An ugly week for energy stocks as oil prices show signs of weakness
This week's notable Canadian economic data:
Wholesale sales edged down 0.1% to $63.6 billion in August. Sales of building materials and auto parts led to the downside, while machinery and equipment posted the largest gain.
Average weekly earnings rose to $1,006 in August, up 0.6% from July, now 2.9% higher than the same time last year. Workers in BC are averaging a 4% y/y pay raise, while salaries in Saskatchewan and Newfoundland are actually in the negative for the year.
As expected, the Bank of Canada raised its overnight lending rate to 1.75%. The BoC says slowing growth in household debt, a US new trade deal and the recent sanctioning of LNG Canada are all reasons to remain bullish on the Canadian economy. The Bank adds it will continue to monitor the fallout from the recent decline in oil and gas prices, as well as "ongoing competitiveness challenges" brought on by insufficient crude export capacity. The loonie was unimpressed, falling 0.2% for the week.
After expanding 4.2% in the spring, US third quarter GDP slowed to 3.5% on an annualized basis, as domestic consumption remains strong south of the border. Despite indications of a strong economy, US bond yields declined across the board this week, sending the yield curve lower.
The US dollar gained 0.7% on Friday, returning to the highs of mid-August. Lack of progress on Brexit and ongoing concerns over Italian debt also weighed on the Euro and pound sterling, falling 0.9% and 1.8%, respectively.
OPEC expressed concerns over global inventories this week, which appear to be rising due to weakness in emerging markets and rising production out of Saudi Arabia, Russia and the US. The cartel now says its plan to raise output in light of falling Iranian supply "may need changing course."
The US Energy Information Administration (EIA) reported its fifth weekly increase in US crude inventories, rising another 6.4 million barrels last week.
According to the National Energy Board (NEB), crude-by-rail exports to the US rose to 229,500 bbl/day in August, while Genscape is forecasting figures closer to 284,000 bbl/day for mid-October. Most analysts expect rail exports to reach 300,000 bbl/day by the end of this year and potentially 400,000 bbl/day by the end of 2019.
US oil rig counts rose for the third week in a row, gaining two rigs on Friday, to a total of 875. Canada put one more oil rig into service this week, rising to 124, and 8 new gas rigs, to a total of 76.
Discounts on Canadian light and heavy crude and condensate widened to record or near-record levels this week, sinking Canadian oil prices to multi-year lows. The widening discounts are being blamed on low demand in the US Midwest, due to a very busy maintenance turnaround season. According to the EIA, refinery utilization has already started to improve, as maintenance gets completed and refineries return to normal rates. The US imported just 3.2 million bbl/day of Canadian crude last week, about 400,000 bbl/day below normal.
Aside from oil prices, gasoline also sank more than 5% for the week. Henry Hub lost just under 1%, while Alberta's AECO gas declined 6%.
In a note to clients this week, Jefferies says the combination of geopolitical tensions in the Middle East, global economic expansion and supply side risks are "likely to drive oil prices higher" this year. The investment bank points to pending sanctions on Iran, continued declines out of Venezuela and levelling out of US shale production as reasons to be bullish, forecasting a fairly balanced market through 2019. However, Jefferies remains concerned on the recent strength of the US dollar and its negative impact on emerging markets, particularly, China and India, two very large crude importers.
Volatility returned to equity markets, blamed in part on fears over rising rates, impact of US trade tariffs on Q3 earnings and a strengthening US dollar.
On US markets, industrials, materials and financial sectors sank to new yearly lows, led by big declines in Caterpillar, DowDupont and 3M.
Except for Brazil and Shanghai, most other global markets sank lower this week, with the Nikkei posting the steepest declines. The TSX fell almost 4%, returning to the lows of mid-2017.
Energy was the worst performing sector on the S&P 500, declining 7% w/w, with all large-cap energy names posting losses. On the TSX, the energy sector posted a 4% loss, with many producers sinking to multi-year lows.
Piper Jaffray analyst Blake Fernandez says energy stocks should begin to improve from here, and potentially outperform the broader markets, particularly mega-cap integrated names. His top pick is Chevron, while international names BP, Total and Equinor were rated as Overweight.
|Imperial Oil||IMO||41.50||▼-5.3||33.43||44.91||85||D W|
|Husky Energy||HSE||18.69||▼-6.9||15.09||22.99||51||D W|
|Pembina Pipeline||PPL||43.31||▼-3.4||37.60||47.84||85||D W|
|Inter Pipeline||IPL||21.84||▼-2.9||21.30||27.92||55||D W|
|Gibson Energy||GEI||20.98||▼-7.6||15.68||23.04||97||D W|
|LARGE CAP E&P|
|Cdn Natural Res||CNQ||36.91||▼-0.7||36.00||49.08||15||D W|
|Cenovus Energy||CVE||11.12||▼-0.3||9.03||14.84||24||D W|
|Seven Generations||VII||13.83||▼-4.2||13.51||21.25||13||D W|
|Pason Systems||PSI||19.98||▼-0.8||16.05||22.10||92||D W|
|Mullen Group||MTL||13.97||▼-8.2||13.87||17.12||35||D W|
|Secure Energy||SES||8.27||▲3.6||6.98||9.82||88||D W|
|REFINING & MARKETING|
|Parkland Fuel||PKI||42.48||▼-7.4||24.97||47.45||98||D W|
|Exxon Mobil||XOM||77.53||▼-5.4||72.16||89.30||60||D W|
|Kinder Morgan||KMI||16.59||▼-7.7||14.69||19.83||61||D W|
|Williams Co||WMB||24.32||▼-9.1||24.00||33.67||32||D W|
|LARGE CAP E&P|
|EOG Resources||EOG||106.56||▼-9.4||95.74||133.53||31||D W|
|Occidental Petroleum||OXY||67.91||▼-5.9||62.47||87.67||27||D W|
|Anadarko Petroleum||APC||58.84||▼-10.8||46.75||76.70||31||D W|
|Concho Resources||CXO||135.18||▼-8.4||123.63||163.11||34↓||D W|
|Ntl-Oilwell Varco||NOV||35.89||▼-11.2||31.47||49.08||25↓||D W|
|Baker Hughes||BHGE||27.36||▼-8.6||25.53||37.76||11||D W|
|Phillips 66||PSX||99.45||▼-3.2||89.14||123.97||37||D W|
|Valero Energy||VLO||85.79||▼-7.5||75.84||126.98||7||D W|
|Marathon Petroleum||MPC||68.86||▼-6.8||55.87||88.45||39||D W|