soon become a global benchmark.

Oil prices averaged as follows for the month of March (change m/m):

  • Brent: US$66.72 +0.99 (+1.5%)
  • WTI: US$62.77 +0.59 (+0.9%)
  • Edmonton Condensate: US$64.84 +2.95 (4.8%)
  • Cdn Light: US$58.60 +2.34 (+4.2%)
  • WCS: US$38.26 +4.37 (+12.9%)

The heavy oil discount narrowed by US$3.78 in March to an average of US$24.52 per barrel.

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)

Baker Hughes reported a decline in oil rig counts this week, falling by 7 in the US and 22 in Canada, bringing the total to 797 and 71, respectively.

The US Department of Energy sold up to 7 million barrels of crude from its Strategic Petroleum Reserves this month, at an average price of US$63 a barrel. Buyers include Valero (VLO), Phillips 66 (PSX), Marathon Petroleum (MPC), Motiva and trading house Trafigura.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

MAR 28, 2018

GULF COAST INVENTORIES FALL ANOTHER 5 MILLION BARRELS AS STOCKPILES CONTINUE TO BUILD IN CUSHING

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

After a Trump-induced meltdown last week, most global markets posted gains for the week. In US markets, all sectors ended the week higher, led by staples and utilities on falling long-term bond yields. 

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

The energy sector posted modest gains on both the TSX and S&P 500 this week. Canadian midstream stocks managed to stage a nice rally, bouncing off very oversold levels.

Goldman Sachs says higher oil prices and lower operating costs have left the world's largest oil majors with plenty of cash, not yet reflected in their share prices. Goldman recommends "Big Oil's reborn Seven Sisters," which include BP (BP), Royal Dutch Shell (RSD.A), Chevron (CVX) and ExxonMobil (XOM).

CANADIAN ENERGY NEWS

The Federal Court of Appeal will not hear an appeal from the BC government and various Lower Mainland municipalities on a ruling by the National Energy Board (NEB) that allows Kinder Morgan Canada (KML) to bypass some municipal permits during the construction of its Trans Mountain Expansion. The city of Burnaby says it will likely now take the matter to the Supreme Court of Canada. Another court ruling is pending on the validity of the NEB's approval of the project. Kinder Morgan says it has completed its site preparation work at both the Westridge and Burnaby terminals.

Husky Energy (HSE) faces up to $1 million in provincial fines related to a July 2016 pipeline leak into the North Saskatchewan River. The province of Saskatchewan alleges that Husky did "unlawfully permit the discharge of a substance to the environment that caused an adverse effect." The company now faces a total of 10 charges over the incident. Court proceedings have been adjourned until June 21.

Enbridge Income Fund (ENF.UN) and Pembina Pipeline (PPL) announced a binding open season for a 25% expansion of its Alliance Pipeline. The expansion will allow for another 400 MMcf/day of natural gas to be delivered from BC, Alberta and North Dakota into the Chicago market. The $2 billion expansion has an in-service date of late 2021.

US ENERGY NEWS

This week's notable US energy news:

  • Concho Resources (CXO) has agreed to buy rival RSP Permian (RSPP) for US$9.5 billion. the all-stock deal represents a 30% premium to RSPP's share price prior to the announcement. The new company now becomes one of the most active players in the Permian Basin. The transaction has been unanimously approved by both boards of directors.
  • Devon Energy (DVN) says it's looking to sell more assets and simplify its portfolio in the SCOOP/STACK, Permian and Rocky Mountain shale basins. CEO Dave Hager says he wants the company to be leaner and more efficient, and has no plans to increase capital spending despite higher oil prices.
  • Williams Partners (WPZ) announced the start of service on the second phase of its Garden State Expansion Project, which forms part of its Transco pipeline network, which transports 180 MMBtu/day of natural gas in the state of New Jersey.
  • Targa Resources (TRGP) announced a long-term agreement for natural gas gathering and processing in the Delaware Basin. The company also announced an extension of its Grand Prix natural gas liquids pipeline into Oklahoma.
  • Pioneer Natural Resources (PXD) announced the sale of a portion of its Eagle Ford assets to Sundance Energy for US$102 million. The assets produce about 1,100 boe/day.
  • Anadarko Petroleum (APC) warned this week that service costs in the Permian Basin will rise as much as 10 to 15% this year. CEO Al Walker says higher oil prices will put upward pressure on operating costs.

Around the world this week:

  • ExxonMobil (XOM) and Royal Dutch Shell (RDS.A) came up big winners in Brazil's 15th deepwater auction. Shell secured 4 exploration blocks, boosting its presence to 18, while Exxon was awarded 8 additional blocks, bringing its total in the country to 24. Other big winners include Chevron (CVX) and Germany's Wintershall.
  • The Dutch government announced plans to phase out production at the Groningen field by 2030 due to ongoing concerns over small but damaging earthquakes. Gronigen is operated by a joint-venture between Shell (RDS.A) and ExxonMobil (XOM), and is the largest natural gas field in Europe. Production has already been cut in half from its peak output of 54 billion cubic meters in 2013. The government says it will look for other sources of energy.
  • Engineering firm TechnipFMC (FTI) was awarded an EPCI contract for Shell's Gumusut-Kakap Phase 2 Project, located off the coast of Malaysia. Terms of the deal were not disclosed.
  • Jacobs Engineering (JEC) was also awarded an EPC contract from Saudi Aramco for a 600,000 bbl/day Arabian heavy oil processing facility, with product sourced from the Zuluf offshore field in the Arabian Gulf. Work on the Zuluf Field Development program began last January, with services executed in both Calgary and Saudi Arabia.
  • French energy major Total (TOT) announced the start of production out of its Timimoun natural gas field in Algeria. The facility has a nameplate capacity of about 175 MMcf/day.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
GAINERS
• Canadian Natural Res (CNQ)
• Cenovus Energy (CVE)
• Enbridge (ENB)
• Ensign Energy Services (ESI)
• Tourmaline Oil (TOU)
• Apache (APA)
• ConocoPhillips (COP)
• Exxon Mobil (XOM)
• Marathon Petroleum (MPC)
• Phillips 66 (PSX)
12-MO
HIGHS
• None • Marathon Petroleum (MPC)
ALL-TIME
HIGHS
• None • None
GOLDEN
CROSSES
• None • None
BEARISH INDICATORS
TSX
S&P 500
TOP 5
LOSERS
• Advantage Oil & Gas (AAV)
• Crew Energy (CR)
• Encana (ECA)
• Paramount Resources (POU)
• Secure Energy Services (SES)
• Anadarko Petroleum (APC)
• Baker Hughes (BHGE)
• Concho Resources (CXO)
• Transocean (RIG)
• Williams Co (WMB)
12-MO
LOWS
• Enbridge (ENB)
• Ensign Energy Services (ESI)
• Imperial Oil (IMO)
• Inter Pipeline (IPL)
• Shawcor (SCL)
• TransCanada (TRP)
• Kinder Morgan (KMI)
• Williams Co (WMB)
ALL-TIME
LOWS
• None • None
DEATH
CROSSES
• Baytex Energy (BTE)
• Gibson Energy (GEI)
• Pason Systems (PSI)
• Secure Energy Services (SES)
• None
ANALYST RATINGS

UPGRADES

  • Baker Hughes (NYSE:BHGE): Upgraded from Hold to Buy at Edward Jones.
  • BP (NYSE:BP): Upgraded from Neutral to Buy at Citigroup.
  • Cenovus Energy (TSX:CVE): Upgraded from Hold to Buy at Tudor Pickering.
  • Enable Midstream Partners (NYSE:ENBL): Upgraded from Neutral to Buy at Citigroup.
  • Kinder Morgan (NYSE:KMI): Upgraded from Neutral to Buy at Citigroup.
  • Marathon Oil (NYSE:MRO): Upgraded from Neutral to Overweight at JPMorgan.
  • Murphy Oil (NYSE:MUR): Upgraded from Hold to Buy at Societe Generale.
  • Summit Midstream Partners (NYSE:SMLP): Upgraded from Neutral to Buy at Citigroup.

DOWNGRADES

  • Chesapeake Energy (NYSE:CHK): Upgraded from Market Perform to Underperform at Sanford C. Bernstein.
  • Range Resources (NYSE:RRC): Downgraded from Outperform to Market Perform at Sanford C. Bernstein.
  • Statoil (NYSE:STO): Downgraded from Buy to Neutral at UBS and from Neutral to Sell at Citigroup.
  • Tallgrass Energy Partners (NYSE:TEP): Downgraded from Buy to Hold at Stifel Nicolaus.
  • Williams Companies (NYSE:WMB): Downgraded from Outperform to Market Perform at Sanford C. Bernstein.
NEXT WEEK'S EVENTS

Monday:

Tuesday:

Wednesday:

Thursday:

Friday:

  • March Labour Force Survey released by StatsCan @ 8:30am
  • Baker Hughes Rig Count released @ 1:00pm ET (holiday schedule)
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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