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Weekly Energy Market Review

Weekly Energy Market Review

Energy Market Summary for the week ending September 15, 2017:
  • Global bond yields recover from last week's lows
  • US markets power to new record highs
  • Oil prices surge on bullish demand forecasts
  • Canadian energy stocks help boost TSX
  • Brent closes in on multi-year highs
  • Producers and service stocks bounce off record lows
QUICK LINKS
MARKET OVERVIEW
CURRENCIES & BONDS

North American bond markets retreated slightly this week, as short-duration yields moved higher. The US 1-year bond yield reached a new high, now back to the levels of late 2008, during the financial crisis. Canadian 10-year bond yields also jumped to a new multi-year high, now back to the levels of late 2014.

UK bond yields also surged this week as the Bank of England threatened to withdraw monetary stimulus and hinted interest rates may go up sooner than expected. The news sent the pound higher by 3% and FTSE tumbling 2%. German and Japan yields also bounced off lows.

The Japan yen declined 2.7%, generally a good sign for global equity markets.

OIL & GAS PRICES (USD)

According to the US Energy Information Administration (EIA), August domestic production averaged 9.2 million bbl/day, down about 40,000 bbl/day from the July average due to outages in the Gulf of Mexico. As a result, the EIA has revised their 2017/2018 production forecast lower by 100,000 bbl/day to 9.3 and 9.8 million bbl/day, respectively.

Bullish demand forecasts from the EIA, International Energy Agency and OPEC released this week helped boost oil prices, sending West Texas Intermediate briefly above US$50 for the first time since August 10th. Brent is a few bucks away from reaching a new multi-year high.

US inventories continued to build last week as Gulf Coast refineries were still running at just 60% of capacity (as of Friday September 8). Baker Hughes reported another decline in US rig counts this week, falling by 7 to 749. Canada added 10 oil rigs, to a total of 112.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

SEP 13, 2017

Production rebounds after Hurricane Harvey but refineries slow to restart

 

The aftermath of Hurricane Harvey sent North American crude oil differentials for a wild ride this week as Texas marine terminals struggle to return to normal operation. The Canadian Light discount narrowed to just over US$1 below WTI while the synthetic crude premium rose from about US$3 a barrel to over US$6, due in part to a 45-day maintenance shutdown at CNRL's Horizon upgrader. Many US refiners are opting to defer maintenance in order to take advantage of unsually high crack spreads for this time of year.

October contracts for Edmonton Condensate, Canadian Light and Western Canadian Select all expired on Friday.

What's moving energy markets this week:

FACTOR
IMPACT
SUMMARY
GEOPOLITICS
NEUTRAL
Ongoing problems with North Korea and Venezuela still having little impact on global energy and equity markets.
USD INDEX
NEUTRAL
The US dollar bounced back from multi-year lows this week, appearing to have found a bottom for now.
SUPPLY
▼ BEARISH
Production from the GoM and Eagle Ford have mostly returned to pre-Hurricane levels. Production out of Libya and Nigeria have also largely recovered from recent militant attacks and civil unrest. Traders now betting OPEC and Russia will extend production caps until June 2018.
DEMAND
▲ BULLISH
Both the IEA and OPEC have revised their demand forecasts higher, although an active hurricane season is expected to dent Q3 consumption in the US.
SENTIMENT
▲ BULLISH
WTI topped $50 for the first time since mid-August, but was unable to hold onto the gains, ending Friday at US$49.89. Brent is closing in on multi-year highs.
EQUITY MARKETS

US markets powered to new record highs this week, as did the All World Index. The TSX had a good week gaining 1.3%, but remains well below the highs of January and still below its 200-day moving average.

Chinese markets retreated on weaker than expected economic data, being blamed on a strengthening yuan. The FTSE also declined sharply on the potential for rising interest rates and withdrawal of monetary stimulus. Most other global markets ended the week mostly positive. Japan's Nikkei was one of the best performers as the yen retreated 2.7%.

SECTORS

Higher short-term bond yields hit the utilities sector, which was the worst performer on both sides of the border. The Canadian materials sector also declined on lower copper and gold prices. Technology, materials and healthcare sectors broke to new highs on US markets.

ENERGY SECTOR PERFORMANCE

Energy was the best performing sector on both Canadian and US exchanges this week, though the sector still remains the weakest over the past 12 months.


TSX ENERGY STOCKS
TSX 300 ENERGY STOCKS

High-beta producers and service stocks were the best performers in the TSX energy sector. Cenovus Energy (CVE) continues to recover from all time lows, gaining another 12% this week. Encana (ECA) rose 13% on an upgrade from Bernstein. 

Junior oil sands producer Athabasca Oil Sands (ATH) touched a 52-week low on Friday but recovered before the close.

This week's notable energy news:

  • NuVista Energy (NVA) provided an operational update on its Bilbo, Elmworth and Pipestone Blocks in Alberta. The company says it remains on track to grow output to 60,000 boe/day by 2021. NVA was the best performer on the TSX, gaining almost 16% for the week.
  • Canadian Natural Resources (CNQ) reported a fire in one of its electrical buildings last Monday evening. The incident coincided with a 45-day planned maintenance shutdown, which also began on Monday. The fire is not expected to impact full year production guidance.
  • Gibson Energy (GEI) announced plans to construct 1.1 million barrels of new storage capacity at its Hardisty Terminal. Two 300,000 barrel tanks and one 500,000 barrel tank are expected to be placed into service by Q3 of 2019.
  • At this week's Peters & Co Conference, Husky Energy (HSE) says it's still working towards divesting its legacy assets and lowering breakeven costs to the mid-US$30s WTI. By 2021, the company hopes to generate over $3 billion in cash flow, even with WTI at US$35 a barrel.
  • Baytex Energy (BTE) says its production facilities in the Texas Eagle Ford sustained very little damage during Hurricane Harvey and have all resumed normal operation. Impact to Q3 production will be about 2,500 boe/day. However, the full year guidance was left unchanged at about 70,000 boe/day.
  • Obsidian Energy (OBE), formerly Penn West Petroleum, has been warned by the NYSE its stock has traded below US$1 a share for 30 consecutive days, putting it at risk of being delisted. Obsidian says it may ask shareholders to approve a reverse split if share prices don't improve in the next 6 months. Obsidian's listing on the TSX is not affected.
  • Paramount Resources (POU) and Trilogy Energy (TET) have completed their planned merger this week. Paramount stock hit a new high on the TSX as it absorbed Trilogy shares on a 1-to-3.75 basis. Trilogy stock has been delisted from the TSX.
  • Enbridge (ENB) has filed for a mixed shelf offering of up to US$7 billion, including common and preferred shares, as well new debt securities, to be issued over the next 25 months. 

S&P 500 ENERGY STOCKS
S&P 500 ENERGY STOCKS

As in Canada, high-beta producers and service companies were the best performers on the S&P 500 this week. Refiners remain the best performing sub-sector in general, with Andeavor (ANDV) and Valero Energy (VLO) reaching new 52-week highs. Statoil (STO) and Royal Dutch Shell (RDS.A) ADRs also hit new highs on the NYSE.

Notable news from the US and global energy patch:

  • Magellan Midstream Partners (MMP) and Valero Energy (VLO) have formed a 50/50 joint-venture to expand a marine terminal in Pasadena, Texas, currently under construction. The terminal will have an initial storage capacity of 5 million barrels, truck loading facilities and two ship docks. The expansion will add another 4 million barrels of storage and a second marine dock at an estimated cost of US$820 million.
  • Chevron (CVX) has agreed to sell 5% of its total Permian basin assets to private-equity backed Sabinal Energy. The 64,500 acres of land produce about 7,500 boe/day. Terms of the deal were not disclosed.
  • India's Petronet LNG has agreed to increase its volumes from Exxon Mobil's (XOM) Gorgon LNG project by an extra 1 million tonnes/year to about 2.5 million tonnes/year, at more "amicable" prices than initially agreed in 2009.
  • BP (BP) has filed for an IPO of its US-based MLP, BP Midstream Partners, under the ticker symbol BPMP. The shares are expected to be listed on the NYSE sometime in the fourth quarter. The IPO is expected to raise up to US$100 million in cash for the MLP. BP also announced the formation of a new joint-venture in Argentina.
  • ConocoPhillips (COP) says its production in the Texas Eagle Ford has returned to pre-hurricane levels of about 130,000 boe/day. The company says full year guidance remains unchanged at about 1.35 million boe/day.
  • Devon Energy (DVN) has also resumed production at its Eagle Ford properties. The company says the outage will reduce third quarter production by 15,000 bbl/day. Impacts to full-year production is expected to be less than 1%.
  • Independent oil & gas producer Energen (EGN) is asking Alabama courts for protection against a forced asset sale, brought on by activist shareholder Covex Management, who would like to see the company sell its Permian Basin assets in Texas and New Mexico. Corvex has a 10.1% stake in the company.
  • Seadrill (SDRL) and its majority-owned subsidiary North Atlantic Drilling (NADL) have filed for Chapter 11 bankruptcy protection after negotiating a US$1 billion restructuring deal with most of its bank lenders, who have agreed to defer payments by five years.
  • Royal Dutch Shell (RDS.A) and Brazil's Petrobras (PBR) have signed a long-term agreement to collaborate on the development of pre-salt fields in the Brazilian continental shelf. Shell also announced plans to divest its stake in two of Iraq's largest oil fields, Majnoon and West Qurna 1, and instead plans to focus on expanding Iraqi gas output.
  • Moody's Investor Services upgraded Marathon Petroleum's (MPC) outlook to stable from negative. The company's Baa2 rating was left unchanged.

UPGRADES & DOWNGRADES

UPGRADES

  • Encana (TSX:ECA): Upgraded from Market Perform to Outperform at Sanford C. Bernstein.

DOWNGRADES

  • Apache (NYSE:APA): Downgraded from Neutral to Underweight at JP Morgan Chase.
  • Hess (NYSE:HES): Downgraded from Overweight to Neutral at JP Morgan Chase.
  • Imperial Oil (TSX:IMO): Downgraded from Neutral to Underweight at JP Morgan Chase.
  • Precision Drilling (TSX:PD): Downgraded from Overweight to Neutral at JP Morgan Chase.
  • Whiting Petroleum (NYSE:WLL): Downgraded from Equal Weight to Underweight at Morgan Stanley.
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 EXCLUDE DIVIDENDS
  • 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
  • Weekly Energy Market Review

    Weekly Energy Market Review

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