Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending December 22, 2017:
  • US tax reform powers markets to new highs
  • Long term yields show signs of life
  • Canadian yield curve headed to zero
  • Maintenance shutdowns in the oil sands drags GDP lower
  • Cdn energy stocks reverse losses from last week
  • Ratings agencies put Enbridge and Inter Pipeline on notice
  • US producers lock-in WTI prices for 2018.
QUICK LINKS
MARKET OVERVIEW
CURRENCIES & BONDS

The US dollar remains stuck in a trading range, declining another 0.6% this week. Higher commodity prices helped boost currencies in Canada, Australia and UK.

This week's Canadian economic data:

  • October's GDP figures were unchanged from September. Wholesale and retail trade had a good month, rising 1.4% and 1.1%, respectively. On the opposite side of the spectrum was mining and oil and gas extraction, contracting another 1.1% in October, the fourth decline in the past five months. Oil extraction from the oil sands declined 3.5% in October as several operators reported being down for maintenance.
  • Canada's consumer price index rose 0.3% in November, bringing the annualized rate to 2.1%. Excluding gasoline, CPI rose 1.5% y/y.
  • Retail sales increased 1.5% in October, mostly attributed to strong automobile sales. Gasoline stations posted their first decline in three months, falling 0.6% on lower volumes.
  • After a 1.1% decline in September, wholesale sales increased 1.5% in October to $63.0 billion. Biggest gains were seen in farming equipment, clothing and food.
  • Average weekly earnings was reported at $983 in October, unchanged from the previous month. Year-over-year, earnings have risen 3.1%, with gains seen in all provinces except PEI.
  • The number of Canadians receiving Employment Insurance (EI) benefits in October was also unchanged from September, at about 510,000. Declines were led by BC, Alberta and Quebec, while Ontario saw increases. Year-over-year, the number of EI recipients in Canada declined by 12.3%. The number of new EI claims jumped 3.2% on October, led by applicants in Ontario and Alberta.

Given this week's positive economic data, the chances of another rate hike by the Bank of Canada in January have risen to about 55%. Canada's yield curve (10 year vs 2 year rates) has flattened from about 2.3% in 2010 to less than 0.30% last week, before recovering slightly on Friday. The yield curve is at risk of inversion if short-term rates continue to rise, generally signalling an upcoming recessions. However, it might be different this time as long-term interest rates remain at or below zero in the EU and Japan, sending bond buyers to the US and Canada, pushing interest rates lower. The last time Canada's yield curve inverted was 2007, just before the 2008 collapse of financial markets.

This week's US economic data:

  • US lawmakers finally delivered on tax reform, cutting the corporate tax rate from 35% to 21% and adding another US$1.46 trillion to the federal deficit over the next decade. The average family should see savings of about US$1,600 annually.
  • Housing starts posted another 3.3% gain for the month of November, the second consecutive monthly increases. Existing home sales also increased for the third month in a row.
  • Third quarter GDP growth was revised from 3.3% to 3.2%.

Euphoria over US tax reform sent both short and long-term yields higher, steeping the yield curve. Bond prices declined both in Canada and the US.

OIL & GAS PRICES (USD)

The differentials for Canadian light and heavy oil continue to widen this week, ending Friday at US$8.90 and US$26.75 a barrel, respectively. Traders are expecting the differentials to remain wider than normal into 2018 as production from the oil sands continues to rise, while pipeline capacity remains oversubscribed.

Despite news the Forties pipeline will be returning to service earlier than expected, Brent prices continue to tick higher, now back to the levels of spring 2015, while WTI remains stuck in a trading range. The differential between Brent and WTI remains just under US$7 a barrel. Backwardation on the WTI futures curve appears to be easing into 2018.

The new year brings with it a wide range of oil prices forecasts from the big banks, ranging from US$54 to US$62 a barrel. Full year average Brent forecasts are as follows:

  • Goldman Sachs: US$62 (revised higher from US$58)
  • UBS: US$60 (revised higher from US$55)
  • Credit Suisse: US$60 (revised higher from US$53)
  • JP Morgan: US$60 (revised higher from US$58)
  • Citigroup: US$54 (reduced from US$60)
  • Barclays: US$55 (no change)

The Energy Information Administration (EIA) reported another 6.5 million barrel decline in crude stockpiles last week, as refineries continue to maximize production. Refinery utilization rates topped 94% across the country, with Gulf Coast facilities running at 96% of capacity. Product stockpiles have been steadily rising since the middle of November.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

DEC 20, 2017

CRUDE STOCKPILES CONTINUE TO DECLINE AND REFINERIES CRANK THROUGHPUT

 
What's moving energy markets this week:

FACTOR
IMPACT
SUMMARY
GEOPOLITICS
NEUTRAL
No new news on the geopolitical front.
USD INDEX
▲ BULLISH
The greenback remains in a trading range, declining another 0.6% this week.
SUPPLY
▼ BEARISH
Reuters is reporting that OPEC is already working on an exit strategy on its 1.8 million bbl/day production cuts. Both Russia and Saudi Arabia deny plans to change course despite expectations for a balanced oil market by the fall of next year. The 450,000 bbl/day Forties North Sea pipeline is now expected to return to service in early January,
DEMAND
NEUTRAL
No new news on the demand front.
SENTIMENT
NEUTRAL
Sentiment is roughly unchanged, as trading volumes are expected to be thin over the next two weeks.
EQUITY MARKETS

US markets all powered to new highs, led by mid and small-cap stocks. The TSX and FTSE also hit a new high this week, helped by higher commodity prices. Markets in Asia, including Japan and emerging markets, also had a great week, helping the FTSE All-World Index power to a new record high. European markets were mostly flat to lower.

SECTORS

Markets were firmly in the offensive camp this week, with the discretionary, industrial, materials and financial stocks at or new record highs in the US. Discretionary and industrial stocks also broke to new highs on the TSX. Materials and energy stocks rose on both the TSX and S&P500 on higher commodity prices.

Rising interest rates sent the utilities stocks sharply lower on both US and Canadian markets.

ENERGY SECTOR PERFORMANCE

Canadian energy stocks rose 5% this week, reversing losses from the previous week. US energy stocks continue to significantly outperform Canadian counterparts, helped by expectations that lower corporate taxes will translate into higher dividends and more share buybacks.

Canadian midstream players ended the week flat to lower, held back by higher interest rates. Canadian energy companies with US exposure, particularly service stocks had a spectacular week. US energy stocks all ended the week in the positive, led by E&Ps and service stocks.


TSX ENERGY STOCKS
TSX 300 ENERGY STOCKS

This week's notable Canadian energy news:

  • Nebraska's Public Service Commission (PSC) has denied TransCanada's (TRP) request to amend its application for Keystone XL, required to match the alternative route approved by the PSC in late November. The approved route differs from the application route by about 8 kms, leaving the project more vulnerable to lawsuits. TransCanada says it is evaluating appropriate next steps before it makes a final decision.
  • AltaGas (ALA) announced a 2018 capital budget of about $400 to $500 million, about two-third allocated to its Gas business, and the remainder for its Power and Utility divisions. Those figures exclude almost $1 billion required to close on its recent acquisition of WGL Holdings (NYSE:WGL), which is still awaiting approval from DC's Public Service Commission. AltaGas announced the start-up of its $120 million North Pine NGL Separation Facility in northeastern BC, ahead of schedule and $15 million below budget.
  • Inter Pipeline (IPL) announced a $900 million capital spending program for 2018, about $820 million dedicated to "organic growth initiatives" and $80 million for sustaining capital. The company's board of directors also announced a positive final investment decision for the $3.5 billion Heartland Petrochemicals Complex, to be located in Strathcona County, Alberta. The facility will convert propane into 525,000 t/y of polypropylene and has received $200 million in royalty credits from the Province of Alberta. Ratings agency DBRS has placed the company's debt rating under review, citing uncertainty over capital costs and future market conditions.
  • Moody's Investors Service downgraded Enbridge's (ENB) senior unsecured debt to Baa3 from Baa2, one notch above junk status. The ratings agency says the company's plans to strengthen its balance sheet will be slow at best. Moody's also changed its outlook for Enbridge to stable from negative.
  • Bonterra Energy (BNE) announced the sale of a 2% royalty Interest in the Pembina Cardium Pool for $52 million and a 2018 capital spending budget of about $75 million. Annual production is expected to rise 2 to 4% next year to a range of 13,200 to 13,500 boe/day.
  • Paramount Resources (POU) announced plans to buy back up to 7.5 million shares over the next 12 months. The buyback represents 10% of current public float.

Husky Energy (HSE) reached a new 52-week high on the TSX this week. New 52-week lows include ARC Resources (ARX), Crew Energy (CR), Tourmaline Oil (TOU), and Whitecap Resources (WCP).


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

According to the EIA, US oil companies hedged at least 1.2 million bbl/day of 2018 production at an average price of US$49.63 per barrel. The figures were gathered from third quarter financial statements of 47 companies. The EIA says those figures are expected to rise in the fourth quarter. Analysts at Citigroup expect the surge will be very good news for drillers in the new year.

This week's other US energy news:

  • Thanks to strong demand, Marathon Petroleum's MLP (MLPX) says it will go ahead and reverse direction on the Capline system. The reversed line will have an initial capacity of 300,000 bbl/day, delivering crude from Patoka, Illinois to St. James, Louisiana. Southbound service is expected to begin in the second half of 2022. Capline is operated by Marathon Pipe Line, and is jointly-owned by Plains All American (PAA) and a subsidiary of BP (BP).
  • A subsidiary of Kinder Morgan (KMI), DCP Midstream (DCP) and Targa Resources (TRGP) have made a positive final investment decision on the US$1.7 billion Gulf Coast Express Pipeline Project. The system will be designed to transport up to 1.92 Bcf/day of natural gas from the Texas Permian Basin to a terminal near Agua Dulce, Texas. If all approvals are received in time, the new line should be in service by October 2019.
  • Buckeye Partners (BPL) announced open season for its 600,000 bbl/day South Texas Gateway pipeline, which is already under construction. The new line will connect producers in the Permian Basin to markets in the Texas Gulf Coast.
  • Cabot Oil & Gas (COG) announced the sale of its Eagle Ford basin to Venado Oil & Gas for US$765 million. The asset sale includes 74,500 net acres of land producing about 15,600 boe/day.
  • Phillips 66 (PSX) announced plans to issue up to US$250 million in common shares.

Across the pond this week:

  • Norway's Statoil (STO) announced plans to extend output from its Snorre oilfield in the North Sea by 25 years. The US$2.3 billion expansion will increase recovery by 200 million barrels. Transocean (RIG) was awarded a US$286 million contract for 22-wells plus two one-well options. TechnipFMC (FTI) was also awarded an EPC contract, including 6 subsea templates and production equipment. Production is expected to begin in 2021.
  • BP (BP) announced first oil from the "super-giant" Zohr gas field, the largest natural gas field in the Mediterranean Sea and the final of seven mega-projects brought online this year. The seven projects will add 800,000 bbl/day of new production by 2020. Zohr is operated by Italian energy major Eni (E).
  • An Italian judge has ordered senior executives at Royal Dutch Shell (RDS.A) and Eni (E) to stand trial over alleged US$1.1 billion bribery payments made to the Nigerian government back in 2011. Both companies deny the allegations.

New 52-week highs on the S&P 500 this week include Andeaver (ANDV), BP (BP), Chevron (CVX), Concho Resources (CXO), ConocoPhillips (COP), Marathon Petroleum (MPC), Occidental Petroleum (OXY), Phillips 66 (PSX), Royal Dutch Shell (RDS/A), Statoil (STO), and  Valero Energy (VLO).


UPGRADES & DOWNGRADES

UPGRADES

  • Anadarko Petroleum (NYSE:APC): Upgraded from Neutral to Buy at Seaport Global Securities.
  • Carrizo Oil & Gas (NYSE:CRZO): Upgraded from Sell to Buy at Seaport Global Securities.
  • Cimarex Energy (NYSE:XEC): Upgraded from Sell to Buy at Seaport Global Securities.
  • Contango Oil & Gas (NYSE:MCF): Upgraded from Neutral to Buy at Seaport Global Securities.
  • Devon Energy (NYSE:DVN): Upgraded from Neutral to Buy at Seaport Global Securities.
  • Eco-Stim Energy Solutions (NYSE:ESES): Upgraded from Neutral to Buy at Seaport Global Securities.
  • ExxonMobil (NYSE:XOM): Upgraded from Outperform to Focus List at Howard Weil.
  • Gaster Exploration (NYSE:GST): Upgraded from Neutral to Buy at Seaport Global Securities.
  • Helmerich & Payne (NYSE:HP): Upgraded from Hold to Buy at Tudor Pickering
  • Key Energy Services (NYSE:KEG): Upgraded from Neutral to Buy at Seaport Global Securities.
  • Just Energy Group (TSX:JE): Upgraded from Sector Perform to Outperform at RBC.
  • Marathon Oil (NYSE:MRO): Upgraded from Sell to Buy at Seaport Global Securities.
  • NewField Exploration (NYSE:NFX): Upgraded from Sell to Neutral at Seaport Global Securities.
  • Noble Energy (NYSE:NBL): Upgraded from Neutral to Buy at Seaport Global Securities and from Hold to Buy at Jefferies Group.
  • Phillips 66 Partners (NYSE:PSXP): Upgraded from Neutral to Buy at Goldman Sachs.
  • Pioneer Natural Resources (NYSE:PXD): Upgraded from Neutral to Buy at Seaport Global Securities.
  • Sundance Energy Australia (NYSE:SNDE): Upgraded from Neutral to Buy at Seaport Global Securities.
  • WPX Energy (NYSE:WPX): Upgraded from Sell to Neutral at Seaport Global Securities.
  • Whiting Petroleum (NYSE:WLL): Upgraded from Sell to Neutral at Seaport Global Securities.

DOWNGRADES

  • Bonterra Energy (TSX:BNE): Downgraded from Sector Perform to Outperform at AltaCorp Capital.
  • Concho Resources (NYSE:CXO): Downgraded from Buy to Hold at KLR Group.
  • ConocoPhillips (NYSE:COP): Downgraded from Focus List to Outperform at Howard Weil.
  • Holly Energy Partners (NYSE:HEP): Downgraded from Neutral to Sell at Goldman Sachs.
  • Inter Pipeline (TSX:IPL): Downgraded from Outperform to Market Perform at BMO.
  • Painted Pony Energy (TSX:PONY): Downgraded from Buy to Hold at GMP.
  • Spectra Energy Partners (NYSE:SEP): Downgraded from Overweight to Equal Weight at Barclays.
  • Western Energy Services (TSX:WRG): Downgraded from Outperform to Sector Perform at RBC.
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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