Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending September 21, 2018:
  • Discount on Cdn crude widens to 5-year high
  • Crude-by-rail expansion continues at Hardisty ...
    ... while feds raise the bar for rail tankers
  • Keystone XL gets another blessing by US State Dep't
  • China adds tariffs to US LNG imports
  • TSX energy stocks finally catch a bounce
  • Morgan Stanley bullish on energy service providers
  • Trump sends OPEC a message via twitter ...
    ... while OPEC and friends mull output increase in Algeria.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
NEUTRAL
  • President Trump took to twitter again this week to complain about high oil prices, once again asking OPEC to take action.
  • At the same time, US officials have asked OPEC and Russia to make-up any shortfalls that may arise from pending sanctions on Iran. OPEC has repeatedly expressed a preference for Brent prices in the US$80 range in order to fund capital spending for production growth.
  • Libya's National Oil Corp reopened the airfield at its Waha oilfield earlier this week after guards staged a blockade. The country has been plagued by a resurgence in protests and terrorist activity in recent weeks, but state officials say production has not been affected.
USD INDEX
BULLISH
  • Despite a small recovery on Friday, the US dollar lost 1.2% this week.
SUPPLY
NEUTRAL
DEMAND
NEUTRAL
  • No new news on the demand front this week.
SENTIMENT
NEUTRAL
  • The number of shorts on managed money contracts for Brent declined again this week, while shorts on WTI ticked slightly higher.
  • Despite rising for the second week in a row, Brent prices seems unable to hit the US$80/bbl mark.
CURRENCIES & BONDS

This week's Canadian economic news:

  • The Consumer Price Index (CPI) decelerated to an annualized rate of 2.8% in August. Excluding gasoline, CPI was unchanged at 2.2%, slightly hotter than the Bank of Canada’s target inflation rate.

  • Retail sales rose 0.3% in July to $50.9 billion. Gains in grocery stores and gas stations offset lower auto sales.

  • Manufacturing sales rose 0.9% in July to $58.6 billion. The gains were mostly in transportation equipment and chemicals.

  • The number of Canadian collecting Employment Insurance (EI) jumped 2.4% from June to July. The increase was attributed to a reduction in wait-times for EI benefits for those employed in the education sector.

  • Still no resolution in sight on US/Canada trade negotiations, with the October 1 deadline only a week away.

This week's US economic news:

  • US initial jobless claims fell by 3,000 to 201,000, the lowest since November 1969.

  • The Philadelphia Fed’s manufacturing index doubled in September to 22.9, recouping losses from the previous month.

  • The New York Fed’s Empire index dropped from 25.6 to 19.0, the lowest since April.

  • After rising 0.7% in July, the ISM index gained another 0.4% in August, signalling continued strength in the US manufacturing sector.

  • President Trump added 10% duties on another US$200 billion worth of Chinese imports. Chinese officials responded by adding tariffs on US$60 billion worth of US imports.

US 10-year notes moved back above 3.0% this week, for the first time since May. The US Federal Reserve is largely expected to increase interest rates at its meeting next week. Most global bond yields, including Canada, also ticked slightly higher.

The pound sterling took a beating on Friday after Brexit talks between British PM Theresa May and the European Union broke down. The pound ended the week roughly unchanged as the US dollar declined almost 1.2%. Most global currencies gained ground for the week, except for the yen, which declined 0.5%.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
78.80
70.78
64.73
52.78
37.03
54.27
48.23
49.92
45.63
30.41
79.80
74.15
71.40
69.32
56.21

The discount on Canadian light and heavy oil widened to US$18 and US$33.75 respectively this week, now back to the highs of December 2013.

According to analysts at AltaCorp, about 830,000 bbl/day of Midwest refining capacity will come offline through the month of October due to maintenance turnarounds. The Midwest region, also know as PADD 2, buys two-thirds of all Canadian crude exports, or roughly 2.5 million bbl/day.

Henry Hub natural gas prices shot up 7.5% this week, while Alberta’s AECO gas rose about 3%.

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 Baker Hughes, the US lost 1 oil rig on Friday, bringing the total to 866. Canada lost 13 rigs this week, bringing the total to 135.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

Sep 19, 2018

CRUDE STOCKPILES CONTINUE TO EASE AS EXPORTS SURGE

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

Most US markets rose this week, with the S&P500 and Dow Jones reaching record highs. The TSX gained 1.3% for the week, with most sectors posting gains. Utilities stocks tumbled on both sides of the border due to rising rates.

Despite ongoing trade jitters, most global markets also rose this week, including emerging markets and underperforming Chinese markets.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

A relatively decent week in US and Canadian energy markets, with both sectors posting gains for the week. US refining stocks were the hardest hit despite a 1.6% gain in wholesale gasoline prices.

According to Morgan Stanley, oilfield service stocks have underperformed the broader energy sector in recent months, raising the subsector from In-Line to Attractive. The investment firm says service stocks are poised to benefit the most from higher capital spending through 2020. Morgan Stanley's top picks include Baker Hughes (BHGE), Halliburton (HAL), Transocean (RIG) and Nabors (NBR).

CANADIAN ENERGY NEWS

This week's Canadian energy news:

  • Houston-based USD Partners (NYSE:USDP) has begun work to expand its crude-by-rail loading terminal in Hardisty, AB. Once completed, capacity will increase by 50% to roughly 225,000 bbl/day. Estimated costs for the expansion were not disclosed, but the company says the work should be completed by the end of the year. USDP's Hardisty crude-by-rail loading facility connects to Gibson Energy's (GEI) storage terminal and  CP Rail's (CPR) North Main Line, providing access to refineries across North America.

  • The federal government now says CPC-1232 rail cars carrying crude must be phased out by November 1, 17 months earlier than originally planned. DOT-111 and CPC-1232 tanks transporting condensate and other highly volatile flammable liquids must be phased out by January 1, more than six years ahead of schedule. DOT-111 tank cars, which were involved in the 2013 Lac-Mégantic disaster, have not been used in crude oil service since November 2016. However, there are 21,367 unjacketed CPC-1232 tank cars still in circulation in Canada. Last June, a record 361,000 bbl/day of crude oil and petroleum products were transported in Canada by rail, with more than two-thirds destined for export to US refineries.

  • Vancouver-based Steelhead LNG announced a new contract with Korean firm Hyundai Heavy Industries for front-end engineering (FEED) on its proposed Kwispaa LNG Project, located at Sarita Bay on Vancouver Island. The work involves designing two At-Shore LNGTM™ hulls for phase one of the project. Financial terms of the deal were not disclosed, but construction of the two hulls is estimated at US$500 million. The proposed LNG terminal has export capacity of 12 mtpa, expandable to 24 mtpa in the future. The project is in partnership with the Huu-ay-aht First Nations, who own the 475 hectare site. Estimated capital costs for the terminal is $10 billion, with another $8 billion allocated to an underwater pipeline, which will supply natural gas from northeastern BC. FEED is expected to begin early next year, with a FID anticipated sometime in 2020. 

This week's Canadian investing news:

  • Enbridge (ENB) is proceeding with its takeover of subsidiary Enbridge Income Fund (ENF) at a rate of 0.7350 ENB shares and $0.45 in cash per ENF share. ENF shareholders will also be entitled to receive Enbridge's fourth quarter dividend payout. Enbridge will also buy all outstanding Enbridge Energy Management (NYSE:EEQ) shares, listed on the NYSE. The company says the buy-ins will simplify the company's corporate structure, and will have no impact on future dividend growth or capital spending programs. The US$3.5 billion deals are expected to close in Q4 subject to shareholder approval.

  • Tamarack Valley Energy (TVE) announced "exceptional 2018 drilling results" this week, and says production is tracking ahead of forecast. Annual production guidance for 2018 has been increased to between 24,000 and 24,500 boe/day (weighted 65% liquids), up 500 boe/day from its previous forecast. The company's 2018 capital budget remains unchanged at about $230 million. For 2019, production volumes are expected to rise to about 26,000 boe/day with capital budget planned at $222 million. TVE will also be added to the TSX Composite Index next week.

  • North American Construction Group (NOA) has agreed to acquire a 49% stake in Nuna Logistics, a civil construction and contract mining company based in Edmonton, for $42.5 million in cash. The remaining 51% interest in Nuna will continue to be held by a subsidiary of the Kitikmeot Inuit Association.

  • Obsidian Energy (OBE) has received a non-compliance warning from the NYSE as its US-listed shares have traded below US$1 for 30 consecutive days. OBE shares on the NYSE will be delisted if prices do not recover over the next 6 months. Obsidian shares averaged US$0.99 per share from mid-August to mid-September. Listings on the TSX are not affected.

US ENERGY NEWS

This week's US energy news:

  • The US Department of State has issued an updated environmental assessment (EA) on Keystone XL's revised route, as approved by the state of Nebraska. The government agency concluded the project poses no threat to the environment, and any spills in the state of Nebraska would have a minimal impact to groundwater quality. Last month, a Montana judge ordered the State Department to conduct the review of the revised route, taking into account new coordinates, which differed from the routing reflected in the permit issued last year. TransCanada (TRP) says it plans to start construction sometime in 2019, but has yet to make a final investment decision.

  • ExxonMobil (XOM), Chevron (CVX) and Occidental Petroleum (OXY) have agreed to join the Oil and Gas Climate Initiative (OGCI), promising to pledge US$300 million towards climate change research. OGCI was formed in 2014, focusing on the area of carbon capture, reducing methane emissions and improving energy efficiency. Members include BP (BP), Royal Dutch Shell (RDS.A), Total (TOT), Eni (E), Equinor (EQNR), Pemex, Petrobras (PBR), Repsol (REPYY), China's CNPC and Saudi Aramco, representing about 30% of world oil supply.

This week's other US midstream news:

  • Federal regulators (FERC) have lifted a stop-work order for the Atlantic Coast natural gas pipeline. Work was halted in mid-August after FERC cancelled a right-of-way permit for construction near an ecologically-sensitive national park. The US Fish and Wildlife Service has since replaced that permit, allowing work to continue. The 600 mile line will bring 1.4 Bcf/day of natural gas from West Virginia into Virginia and North Carolina. Construction is now expected to be completed by the end of next year. Various environmental groups are appealing the decision. Atlantic Coast is owned by Dominion Energy (D), Duke Energy (DUK) and The Southern Company (SO).

  • Williams Co (WMB) announced the mechanical completion of its 1.7 Bcf/day Atlantic Sunrise pipeline, and is now seeking final approvals from FERC to place the entire line into service. The US$3 billion expansion of the existing Transco natural gas pipeline will connect supply from the Marcellus shale with markets in the Mid-Atlantic and Southeastern US. 

  • FERC has also been asked to green-light the Nexus Pipeline to begin operations at the end of the month. The 255 mile line will deliver 1.5 Bcf/day of gas from eastern Ohio to markets in western Ohio, Michigan and Ontario. Nexus is a joint-venture between DTE Energy (DTE) and Enbridge (ENB) subsidiary Spectra Energy Partners (SEP).

This week's US LNG news:

  • China has set a 10% tariff on imports of US LNG, effective September 24, in retaliation for the latest round of duties imposed by the Trump Administration. The 10% tax rate is considerably lower than the 25% duty that was largely expected. China purchased 15% of all US LNG exports in 2017, but those volumes are expected to drop this year as Beijing looks for alternative suppliers. In the meantime, US officials are looking to increase exports to Europe in an effort to diversify its customer base.

  • Cheniere Energy (LNG) has signed a 15-year agreement with commodities-trader Vitol to supply 700,000 t/yr of LNG starting in 2018. The purchase price will be pegged to the Henry Hub monthly average, plus a fee.

  • Engineering firm KBR (KBR) has expanded its partnership with ConocoPhillips (COP) to develop "off-the-shelf" modularized LNG processing units, with capacities in the range of 1.5 to 3.0 t/yr. The standardized units will be cheaper and faster to build, with commercialization expected by the end of next year. KBR has designed approximately one-third of the world's current LNG production, and says plans are in the works for larger scale modules.

Other US investing news:

  • Seadrill (SDRL) was awarded a contract with ExxonMobil's (XOM) Canadian subsidiary for the West Aquarius submersible drilling rig, to be used for exploration in Canada's Atlantic basin. The deal was reported to be worth US$24 million, with work expected to begin by the middle of next year. West Aquarius is currently being operated by BP (BP) at Aspry D-11A off the coast of Nova Scotia.

  • Transocean (RIG) was awarded a six-well contract with Equinor (EQNR) for drilling in the Norwegian Continental Shelf. The rig is expected to delivered early next year with drilling expected to commence next summer.

  • Dominion Energy (D) has made an offer to buy subsidiary Dominion Energy Midstream Partners (DM) at a ratio of 0.2468 Dominion Energy common shares per Dominion Energy Midstream share.

  • S&P Global Ratings has placed Kinder Morgan (KMI) ratings on CreditWatch positive, potentially leading to an upgrade after the company announced plans to sell its Canadian assets and accelerate debt repayment. 

GLOBAL ENERGY NEWS

Around the world this week:

  • An Italian court has acquitted oil major Eni (E) and its ex-CEO on charges of bribery in Algeria. The charges stem from a US$230 million payment allegedly made to Algerian officials between 2007 and 2010 in exchange for €8 billion in contracts awarded to its EPC subsidiary Saipem. Saipem was fined €400,000 and its former head Pietro Tali was sentenced to almost 5 years in prison. The courts also seized €197 million in funds from the engineering firm, who says all parties involves no longer work at the company. Eni remains on trial in another Italian court on similar charges in Nigeria and remains under investigation in the Congo.

  • French energy major Total (TOT) has closed on its acquisition of Direct Energie for US$1.7 billion, giving it a sizeable foothold in France's retail electricity market, The company also announced the purchase of EV charging station provider G2mobility this week. Financial terms of the deal were not disclosed.

  • SDX Energy (SDX.V) says it in talks with BP (BP) to buy a package of undisclosed assets in Egypt. BP has been trying to find a buyer for its legacy assets in Egypt, estimated to be worth about US$500 million. SDX Energy is primarily focused on E&P activity in North Africa. The company is listed on both the TSX Venture and LME.

  • Abu Dhabi is planning to IPO a stake in Spanish refiner Cia Espanola de Petroleos, said to be one of the largest IPOs in the past decade. State-owned Mubadala Investment Company plans to IPO a minimum of 25% sometime in the fourth quarter, in a deal that could be worth as much as US$3.5 billion. Shares will be listed on Spanish exchanges.

  • Brazilian regulators have approved a US$173 million payout to state-owned Petrobras (PBA) to compensate for diesel subsidies, announced in late May to end a truckers' strike. The truckers had been protesting high diesel prices.

This week's Royal Dutch Shell (RDS.A) chatter:

  • According to Bloomberg, Shell is looking at selling its 22.5% stake in the Caesar Tonga field, located in the Gulf of Mexico, to Houston-based Focus Oil. The sale is estimated to be worth about US$1.3 billion. Caesar Tonga is jointly owned with Equinor (EQNR), Chevron (CVX) and operator Anadarko Petroleum (APC). Production in the field first began in 2012.

  • Shell was also awarded a 15-year contract to supply LNG to a new 441 MW power plant in Panama, currently being built by Chinese firm Sinolam LNG. Terms of the deal were not disclosed but the plant is said to require about 400,000 tonnes of LNG annually. Deliveries are expected to begin in 2020.

  • Egypt's petroleum ministry announced a US$1 billion deal with Shell and Malaysia's Petronas for 8 deep-water exploration licenses in the country's West Nile Delta. Egypt is home to the massive Zohr gas field and aims to become a major player in the global LNG sector.

  • Following in the footsteps of ExxonMobil (XOM) and BP (BP), Shell also announced plans to limit its methane emissions intensity below 0.2% by 2025. Plans include using infrared cameras to scan for methane leaks and replacing high-bleed pneumatically-operated control valves. The company estimates its leak rate to be between 0.01% and 0.8% across all of its oil and gas assets. The move is part of Shell's grand plan to cut its carbon footprint in half by 2050.

MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
  • Gibson Energy (GEI +8.4%)
  • MEG Energy (MEG +8.1%)
  • Seven Generations (VII +6.8%)
  • Crescent Point (CPG +6%)
  • Secure Energy Services (SES +5.1%)
  • Transocean (RIG +15.2%)
  • Range Resources (RRC +11.3%)
  • Chesapeake (CHK +11%)
  • Hess Corp (HES +6.8%)
  • Newfield Exploration (NFX +6.7%)
  • 12-MO
    HIGHS
  • Husky Energy (HSE +2.3%)
  • Gibson Energy (GEI +8.4%)
  • Parkland Fuel (PKI +0.1%)
  • ConocoPhillips (COP +3.8%)
  • 10-YR
    HIGHS
  • Parkland Fuel (PKI +0.1%)
  • None
  • GOLDEN
    CROSSES
  • None
  • None
  • BEARISH INDICATORS
    TSX
    S&P 500
    BOTTOM
    5
  • Trican Well (TCW -8.1%)
  • Crew Energy (CR -4.7%)
  • PrairieSky (PSK -3.7%)
  • Baytex Energy (BTE -3.1%)
  • Gran Tierra (GTE -3.1%)
  • HollyFrontier (HFC -5%)
  • Valero Energy (VLO -4.2%)
  • National-Oilwell Varco (NOV -2.6%)
  • Phillips 66 (PSX -1.7%)
  • Marathon Petroleum (MPC -1.2%)
  • 12-MO
    LOWS
  • PrairieSky (PSK -3.7%)
  • Altagas (ALA -2.2%)
  • Freehold Royalties (FRU -0.6%)
  • Paramount Resources (POU +2.9%)
  • Trican Well (TCW -8.1%)
  • None
  • 10-YR
    LOWS
  • None
  • None
  • DEATH
    CROSSES
  • Parex Resources (PXT +1.5%)
  • Noble Energy (NBL +3.7%)
  • ANALYST RATINGS

    UPGRADES

    • Diamond Offshore Drilling (NYSE:DO): Upgraded from Sector Perform to Outperform at RBC and from Hold to Buy at HSBC.

    • Gibson Energy (GEI): Upgraded from Sector Perform to Outperform at National Bank.

    • Helmerich & Payne (NYSE:HP): Upgraded from Sector Perform to Outperform at RBC.

    • Noble (NYSE:NE): Upgraded from Sector Perform to Outperform at RBC.

    • Occidental Petroleum (NYSE:OXY): Upgraded from Neutral to Positive at UBS.

    • Pioneer Natural Resources (NYSE:PXD): Upgraded from Neutral to Positive at UBS.

    • Range Resources (NYSE:RRC): Upgraded from Neutral to Buy at B. Riley.

    • Rowan Companies (NYSE:RDC): Upgraded from Sector Perform to Outperform at RBC.

    • Targa Resources (NYSE:TRGP): Upgraded from Market Perform to Outperform at Wells Fargo.

    • Transocean (NYSE:RIG): Upgraded from Sector Perform to Outperform at RBC.

    DOWNGRADES

    • Apache (NYSE:APA): Downgraded from Buy to Hold at Edward Jones.

    • Antero Resources (NYSE:AR): Downgraded from Outperform to Market Perform at BMO.

    • Canadian Natural Resources (CNQ): Downgraded from Top Pick to Outperform at RBC.

    • ConocoPhillips (NYSE:COP): Downgraded from Outperform to SEctor Perform at RBC.

    • Dominion Energy Midstream Partners (NYSE:DM): Downgraded from Buy to Hold at Citigroup.

    • Energen (NYSE:EGN): Downgraded from Buy to Hold at National Alliance Securities.

    • Forum Energy Technologies (NYSE:FET): Downgraded from Buy to Accumulate at Johnson Rice.

    • Rowan Companies (NYSE:RDC): Downgraded from Buy to Hold at HSBC.

    • STEP Energy Services (STEP): Downgraded from Strong Buy to Outperform at Raymond James.

    • Trican Well Services (TCW): Downgraded from Outperform to Sector Perform at RBC and from Strong Buy to Outperform at Raymond James.

    NEXT WEEK'S EVENTS

    Sunday:

    • Meeting of OPEC/non-OPEC energy ministers in Algiers, Algeria

    Monday:

    Tuesday

    • API Weekly Statistical Bulletin released @ 4:30pm ET

    Wednesday:

    • EIA Weekly Petroleum Status Report released @ 10:30am ET

    • US Federal Reserve releases interest rate decision @ 2:00pm ET

    • October contract expiry for Henry Hub natural gas.

    Thursday:

    • Weekly payroll data released by StatsCan @ 8:30am ET

    • Third estimate of Q2 US GDP released at 8:30am ET

    • Bank of Canada Governor Stephen Poloz delivers speech in Moncton, NB

    • EIA Weekly Natural Gas Storage Report released @ 10:30pm ET

    Friday:

    • July GDP by industry released by StatsCan @ 8:30am ET

    • August industrial product and raw materials price indices released by StatsCan @ 8:30am ET

    • Baker Hughes Rig Count released @ 1:00pm ET

    • October contract expiry for gasoline and November contract expiry for Brent crude.

    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
  • Weekly Energy Stock Performance

    Weekly Energy Stock Performance

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