Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending July 20, 2018:
  • Albian Sands hits the billion barrel mark
  • LNG Canada promises to hire Canadians first
  • Higher crude-by-rail volumes boost CP's revenues
  • PM Trudeau appoints Edmonton MP as new head of energy
  • Ontario and Saskatchewan team up to fight the feds
  • FERC eases stance on tax breaks for natgas pipelines
  • ConocoPhillips bullish on Alaska
  • ICE launches Permian WTI futures
  • US crude output touches another record high
  • Shell mulls divestment of Niger Delta assets
  • World's largest oil company about to get a lot bigger.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
NEUTRAL
  • The Trump Administration continues to send out mixed signals on waivers for importers of Iranian crude, this time signalling there may be some exceptions, hinting some countries may be allotted more time to find alternate crude supplies.
USD INDEX
NEUTRAL
  • The US dollar briefly touched a one-year high this week before pulling back on Friday. Despite complaints by the US Administration of a strong dollar, the greenback has been stuck in a very narrow trading range for 2 months.
SUPPLY
NEUTRAL
  • Saudi Arabia has agreed to cut exports by 100,000 bbl/day in August, to ensure supply does not outstrip demand. The OPEC member produced 10.5 million bbl/day in June, up 458,000 bbl/day from the previous month. The kingdom has promised not to raise production rates for the month of July.
  • Shell lifted force majeure on its Bonny Light exports out of Nigeria this week, about two months after the pipeline was attacked by militants.
  • After lifting force majeure on exports last week, supply out of Libya is back on shaky ground after several workers were abducted at the 300,000 bbl/day Sharara oil field, forcing further production cuts.
  • Drillers in the Norwegian North Sea ended their strike action this week, as both sides reached agreement on wages and pensions. The 10-day strike had cut 23,000 bbl/day of production.
  • Striking oil workers in Gabon have also been order to go back to work this week. The 11-day strike had taken 54,000 bbl/day of output offline.
DEMAND
NEUTRAL
  • No new news on the demand front this week.
SENTIMENT
BEARISH
  • Net longs declined sharply for Brent futures last week, falling by over 94,500 contracts. Net longs also dipped on WTI, declining by 34,100.
CURRENCIES & BONDS

This week's Canadian economic data:

  • The Consumer Price Index (CPI) rose 2.5% y/y in June, the hottest on record since February 2012. The largest contributor was the transportation index (+6.6%), most notably energy costs, now up almost 13% y/y, with gasoline prices higher 25% y/y.
  • After falling almost 1% in April, retail sales rebounded 2.0% in May to $50.8 billion. Receipts at gasoline stations gained 4.3% for the month, reflecting higher prices at the pump and a 2.7% increase in sales volumes.
  • An estimated 454,100 Canadians received regular Employment Insurance (EI) benefits in May, roughly unchanged from the previous month. The number of EI recipients is now down 15.2% for the year, with Alberta seeing declines of over 28% over the past 12 months.

Trade jitters were front and centre again this week as President Trump again stated a preference for bilateral deals with both Canada and Mexico. The Canadian dollar declined earlier in the week but later recovered, ending Friday roughly unchanged.

The President again tweeted his dismay over a strengthening greenback and falling global currencies, which makes US exports less competitive. The Chinese yuan continued its declines on news the US is looking at widening tariffs to as much US$500 billion worth of goods. The yuan is down almost 8% in the second quarter and touched a one-year low earlier in the week.

Trump also says he's unhappy with the prospects of higher rates, noting he would like a strong economy, low dollar and low interest rates. In a written statement this week, Federal Reserve Chairman Jerome Powell says he sees several years of steady growth, but concerns of protectionist trade policies may dent business investments. Powell's optimism helped longer duration bond yields move higher this week, giving a small boost to the yield curve.

As in previous weeks, the US dollar hit a one-year high earlier week before retreating on Friday. The greenback has been stuck in a very narrow trading range for the past two months.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
73.07
70.46
69.36
63.61
44.16
47.52
45.04
44.31
42.16
30.41
79.80
74.15
71.40
69.32
56.21

Goldman Sachs warns investors to expect volatility in oil prices over the short-term due to "uncertainty on the magnitude and timing of the supply shifts" and "US political decisions." The bank says demand remains robust so far, which should be supportive of oil prices in the longer term. Goldman expects Brent to hover between US$70-80 per barrel this year, potentially touching US$80 in the fourth quarter.

The Intercontinental Exchange (ICE) announced the launch of new Permian WTI Futures, priced out of Houston, TX. The company says WTI prices in Houston will "offer greater pricing precision for US crude," allowing for a better comparison to Brent. The WTI benchmark is priced out of Cushing, Oklahoma, which trades at a discount to Brent due to bottlenecks in infrastructure. The new contracts are expected to launch in the third quarter, subject to regulatory review.

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)

According to the US Energy Information Administration (EIA), production out of the Permian is expected to continue to drive much of the growth in US crude output, despite serious pipeline bottlenecks. Output from the Permian region is expected to rise about 500,000 bbl/day to an average of 3.9 million bbl/day in 2019. Offshore production out of the Gulf of Mexico is the second largest contributor to US production growth, expected to rise from the current 1.2 million to 1.4 million bbl/day next year.

According to the International Energy Agency (IEA), global investment in fossil fuels was roughly unchanged this year at US$790 billion, as lower spending in coal and LNG offset an increase in oil and gas spending. Upstream investments rose 5% y/y to US$472 billion, driven by higher output from US shale basins. Conventional oil and gas spending remains "subdued," with the majority of capital dedicated to expansions instead of greenfield projects. Spending in the petrochemical sector remains strong, estimated at almost US$20 billion this year, up over 15% y/y. The IEA says the oil and gas sector is shifting towards short-cycle projects with rapidly declining production profiles.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

Jul 18, 2018

Crude stockpiles rise as refinery utilization rates tumble and production hits a record 11.0 Million bbl/day

 

US crude output hit a record 11.0 million bbl/day last week, now up 2.5 million bbl/day from the lows of 2016. Baker Hughes reported a decline in US oil rig counts this week, falling by 5 to 858. In contrast, Canada gained 3 oil rigs, rising to 142.

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

Little movement in equity markets this week with the Russell 2000 Small Cap index eking out a 0.6% gain. The S&P 500, NASDAQ, NYSE and DJIA ended the week roughly unchanged. European markets were also flat for the week, except for France's CAC 40, which dipped 0.6% and the Nikkei which gained 0.4%. The TSX Composite declined 0.8% on declines in the energy sector and a pullback in cannabis stocks.

Chinese markets were hit again this week, and remain one of the worst performing global equity markets so far this year. Hong Kong's Hang Seng Index declined 1% while the Shanghai Index managed to recover its losses, ending the week unchanged.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

Losses were seen across most of the energy sub-sectors on both sides of the border. US midstream stocks ended the week roughly unchanged while select Canadian oilfield services stocks also posted gains.

CANADIAN ENERGY NEWS

This week's Canadian energy news:

  • One worker was sent to hospital on Wednesday after toxic hydrogen sulphide gas was released at Suncor Energy's (SU) Edmonton Refinery. A spokesperson for Suncor says the area was evacuated as a precaution but the affected unit is no longer leaking. No impact to production was reported. The cause of the leak is still under investigation.
  • Canadian Natural Resources (CNQ) announced its 1-billionth barrel of production at Albian Sands. Albian includes both the 155,000 bbl/day Muskeg River Mine and 100,000 bbl/day Jackpine expansion. CNRL took over as operator of both facilities in the spring of 2017, taking over from Royal Dutch Shell (NYSE:RDS.A).
  • Despite a continued outage of Syncrude's 350,000 bbl/day upgrader, apportionment on Enbridge's (ENB) Lines 2 and 3 are set at 35% in August, much higher than expected. Lines 2 and 3 transport about 830,000 bbl/day of light oil from Edmonton to Superior, Wisconsin, forming part of Enbridge's 2 million bbl/day Mainline network. In contrast, August apportionment for heavy crude on Lines 4 and 67 is 47%, roughly unchanged from the previous month. Apportioned volumes represent the fraction of shipper nominations that are not accepted on the line due to excessive demand. 
  • The province of Alberta is making another $70 million available for new technologies that reduce greenhouse gas emissions in the areas of biotechnology, electricity or sustainable transportation. The funds will be managed by Emissions Reduction Alberta (ERA) with up to $10 million available per project. Funding is limited to 50% of project costs. Deadline for submissions is September 13, 2018.

This week's Canadian political news:

  • According to the BC government, the $40 billion LNG Canada project, if sanctioned, will use primarily Canadian labour. The company says only 5% of its construction work force of 4,500 will be temporary foreign workers (TFW), required for jobs with "unique skills." The employment strategy is in sharp contrast to the now-cancelled Pacific Northwest LNG, where TFWs were expected to account for about 70% of the workforce. LNG Canada is being led by Royal Dutch Shell (NYSE:RDS.A) who is expected to announced a decision by the end of this year.
  • Ontario Premier Doug Ford and Saskatchewan Premier Scott Moe have teamed up in their fight against a federally-imposed provincial carbon tax. Ontario has been granted intervenor status in Saskatchewan's constitutional challenge of the plan, vowing to "use every single tool" available to challenge the federal government's authority. Ford claims carbon taxes do nothing for the environment and is simply a slush-fund for "big government initiatives." The duo call on the Trudeau Liberals to work more collaboratively with the provinces.
  • Prime Minister Trudeau shuffled his cabinet this week, in preparation for upcoming federal elections in the fall of 2019. BC MP Jonathan Wilkinson takes over as head of Fisheries and Oceans, now in charge of the contentious $1.5 billion Oceans Protection Plan and crude tanker moratorium on BC's northern coast. Edmonton MP Amarjeet Sohi takes over the Natural Resources profile, replacing Jim Carr, who was moved to International Trade. Alberta Premier Rachel Notley calls Sohi an "ally" in the province's quest to build more export pipelines.

This week's Canadian investing news:

  • A subsidiary of Emerge Energy Services (NYSE:EMES) announced a new partnership with Calgary-based Torq Energy Logistics to build a new frac sand terminal in Buick, BC, located about 75 km north of Fort St. John. Torq will construct and operate the terminal, which is located along the CN Rail (CNR) network. The company already operates seven rail terminals in Alberta and Saskatchewan.
  • Camp operator Black Diamond Group (BDI) was awarded a $42.5 million contract to provide remote workforce accommodations for TransCanada's (TRP) Coastal GasLink Pipeline. The deal is for a 908-bed camp for 27 months of construction, which is expected to begin early next year. Coastal Gaslink will transport natural gas from northeastern BC about 670 km to the proposed LNG Canada export terminal near Kitimat, BC. The pipeline and contract with BDI is contingent on a positive final investment decision on the LNG project. TransCanada struck a similar deal with Houston-based CIVEO (NYSE:CVEO) in early July.
  • Toronto-based Aecon Group (ARE) and privately-held Somerville were awarded an $282 million contract for the construction of Spreads 8 and 9 of Enbridge's (ENB) Line 3 Replacement in southern Manitoba. The scope includes almost 200 km of pipeline stretching from Brandon, Manitoba, to the Canada/US border. Construction will begin next month and is expected to be completed by the end of the year. Last May, the federal government blocked Aecon's planned takeover by a Chinese firm on concerns of national security.
  • Kinder Morgan Canada (KML) reported a net income of $13.7 million in the second quarter, almost half the same time last year. Distributable cash flow rose 16% y/y to $91.8 million. Earnings included a non-cash write-off of its $5.5 billion credit facility fees, which was terminated and replaced with a $1 billion temporary credit facility due to the pending sale of its Trans Mountain assets to the federal government. By the end of Q2, the company says it has spent $1.3 billion on the Trans Mountain Expansion Project (TMEP). KML says it will update its forward guidance once it closes on the sale of its Trans Mountain assets.
  • Calgary-based CP Rail (CPR) reported a 29% increase in revenues from the transport of energy, chemicals and plastics, rising to $278 million in the second quarter. The gains were primarily from higher crude-by-rail volumes, LPGs and higher fuel surcharges, offsetting losses in foreign exchange. Total revenues at CP rose 7% to $1.75 billion on a 4% increase in carloads.
US ENERGY NEWS

This week's US energy news:

  • Privately-held Meridian Energy Group announced the start of construction of its Davis Refinery, located in the Bakken region of North Dakota. The US$800 million refinery has a phased configuration, starting with an initial capacity of 27,500 bbl/day but eventually intended to be expanded to a 49,500 bbl/day high conversion facility. The first phase is expected to be completed by 2020, making it just the seventh oil refinery built in the US in the last two decades.
  • Enterprise Products Partners (EPD) announced plans to build an offshore crude oil export terminal in the Texas Gulf Coast. The terminal would be capable of loading Very Large Crude Carriers (VLCC), which have a capacity of about 2 million barrels. Most US shipping channels are too low and shallow to load large vessels, which has held back the country's crude export volumes. There are only a handful of companies in the US currently capable of loading VLCC vessels, which is the most cost-efficient method of shipping crude long distances.

This week's US pipeline news:

  • Regulators in Pennsylvania issued another violation to Energy Transfer Partners (ETP) after drilling fluid was spilled into a wetland during construction of its Mariner East 2 pipeline. This is the 65th violation since construction began at the beginning of 2017. Mariner East will export NGLs from the Marcellus and Utica shale fields in western Pennsylvania to domestic and international customers. The US$2.5 billion pipeline has an in-service data of Q3/2018, more than a year later than originally planned.
  • Plains All American (PAA) was denied a waiver on steel tariffs for its Cactus II pipeline, which runs 885 km (550 miles) from the Permian Basin to the Corpus Christi area. The company has already purchased the pipe from a Greek supplier, which is now subject to a 25% tariff. The US Commerce Department concluded a comparable product was available domestically. Capital costs for the 585,000 bbl/day pipeline were estimated at US$1.1 billion, but the company has yet to provide revised estimate. PAA called the review process "flawed" and will be looking at options to challenge the decision. Out of 26,400 tariff waivers requested so far, the government has denied 452 and approved just 267.
  • Williams Partners ( WPZ) says it has almost completed construction of its Atlantic Sunrise pipeline, and is targeting an in-service date of August 2018, subject to regulatory approvals. Atlantic Sunrise is an expansion of the existing Transco natural gas pipeline, bringing 1.7 Bcf/day of natural gas from the Marcellus shale to markets in the mid-Atlantic and southeastern US.
  • Federal regulators (FERC) finalized a new policy for interstate natural gas pipeline operators, allowing them to report revenue changes that resulted from last spring's elimination of income tax allowances. Pipeline operators will now be allowed to adjust rates to a "just and reasonable level" for both the company and its customers. The new policy is a big boon for MLPs (Master Limited Partnerships), who do not pay federal income taxes but instead distribute their income in the form of dividends to shareholders.

This week's US investing news:

  • ConocoPhillips (COP) provided an update on its Alaskan operations this week, which has become more competitive due to cost reductions, a friendly regulatory regime and technological advancements. COP now has 2 billion barrels of oil equivalent (boe) in legacy assets, 1.1 billion boe in new discoveries and about 3 billion boe of yet untapped reserves in the state. Production costs are estimated to be less than US$40 per barrel.
  • Kinder Morgan (KMI) announced a US$180 million net loss for the second quarter, including a non-cash impairment charge of US$749 million. Cash flow increased 9% y/y to US$1.1 billion. The company's capital budget for this year has been increased by US$200 million to US$2.4 billion. KMI says it expects to net about US$2 billion from the sale of the Trans Mountain Pipeline System to the Canadian government, most of which will likely be used to pay down debt. The company says all its growth capital is fully funded through operating cash flows.
  • Baker Hughes (BHGE) has agreed to sell its Natural Gas Solutions (NGS) business to First Reserve and Pietro Fiorentini for US$375 million. The division includes the sale and servicing of gas meters, chemical injection pumps, pipeline repair products and electric actuators. The deal is part of GE's (GE) master plan to spin-out or sell Baker Hughes only one year after merging the company with its oilfield services unit. BHGE reported a 2% increase in second quarter revenues this week, rising to US$5.5 billion.
  • Revenues at competitor Schlumberger (SLB) rose 11% y/y to US$8.3 billion. Net income, excluding one-time charges, rose 22% y/y to US$594 million. North America remains the strongest market for the company, where revenues rose 43% y/y on higher rig counts and strong demand in the Gulf of Mexico and offshore Atlantic Canada.
GLOBAL ENERGY NEWS

Around the world this week:

  • Saudi media is reporting that Saudi Aramco is working towards taking a stake in petrochemicals giant Saudi Basic Industries Corp (SABIC). Aramco says the deal would help diversify earnings and make the company less vulnerable to oil prices. SABIC has a market cap of about US$103 billion and majority owned by a Saudi Arabia's largest sovereign wealth fund. The pending deal has put Saudi Aramco's mego-IPO on the back-burner for now.
  • According to Nigeria's National Petroleum Corp (NNPC), China's CNOOC (CEO) has offered to invest another US$3 billion in its existing oil and gas operations in the country. CNOOC has already invested US$14 billion in Nigeria, along with Chevron (CVX), ExxonMobil (XOM) and Royal Dutch Shell (RDS.A) who have also made significant investments in the country.
  • According to Bloomberg, Shell is reportedly looking at divesting some of its Nigerian assets, particularly in the problematic Niger Delta Region, which has been plagued by civil unrest and militant attacks. The deal is estimated to be worth about US$2 billion. Shell produces over 250,000 bbl/day in the country.
  • TransCanada (TRP) announced the start of service on its Topolobampo Pipeline in northern Mexico. The US$1.2 billion line transports 670 MMcf/day of natural gas from El Encino to the Mexican states of Chihuahua and Sinaloa, connecting with the company’s Mazatlán Pipeline. TRP operates over 3,000 km of natural gas lines in the country, with a total capacity of over 7 Bcf/day.
  • Norway's drilling rig operators ended their strike action this week, after the union representing 1,600 employees reach a deal with employers. The group had been on strike since July 10 over wages and pensions, leading to the shutdown of several production and exploration platforms in the North Sea.
  • According to Reuters, two out of four of Venezuela's heavy oil upgraders are going offline over the next few weeks, which should further reduce light oil exports out of the country. The maintenance shutdowns had been deferred from last April due to la ack of spare parts. The two upgraders are operated by state-owned PDVSA and have a combined capacity of 700,000 bbl/day. Output from the OPEC member fell to just 1.34 million bbl/day in June, the lowest in over 60 years.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
GAINERS
• Advantage Oil & Gas (AAV)
• Enerflex (EFX)
• Kelt Exploration (KEL)
• Secure Energy Services (SES)
• TransCanada (TRP)
• Andeavor (ANDV)
• Cabot Oil & Gas (COG)
• HollyFrontier (HFC)
• Marathon Petroleum (MPC)
• Williams Co (WMB)
12-MO
HIGHS
• Kelt Exploration (KEL)
• Parkland Fuel (PKI)
• Parex Resources (PXT)
• None
10-YR
HIGHS
• Parkland Fuel (PKI) • None
GOLDEN
CROSSES
• None • None
BEARISH INDICATORS
TSX
S&P 500
TOP 5
LOSERS
• Crescent Point (CPG)
• Gran Tierra (GTE)
• MEG Energy (MEG)
• Parex Resources (PXT)
• Trican Well (TCW)
• Apache (APA)
• Anadarko Petroleum (APC)
• Helmerich & Payne (HP)
• Newfield Exploration (NFX)
• Transocean (RIG)
12-MO
LOWS
• None • None
10-YR
LOWS
• None • None
DEATH
CROSSES
• None • None
ANALYST RATINGS

UPGRADES

  • Bellatrix Exploration (TSX:BXE): Upgraded from Underperform to Sector Perform at National Bank.
  • Concho Resources (NYSE:CXO): Upgraded from Neutral to Buy at Goldman Sachs.
  • ENI (NYSE:E): Upgraded from Neutral to Outperform at Credit Suisse.
  • MPLX (NYSE:MPLX): Upgraded from Hold to Buy at Jefferies.
  • Pine Cliff Energy (TSX:PNE): Upgraded from Underperform to Neutral at CIBC.
  • PraireSky Royalty (TSX:PSK): Upgraded from Sector Perform to Outperform at National Bank.
  • Royal Dutch Shell (NYSE:RDS/A): Upgraded from Market Perform to Outperform at Raymond James.
  • Sunoco (NYSE:SUN): Upgraded from Underperform to Hold at Jefferies.

 

 

DOWNGRADES

  • Andeavor Logistics (NYSE:ANDX): Downgraded from Neutral to Underperform at Bank of America.
  • Dril-Quip (NYSE:DRQ): Downgraded from Buy to Neutral at B. Riley.
  • Energen (NYSE:EGN): Downgraded from Buy to Hold at Williams Capital.
  • Equinor (NYSE:EQNR): Downgraded from Outperform to Neutral at Credit Suisse.
  • Magellan Midstream Partners (NYSE:MMP): Downgraded from Buy to Hold at Jefferies.
  • MEG Energy (TSX:MEG): Downgraded from Outperform to Sector Perform at AltaCorp Capital.
  • Newfield Exploration (NYSE:NFX): Downgraded from Buy to Neutral at Goldman Sachs.
  • ONEOK (NYSE:OKE): Downgraded from Buy to Hold at Jefferies.
  • Plains All American Pipeline (NYSE:PAA): Downgraded from Neutral to Buy at Bank of America.

 

NEXT WEEK'S EVENTS

Monday:

  • May wholesale trade data released by StatsCan
  • Q2/2018 earnings: PrairieSky Royalty, Halliburton

Tuesday:

  • Q2/2018 earnings: CN Railway

Wednesday:

Thursday:

Friday:

  • Imperial Oil 2018 Mid-Year Update @ 9:00am MDT
  • US Q2 GDP estimates (advance estimates)
  • Baker Hughes Rig Count released @ 1:00pm ET
  • Q2/2018 earnings: Civeo, Imperial Oil, Exxon Mobil, Phillips 66, Chevron
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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