Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending December 15, 2017:
  • North American equity markets power to new highs, again
  • Canadian heavy oil prices get slammed on pipeline constraints ...
  • ... dragging energy stocks with it
  • Natural gas prices take another leg lower
  • 2018 oil price forecasts slowly creep higher
  • Traders start to trim record long positions.
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MARKET OVERVIEW
CURRENCIES & BONDS

This week's notable Canadian economic data:

  • According to Statistics Canada, the national debt-to-disposable income ratio hit 172.1% in 2016, with Albertans leading the pack. 
  • National net worth was roughly unchanged in the third quarter at $10.61 trillion. Residential real estate declined by $3.0 billion, the first quarterly decline since Q1/2009. The value of financial assets edged up 0.1%.
  • After two months of increases, manufacturing sales fell 0.4% in October to $53.5 billion. Sales of autos and auto parts accounted for most of the declines.

Bank of Canada Governor Stephen Poloz says high home prices, elevated household debt, a soft labour market for the country's youth and Bitcoins are keeping him awake at night. Poloz says although the economy generally looks good, inflation remains below expectations and exports "have not been stellar." Canadian bond markets had another good week as yields on 10-year notes continue to move lower. The Canadian dollar dipped 0.1% this week.

This week's notable US economic data:

  • US producer price index rose 0.4% last month on higher gas prices. That brings the annual increase to 3.1%, the biggest since early 2012.
  • The CPI increased from 2.0% to 2.2% y/y, while core inflation declined from 1.8% to 1.7%.

The US Federal Reserve raised interest rates by a quarter point to 1.25-1.50% this week, and signalled intentions for three more rate hikes next year. In her final news conference, Fed Chair Janet Yellen said she expects tax reform to further stimulate the US economy, adding to an already tight labour market. Next year's GDP growth estimate was revised higher to 2.5%, falling to 2.1% in 2019 and 2.0% in 2020. Expectations for inflation next year were also revised higher from 1.6% to 1.7%.

US Short term yields continue to move higher, returning to the levels last seen in October 2008. However, longer duration yields continue to slide, dropping the yield curve (10 vs 2 yr) to just 0.5% this week, the narrowest spread since late 2007. The US dollar tanked on Wednesday but recovered by the end of the week, ending Friday 0.4% lower.

The Bank of England (BOE) left interest rates unchanged this week despite hotter than expected inflation. UK rates remain unchanged at 0.5%. The BOE's Monetary Policy Committee remains concerned over Brexit uncertainties. Yields on UK 10-year notes fell 10% this week, to 1.15%, while the pound declined 0.6%.

The Aussie dollar had a spectacular week, gaining 1.8% as copper prices jumped 5% for the week. The yen also gained 0.8% this week.

OIL & GAS PRICES (USD)

Brent crude prices jumped over US$65 per barrel earlier this week after the 450,000 bbl/day Forties North Sea pipeline into the UK was shutdown due to a leak and discovery of a hairline crack. Owner INEOS says the pipeline could be offline for several weeks, perhaps as long as a month. The shutdown has steepened backwardation on the Brent futures curve as traders scramble to find alternate crude supplies.

This week's updated 2018 oil price forecasts:

  • The EIA says it expects Brent spot prices to average US$54 a barrel this year, rising to US$57 in 2018. The WTI discount to Brent is expected to average US$4 a barrel next year. Henry Hub prices are forecasted at US$3.01/MMBtu this year, rising to US$3.12 in 2018.
  • Goldman Sachs says the world's largest oil majors should enter "a positive earnings-revision cycle" next year, allowing them to "re-employ capital at double-digit returns." The bank revised its 2018/19/20 Brent oil price forecasts to US$62, US$60 and US$55 per barrel, respectively.
  • JP Morgan says OPEC and Russia will likely have no choice but to extend their 1.8 million bbl/day production cuts to the first quarter of 2019, as oil markets are unlikely to be rebalanced by the second half of next year. The bank also raised its Brent price forecast to US$62 in Q3/2018, rising to US$65 Q4/2018.

Canada's total crude output hit a record 4.2 million bbl/day in September, up from 135,500 bbl/day the previous month and now 445,000 bbl/day higher than the same time last year. Unfortunately, export pipelines are already at capacity, widening both the heavy and light oil discounts to multi-year highs. Western Canadian Select (WCS) slid US$6 a barrel this week, now back to the lows of last June as the heavy oil discount widened from about U$10 a barrel in August to over US$24 on Friday.

Gasoline prices declined 3.6% this week as the US Energy Information Administration (EIA) reported another big increase in gasoline inventories last week. Despite the return of cold weather on the East Coast, natural gas prices declined another 6% w/w on concerns of rising supply.

Summary of this month's Short Term Energy Outlook from the EIA:

  • The US produced 9.7 million bbl/day in November. The EIA is sticking to its 2017 average of 9.2 million bbl/day.
  • US production is expected to reach a record 10.0 million bbl/day next year, surpassing the 1970 annual average of 9.6 million bbl/day.
  • OPEC's output is forecasted at 32.5 million bbl/day this year, down 200,000 bbl/day from 2016. The EIA is projecting a slight increase for 2018, rising to 32.7 million bbl/day. 
  • Non-OPEC output is expected to rise by 1.7 million bbl/day next year to 60.3 million bbl/day, with additional production coming from US, Canada, Brazil, Norway, the UK and Kazakhstan.
  • After rising 1.4 million bbl/day this year, global oil demand is expected to rise another 1.6 million bbl/day in 2018.
  • US natural gas production is forecasted to average 73.5 Bcf/day this year, rising to almost 80 Bcf/day next year.

US oil rig counts declined for the first time in six weeks, falling by 4 in the US, to 747. In Canada, rig counts surged by 22 to 134.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

DEC 13, 2017

US crude production creeps closer to 10 million barrels per day milestone

 
What's moving energy markets this week:

FACTOR
IMPACT
SUMMARY
GEOPOLITICS
NEUTRAL
No new news on the geopolitical front this week.
USD INDEX
▲ BULLISH
Despite this week's US interest rate hike, the US dollar ended the week 0.4% lower.
SUPPLY
▼ BEARISH
US production hit another record high of 9.8 million bbl/day last week. In their respective December oil market reports released this week, the IEA, EIA and OPEC all say they remain concerned that rapidly rising output from US shale will delay oil market rebalancing until the end of 2018. All agencies are forecasting higher global oil output next year, including supply from OPEC members.
DEMAND
NEUTRAL
Expectations for 2018 increases in global oil demand range from 1.3 million bbl/day (IEA data) to 1.6 million bbl/day (EIA forecast). OPEC is forecasting little change from this year at about 1.5 million bbl/day.
SENTIMENT
▼ BEARISH
After reaching record bullish levels in late-November, traders have started to reduce their net long positions. Net shorts are also starting to move higher, albeit from very low levels. Both Brent and WTI nudged lower this week, the third consecutive weekly decline.
EQUITY MARKETS

US markets powered to new highs again this week, led by large cap stocks. The TSX hit an intra-day high on Wednesday but ended the week slightly in the negative, pulled lower by the energy patch.

European markets and Japan's Nikkei also ended the week lower. London's FTSE was a notable exception, gaining 1.3% for the week.

SECTORS

A mixed bag across the sectors this week, as the US discretionaries, technology and staples posted strong gains. In Canada, the energy sector once again dragged the overall market lower, falling another 4% this week and now down almost 12% from the highs of early November. The Canadian materials sector was the best performer on the TSX on higher copper and gold prices.

ENERGY SECTOR PERFORMANCE

Canadian energy stocks continue to badly underperform US counterparts, as the discounts on Canadian light and heavy oil continue to widen. Producers and energy service stocks were the worst hit on both sides of the border. Integrated oil majors had a better week, with most independent refiners posting new record highs.


TSX ENERGY STOCKS
TSX 300 ENERGY STOCKS

This week's notable Canadian energy news:

  • Enbridge (ENB) warned its Line 3 Replacement Project may not be put into service until the third quarter of 2019. The company also says it will start rationing space on its Mainline network due to unplanned outages in the western part of its system.
  • TransCanada (TRP) has asked Nebraska's regulator for permission to amend its Keystone XL pipeline application, reflecting the alternative route that was approved by the state in late November. The company has committed to making a final investment decision on the project by the end of this month.
  • Canadian Natural Resources (CNQ) announced the promotion of Steve Laut from President to Executive Vice Chairman, while current COO Tim McKay moves into the President's spot. Executive VP Darren Fichter was promoted to COO, E&P while Scott Stauth is the new COO, Oil Sands.
  • Moody's Investors Service upgraded Seven Generations Energy's (VII) outlook from stable to positive, noting the "continued successful execution on production and reserves growth, and maintenance of solid credit and efficiency metrics."
  • Whitecap Resources (WCP) announced plans to issue $195 million in senior unsecured notes, maturing in 9 years at an interest rate of 3.9%. The company also says it has closed on its purchase of Cenovus Energy's Weyburn assets in southeast Saskatchewan, adding 14,800 boe/day of production to its total output.

This week's 2018 production and capital spending forecasts:

  • Advantage Oil & Gas (AAV) has approved a 2018 capital budget of $175 million, to be funded through internal cash flow. Gas production is expected to rise 10% to 260 MMcf/day while liquids output is forecasted to double to 1,900 bbl/day. The company is assuming $1.75/MMcf AECO and US$55 WTI.
  • Bellatrix Exploration (BXE) announced a 2018 capital budget of $65 to $80 million, while production is expected to average between 35,000 and 37,000 boe/day. About 40% of next year's natural gas production is hedged at $3.06/MMcf.
  • Cardinal Energy (CJ) has approved a 2018 capital budget of $132 million, assuming a royalty rate of 15.8%, $55 oil, a 78¢ exchange rate and a $1.75/MMcf AECO natural gas prices. Production is expected to average 21,000 to 21,500 boe/day next year.
  • Enerplus (ERF) announced a 2018 capital spending budget of $535 to $585 million, about 75% dedicated to its North Dakota operations. Production is expected to rise 10%, adjusted for divestments, to a range of 86,000 to 91,000 boe/day.
  • Mullen Group (MLT) has approved a 2018 capital budget of $40 million, with $30 million allocated towards Trucking/Logistics and $10 million earmarked for their Oilfield Services segment. The company also boosted its dividend by 67% to $0.60 per share annually.
  • Painted Pony Energy (PONY) announced a 2018 capital spending plan of $185 million. Production volumes are expected to average between 366 and 378 MMcf/day.
  • Raging River Exploration (RRX) has approved a 2018 capital budget of $335 million. Annual average production is expected to rise to 24,500 boe/day next, weighted 92% oil, with Q4/2018 production estimated at 26,000 boe/day.
  • Surge Energy (SGY) has revised its 2018 capital budget to about $98.75 million. The company says it will exit this year at over 15,850 boe/day.
  • Tourmaline Oil (TOU) says it will exit 2017 at over 280,000 boe/day, slightly higher than initially forecasted. Full year guidance for 2018 remains unchanged at 270,000 boe/day.

Raymond James released its Canadian analysts’ 2018 best picks list this week, including Encana (ECA), Kelt Exploration (KEL) and Paramount Resources (POU).

New 52-week lows on the TSX include Advantage Oil & Gas (AAV), ARC Resources (ARX), Birchcliff Energy (BIR), Bonavista Energy (BNP), Crew Energy (CR), Enerflex (EFX), Tourmaline Oil (TOU) and Whitecap Resources (WCP).


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

This week's notable US energy news:

  • Enbridge (ENB) and Phillips 66 (PSX) have launched open season for their proposed Gray Oak Pipeline. The 385,000 bbl/day line will transport West Texas crude to markets in Corpus Christi, Freeport, and Houston. The companies say they will evaluate expansion of the system if there's sufficient shipper interest. The pipeline is expected to be placed into service in the second half of 2019.
  • A subsidiary of Anadarko Petroleum (APC) today has launched a binding open season for a new high-pressure oil-gathering and treating system in West Texas. The system will have a gathering capacity of about 400,000 bbl/day and a treating capacity of 120,000 bbl/day by the end of next year, rising to 180,000 bbl/day in 2019. Subject to all regulatory approvals, the network is expected to be operational in Q2/2018.
  • Whiting Petroleum (WLL) warned it will take an impairment charge of US$800-900 million in the fourth quarter due to a partial write-down of its Redtail field in Colorado. The write-down is not expected to result in any cash expenditures. The company also announced the private placement of US$750 million in senior notes due 2026. Net proceeds will be used to buy back debt due in 2019.
  • Oasis Petroleum (OAS) announced plans to buy several assets in the Delaware Basin from privately-held Forge Energy for US$946 million. The company also says it plans to divest various non-core assets in the Williston Basin next year, valued at US$500 million. Oasis also announced the issuance of 32 million common shares, valued at about US$306 million.
  • Noble Midstream Partners (NBLX) and Greenfield Midstream announced the formation of a joint venture, Black Diamond Gathering, which will acquire Saddle Butte Rockies Midstream for US$625 million. Noble Midstream will operate the Saddle Butte system upon closing of the deal and will issue 3.2 million common shares to help finance the acquisition. The company also announced the sale of its 50% stake in the Cone Gathering to CNX Resources (CNX) for US$305 million.
  • American Midstream Partners (AMID) announced plans to sell US$125 million in senior notes, due in 2021 at an interest rate of 8.5%. Net proceeds from the sale will be used to reduce debt from its revolving credit facility.
  • Carrizo Oil & Gas (CRZO) announced the sale of various Eagle Ford assets for US$245 million. The assets cover 24,500 net acres, producing about 3,400 boe/day in the third quarter.
  • Pittsburg-based EQT Corp (EQT) has set a 2018 capital budget of US$2.4 billion, including US$2.2 billion for well development. The company expects to sell 1,520-1,560 Bcfe of natural gas next year. EQT says its drilling program should be fully funded by internal cash flow.

Around the world this week:

New 52-week high on the S&P 500 include Phillips 66 (PSX) Marathon Petroleum (MPC) and Valero Energy (VLO). New 52-week lows on the S&P 500 include Range Resources (RRC).


UPGRADES & DOWNGRADES

UPGRADES

  • ARC Resources (TSX:ARX): Upgraded from Neutral to Outperform at Macquarie.
  • Athabasca Oil (TSX:ATH): Upgraded from Hold to Buy at GMP.
  • ConocoPhillips (NYSE:COP): Upgraded from Neutral to Buy at Goldman Sachs.
  • Crescent Point Energy (TSX:CPG): Downgraded from Outperform to Market Perform at Raymond James.
  • Husky Energy (TSX:HSE): Upgraded from Market Perform to Outperform at Raymond James, from Sell to Neutral at Goldman Sachs, from Neutral to Outperform at Credit Suisse and from Sector Perform to Sector Outperform at Scotiabank.
  • Marathon Oil (NYSE:MRO): Upgraded from Underweight to Neutral at JP Morgan.
  • Tamarack Valley Energy (TSX:TVE): Upgraded from Market Weight to Outperform at BMO.

DOWNGRADES

  • ARC Resources (TSX:ARX): Downgraded from Strong Buy to Outperform at Raymond James.
  • Baytex Energy (TSX:BTE): Downgraded from Buy to Hold at GMP Securities.
  • Bellatrix Exploration (TSX:BXE): Downgraded from Market Perform to Underperform at Raymond James.
  • Chinook Energy (TSX:CKE): Downgraded from Market Perform to Underperform at Raymond James.
  • Crew Energy (TSX:CR): Downgraded from Strong Buy to Outperform at Raymond James.
  • Hess Corp (NYSE:HES): Downgraded from Neutral to Underweight at JP Morgan.
  • Mullen Group (TSX:MTL): Downgraded from Outperform to Sector Perform at National Bank.
  • Newfield Exploration (NYSE:NFX): Downgraded from Overweight to Neutral at JP Morgan.
  • Noble Energy (NYSE:NBL): Downgraded from Overweight to Neutral at JP Morgan.
  • PBF Energy (NYSE:PBF): Downgraded from Neutral to Underweight at JP Morgan.
  • Petrus Resources (TSX:PRQ): Downgraded from Outperform to Market Perform at Raymond James.
  • Sanchez Energy (NYSE:SN): Downgraded from Neutral to Underweight at JP Morgan.
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
  • CHARTPACKS COURTESY STOCKCHARTS.COM
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