Weekly Energy Market Review
Energy market summary for the week ending June 30, 2017:
- Ex-US currencies were the biggest gainers this week, as central bankers around the world signalled intentions to raise interest rates.
- Most commodities staged a nice rally, due in part to a falling US dollar.
- Oil prices all gained for the week, mostly attributed to short covering in options markets.
- TSX energy stocks were less than impressed with the increase in oil prices, ending the week mostly unchanged. Energy services and small caps had a good week, but Canada's large integrated companies mostly declined.
- US energy stocks did slightly better, helped by the refining and energy services group.
- This week marked a reversal of the recent trend, where money came out of bonds and the US dollar, flowing into commodity markets.
- US stocks retreated, but still remain relatively close to their record highs.
At this week's ECB conference in Portugal, the world's top central bankers (ex-Japan) collectively signalled that interest rates will likely rise "very gradually" from here. UK governor Mark Carney suggested England might be ready for an interest rate hike soon, causing the pound to rise 3%. ECB head Mario Draghi also spooked bond markets this week by suggesting the EU might pivot on its monetary policy, sending the Euro to a 12-month high. Latest estimates peg global debt at a record $217 trillion, making rising interest rates a cause for concern.
Bank of Canada Governor (BoC) Stephen Poloz and Deputy Governor Lynn Patterson reiterated that the oil price shock is largely over and Canadians should brace themselves for an interest rate hike.
In their latest Business Outlook Survey, the BoC also says business outlook is the strongest since 2011, with sales activity expected to pick up momentum over the next 12 months. This week's other notable Canadian economic data:
- A strong showing in mining, energy and oil & gas services helped boost April's real GDP by 0.2% (m/m). Manufacturing was the weakest sector, contracting 0.9% for the month.
- Lower oil prices dropped the Industrial Product Price Index by 0.2% in May and the Raw Materials Price Index by 1.8% (m/m). Crude oil declined 5% while petroleum products fell 3.5% for the month but both are still up almost 10% for the year.
The Canadian dollar had a strong week, now back to the highs of last August. The loonie is now up 6% since the beginning of May despite lower oil prices.
This week's notable US economic data:
- US Q1 economic growth was revised from an annualized rate of 1.2% to 1.4% on improved consumer spending.
- The IMF has cut its outlook on the US economy to 2.1% this year, from a previous forecast of 2.3%, and far below President Trump's target of 3%.
- Despite more conflicting economic data, both short and long bond yields rose this week, steeping the yield curve.
The US dollar fell to a 10-month low as all other currencies (except the yen) spiked higher. For the first 6 months of the year, the US dollar is now down almost 7% while the Euro (the largest component in the USD Index) has gained almost 9%.
Net short positions on crude oil contracts have increased 400% since the beginning of the year, now totalling 480 million barrels. Net shorts are approaching the highs of January 2016, when oil prices were closer to US$30 a barrel.
Oil prices caught a nice bounce this week, despite an unexpected gain in US crude inventories. The increase was attributed to short-covering and a weak US dollar. Despite the gains, the first half of 2017 turned out to be the worst on record in 19 years, down 14% year-to-date.
BMO Capital Markets lowered their Brent forecast by US$2.50/bbl for 2018, now expected to average US$52.50. The bank cites interest rate hikes by the US Federal Reserve, rising production in Libya and Nigeria, relentless growth in US crude output, and stubbornly high OECD inventories as reasons to be pessimistic. BMO does not expect oil prices to recover much over the next three years, also lowering their 2019, 2020 and 2021 forecasts to US$53, US$58 and US$63/bbl, respectively. As a result, the bank has lowered their target prices for global oil majors by 5-10% across the board.
Goldman Sachs says the recent crude price crash is unlikely to last and represents a good buying opportunity. The investment firm calls current prices "unsustainable" since the cost of production for US shale producers is in the US$50-55/bbl range. Goldman is forecasting an average oil price of US$47.50 for the next three months but acknowledged they've not done a good job forecasting commodity prices so far this year.
JP Morgan also reduced their WTI price forecast to just US$48/bbl for this year, falling to US$44 next year. The bank assumes a US$2 discount to Brent for 2017, falling to US$1/bbl in 2018. Morgan Stanley and Societe Generale also cut their expectations for future crude oil prices this week.
- US markets were flat to slightly lower this week, except for the NASDAQ which continues to pull back from record highs. Despite this week's declines, all US markets remain near record high territory.
- The TSX continued its downward trend this week, falling almost 1%. The TSX is now down 2.6% for the second quarter and down 0.7% for the first 6 months of the year. In contrast, the S&P 500 is up 8% so far this year.
- The strengthening Euro pulled all European markets sharply lower this week.
- On the TSX, all sectors were flat to lower, with technology and gold stocks (materials) leading to the downside.
- On the S&P 500, financials staged a nice rally due to a steeping yield.
- Money continues to flow out of US technology stocks. However, the sector still remains the best performer year-to-date on US markets.
- The TSX energy sector ended the week roughly unchanged, however, energy stocks are down an average of 14% for the quarter and 22% for the first 6 months of the year.
- In contrast, the S&P 500 energy sector rallied this week, gaining 0.7%. In Q2, US energy stocks are down over 7% and almost 14% year-to-date.
Canada's most heavily weighted big-three integrated stocks, Suncor (SU), Imperial Oil (IMO) and Husky Energy (HSE), were some the biggest losers on the TSX energy sector, offsetting gains elsewhere in the group.
Energy service stocks staged a nice rally, being highly leveraged to oil prices. Despite the good performance, Calfrac Well Services (CFW), ShawCor Ltd (SCL) and Western Energy Services (WRG) hit 52-week lows during the week.
TransCanada (TRP) announced plans to issue up to $1 billion in new common shares over the next 25 months. The company says it will issue the shares "as required" based on its capital spending profile and "relative cost of other funding options."
Enbridge (ENB) and its US-subsidiary Enbridge Energy Partners (NYSE:EEP) has closed on a previously announced deal to sell EEP's interest in the Midcoast Gas Gathering and Processing business to another subsidiary of Enbridge, Enbridge Energy Company. Spectra Capital, another a wholly-owned subsidiary of Enbridge, is offering to buy back up to US$1.1 billion in unsecured notes, dated 2018 to 2038. The offer is open until July 6th.
Crescent Point Energy (CPG) hit a 52-week low this week.
AltaGas (ALA) hit a 52-week low this week.
Baytex Energy (BTE) released a mid-year report card this week, noting that Q2 production is up 5% from the previous quarter, estimated at about 72,000 boe/day. Production guidance was left unchanged at about 70,000 boe/day for the full year. Capital spend is also unchanged at $325 to $350 million.
Bellatrix Exploration (BXE) has closed on a previously announced sale of various non-core assets in Alberta's Strachan area. The company maintains $120 million in revolving credit facilities and has no major debt maturing before 2020. The Board of Directors has also approved a 2017 capital budget increase to $120 million, up $15 million from the previous plan. Bellatrix expects to average 34,500 boe/day in 2017, exiting the year at 35,500 boe/day. The stock hit another 52-week low on the TSX this week.
Oil majors ExxonMobil (XOM) and Chevron (CVX), were the biggest drag on the US energy sector. Refiners had another good week, with Tesoro Petroleum (TSO) reaching another 52-week high.
Energy service stocks staged a nice rally, with the exception of Schlumberger (SLB), which hit a 52-week low this week.
Switzerland-based Weatherford (WFT) has issued another US$250 million in senior notes, due in 2024 at an interest rate of 9.875%. The new notes are in addition to another US$540 million issued in November of last year. The company says it will use the proceeds to repay its revolving credit facility and provide additional liquidity for the rest of 2017.
ConocoPhillips (COP) has agreed to sell its Texan assets in the Barnett shale to an affiliate of law firm Miller Thomson & Partners for US$305 million. The divested assets produce about 11,000 boe/day, weighted 45% liquids. The transaction will also result in a pre-tax impairment charge of US$600 million. The company says there is no material impact to 2017 guidance. Proceeds from the deal will be used for general corporate purposes.
Anadarko Petroleum (APC) and Marathon Oil (MRO) hit 52-week lows this week.
Newfield Exploration (NFX) hit a 52-week low this week.
- Athabasca Oil (TSX:ATH): Downgraded from Market Perform to Underperform at BMO.
- Baytex Energy (TSX:BTE): Downgraded from Outperform to Sector Perform at Scotiabank.
- Cenovus Energy (TSX:CVE): Downgraded from Buy to Hold at TD Securities.
- Encana (TSX:ECA): Upgraded from Sell to Buy at Scotiabank and from Hold to Buy at TD Securities.
- Hess Corporation (NYSE:HES): Downgraded from Overweight to Neutral at Atlantic Securities.
- Husky Energy (TSX:HSE): Downgraded from Buy to Hold at TD Securities.
- MEG Energy (TSX:MEG): Downgraded from Buy to Hold at GMP Securities.
- Precision Drilling (TSX:PD): Downgraded from Overweight to Neutral at Piper Jaffray.