Canadian oil prices sink as differentials keep widening

Canadian oil prices sink as differentials keep widening

WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
NEUTRAL
  • No new news on the geopolitical front this week.
USD INDEX
NEUTRAL
  • The US dollar gained 0.6% for the week, but remains relatively subdued despite rising US bond yields.
SUPPLY
BEARISH
  • OPEC produced 32.85 million bbl/day in September, up 90,000 bbl/day from August. Libya, Angola, Saudi Arabia and Nigeria contributed to most of the gains, offsetting another 100,000 bbl/day loss out of Iran.
  • The US reported no change in output last week, still estimated at 11.1 million bbl/day. Rig counts have flatlined at about 860 since the spring, falling by another 2 this week.
DEMAND
NEUTRAL
  • No new news on the demand front this week.
SENTIMENT
BULLISH
  • Brent and WTI remain in solid uptrends, with both benchmarks breaking out to new multi-year highs this week.
CURRENCIES & BONDS

This week's notable Canadian economic news:

  • According to Statistics Canada, 63,000 new positions were added in September, lowering the national unemployment rate from 6.0% to 5.9%. The new positions were mostly part-time and mostly focused in Ontario and BC.

  • Canada's international trade balance swung to a $526 million surplus in August, the first surplus since December 2016. Imports fell 2.5%, mostly outside of the US, while exports declined 1.1%, on fewer exports of cars and light trucks.

The Canadian dollar spiked to over 78¢ on Monday after news broke of a new NAFTA deal. The loonie fizzled by Friday, ending the week 0.2% lower.

This week's US economic data:

  • The US added 134,000 jobs in September, far short of the 185,000 positions that were expected. The national jobless rate declined from 3.9% to 3.7%, the lowest since 1969. Average hourly earnings ticked up 0.3%, dropping the annualized increase from 2.9% to 2.8%.

  • The US trade deficit expanded for the third month in a row, reaching US$53.2 billion in August.

  • The ISM manufacturing index slid slightly in August, but the non-manufacturing index hit an 11-year high.

Fed Chair Jerome Powell spooked equity markets this week after he called the US economic outlook "remarkably positive," suggesting that interest rates could rise above neutral. Economists are expecting one more rate hike in December, followed by at least three more increases in 2019. Yields on the 10-year broke out to a 7 year high, further steepening the yield curve.

SUPPLY & DEMAND FUNDAMENTALS

This week’s OPEC/NOPEC update:

  • Russia produced 11.4 million bbl/day in September, up about 150,000 bbl/day from August. The country's energy minister says he expects production to keep rising through the end of the year, reaching 11.9 million bbl/day in 2019.

  • Saudi Arabia is targeting 10.7 million bbl/day of crude output for the month of November, just shy of its November 2016 record high of 10.72 million bbl/day.

  • Despite the increases, OPEC and Russia are still in compliance with their November 2016 production reduction pact.

  • Saudi Arabia's energy minister announced plans to invest US$20 billion over the next few year to "maintain and possibly expand" its production capacity by about 1 million bbl/day. The kingdom claims it can sustain as much as 12 million bbl/day. According to Reuters, Saudi Arabia and Russia struck a private deal to raise output in September, ahead of its meeting with OPEC's monitoring committee.

  • Goldman Sachs says its expects 1.5 million bbl/day of crude to come offline once US sanctions are reinstated on Iran, in addition to the 700,000 bbl/day that have already been curtailed. However, the investment firm warns oil markets could swing into surplus next year, as new spare capacity comes online.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

Oct 3, 2018

CRUDE STOCKPILES SURGE IN THE GULF COAST AND MIDWEST

 

The US lost another 2 oil rigs this week, falling to 861. Canada lost another 3 oil rigs, ending Friday at 119. Rig counts have been down for the past three weeks on both sides of the border.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
84.16
74.34
66.67
49.28
32.35
55.62
49.29
51.08
46.46
30.41
86.29
76.41
71.40
69.32
56.21

The discount on Canada's benchmark light and heavy crudes widened again this week, as rising supply out of Alberta clashes with maintenance season for refineries in the US Midwest. The Western Canadian Select (WCS) discount to WTI is now at a record 55%, while the discount to Brent is over 60%. 

According to the EIA, Midwest refineries, the biggest buyers of Canadian crude, were operating at just 79% of capacity last week.

According to the National Bank, the newly sanctioned LNG Canada project should absorb about 20% of the country's natural gas supply, once fully operational at 26 million t/y. AECO gas prices out of Western Canada have more than doubled from the lows of late August, mainly due to the early arrival of winter, which has reduced drilling activity in Alberta and BC. The US Henry Hub benchmark rose another 4.5% for the week, thanks to seasonally-low inventory levels, abnormally-warm fall temperatures and a series of nuclear power plant outages.

CRUDE OIL FUTURES CURVES
BRENT
WTI
█ OIL PRICE (USD/BBL)   █ MONTH 3   █ MONTH 5 (VS NEAR MONTH)
MANAGED MONEY: FUTURES & OPTIONS
BRENT
WTI
█ OIL PRICE (USD/BBL)   █ LONG   █ SHORT █ NET LONG (1000 BBL CONTRACTS)
EQUITY MARKETS
    TSX SECTORS
52-WK
    SPX SECTORS
52-WK

The threat of higher interest rates once again spooked emerging markets, sending Chinese indices lower by more than 4%. US markets didn't fare much better, particularly small caps and the tech-heavy NASDAQ, both falling more than 3%. The TSX and S&P 500 lost about 1% for the week.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

The Canadian energy sector ended the week roughly unchanged, while the S&P 500 energy basket rose for the third week in a row, gaining almost 2% by Friday.

On the TSX, producers were the worst hit due to the constantly widening differentials on Canadian light and heavy crude. MEG Energy was a notable exception, rising almost 37% for the week. Canadian pipeline stocks had a stellar week, despite the threat of rising rates.

Most S&P 500 energy components also posted gains for the week.

According to Credit Suisse, the LNG Canada project will boost prospects for the country's natural gas producers and distributors. The bank's top picks include ARC Resources, Brookfield Infrastructure Partners, Enbridge, Encana, Keyera Corp, NuVista Energy, Pembina Pipelines, Seven Generations and TransCanada.

CANADIAN ENERGY NEWS

This week's LNG Canada news:

  • BC Premier John Horgan and Prime Minister Trudeau announced the sanctioning of the massive LNG Canada project, located in Kitimat, BC. The $40 billion export terminal, led by Royal Dutch Shell, is the country's largest private sector investment in its history. The initial phase of development will consist of two LNG liquefaction trains, for a total capacity of 14 million t/y, with the potential to expand to four operating trains. Shell CEO Ben van Beurden says he believes "LNG Canada is the right project, in the right place, at the right time." LNG Canada is co-owned by PetroChina, Japan's Mitsubishi Corporation and the Korea Gas Corporation. The export terminal has an estimated in-service date of about 2025. 

  • A joint-venture between Fluor and Japan's JGC Corporation has been awarded a US$14 billion EPC contract for the export terminal. Fluor says construction will peak at 4,500 workers, expected to be sourced domestically. The team expects to begin site activities this year. According to operator Shell, LNG Canada will be constructed under a single EPC lump-sum contract at an estimated cost of US$1,000 per tonne of LNG. Each LNG train will be modularized and built in Asia.

  • Now that LNG Canada is a go, TransCanada also gave the green light to its 670 km Coastal GasLink Pipeline Project, bringing 2.1 Bcf/day of natural gas from the Dawson Creek area in northeastern BC to Kitimat. TransCanada says it is exploring joint-venture partners and financing options for the project, which has an estimated capital cost of $6.2 billion. 

  • A 50/50 joint venture between Aecon Group and Robert B. Somerville has been awarded a $526 million contract by TransCanada for parts of the GasLink project. The scope includes construction of about 200 km of pipe near Prince George, BC. Early works is expected to begin in the middle of next year, with construction starting in July 2020. Construction is expected to be completed by the end of 2022.

This week's Trans Mountain Expansion (TMEP) news:

  • The federal government says it will not appeal a court ruling that overturned the TMEP's approval, instead opting for more consultations with aboriginal groups. The Trudeau Liberals have promised to re-initiate Phase III consultations with all 117 Indigenous groups impacted by the project, appointing former Supreme Court Judge Frank Iacobucci as its representative to oversee the process. The government acknowledges its Indigenous consultations on TMEP were "more extensive than any in the past," but obviously still fell short according to the Federal Court of Appeal.

  • Alberta Premier Rachel Notley says she does not agree with the federal government's decision to not pursue an appeal, arguing it could be faster and more effective. The premier says she welcomes the renewed consultations, but expressed doubts construction can be restarted by next summer.

  • The province of BC has filed for intervenor status in the National Energy Board's (NEB) latest round of regulatory reviews on TMEP, claiming its mandated 22-week timeframe is "insufficient to accommodate a thorough review" on the impacts of additional marine traffic and consultations with Indigenous groups.

This week's other Canadian political news:

  • Canada and the US agreed to new NAFTA terms last weekend, just hours ahead of the October 1 deadline. Absent from the new United States, Mexico and Canada Agreement (USMCA) is Article 605, which forbids Canada from withholding crude shipments to the US below the 3-year average. API says preserving the minimum threshold is no longer required, now that both the US and Canada have a major excess of crude supply. The energy advocacy group says USMCA is "a good deal for the American energy consumer," recommending that Congress approve the deal.

  • The Government of Canada says it is committed to working and consulting with territorial governments, industry, and Indigenous groups on the future offshore oil and gas development in the Arctic, particularly for current licence holders. The government says it plans to develop a framework for a "science-based, life-cycle impact assessment review" every five years, taking into account marine and climate change science. NWT Premier Bob McLeod welcomed the news, in hopes that the Liberals may relax its current moratorium on oil ands gas development. There are currently 63 exploration and discovery licences in the Beaufort Sea.

  • The province of Manitoba has backtracked on plans to enact a $25/t carbon tax, and now says it may join Saskatchewan and Ontario in their fight against the federal Liberals. Manitoba Premier Brian Pallister agreed to the $25 levy, but didn't agree to Ottawa's demand to increase the tax by $10/yr, rising to a minimum of $50/t by 2022. The premier accuses the federal government of being non-cooperative. Alberta’s United Conservatives party leader Jason Kenney has also vowed to join the fight if elected next spring.

Other notable Canadian energy news:

  • According to sources at Bloomberg, Enbridge is looking at changing the way it delivers crude on its 2.85 million bbl/day Mainline network, Canada's largest export pipeline. The pipeline currently operates as a common carrier, with no set contracted volumes. Starting January 2020, Enbridge has asked the NEB for permission to begin take-or-pay agreements for 90% of the line's capacity. The company is reportedly planning to begin open-season early next year, asking producers to sign long-term deals on the export pipeline.

  • The Alberta Energy Regulator (AER) has cancelled its planned hearings into Imperial Oil's 162,000 bbl/day Aspen Project. Imperial submitted its regulatory application at the end of 2013, but has yet to receive approvals. The Fort McKay First Nation has requested to participate in hearings, but the community now says it will address its concerns directly with Imperial. The first phase of development for the in-situ project has an estimated capital cost of $2.4 billion, and has yet to be sanctioned by the company.

  • The NEB has cleared Enbridge to restart Line 21, which has been out of service since the end of 2016 due to slope stability issues on a 2.5 km section of the line near Fort Simpson, NWT. Line 21 carries crude from Imperial Oil's Normal Wells plant into Zama, Alberta, where it connects to a larger pipeline network. The pipeline outage forced the shutdown of the 11,000 bbl/day facility, much to the dismay of the NWT government, since the site also provides power to the local community. Imperial had put Norman Wells up for sale in 2016, but failed to find a suitable buyer. The company now says it plans to restart production, but has yet to provide a definite timeline.

This week's M&A activity:

  • Husky Energy launched a $6.4 billion hostile bid for MEG Energy, including the assumption of $3.1 billion in debt. According to the Globe and Mail, negotiations between Husky CEO Rob Peabody and MEG's board began last spring, but broke down in the summer after one of MEG's largest shareholders resigned. Husky says although MEG has high quality assets, it has "failed to create shareholder value" for its investors due to insufficient takeaway capacity and lack of integration with downstream refineries. According to Husky, the combined company would produce over 410,000 boe/day, potentially resulting in savings of $200 million annually. Husky has commenced its tender offer at $11 in cash or 0.485 Husky shares for each MEG share. MEG says it is reviewing its options and asks its shareholders not to tender their shares.

  • After fending off a hostile takeover from Ensign Energy Services, Trinidad Drilling has agreed to be purchased by Precision Drilling for $1 billion, including $477 million in debt. Precision is offering $1.98 in stock, besting Ensign's all-cash bid by about 20%. The company says it expects the deal to save it about $30 million annually. If completed, the new Precision Drilling would be valued at about $4 billion, and be the third largest driller in the US. The transaction is subject to shareholder approval.

  • Aecon Group has agreed to sell its Contract Mining business to North American Construction Group (NACG) for $199.1 million in cash. The division provides overburden removal and reclamation services, primarily to oil sands mine operators north of Fort McMurray, Alberta. The transaction includes Aecon's fleet of mining equipment and existing contracts. North American says the deal will add $220 million to its annual revenues.

  • Bellatrix Exploration has agreed to acquire all the remaining Grafton Energy assets for $13 million, after which its existing joint-venture will be terminated. The assets are located in the Ferrier area, in central Alberta, producing 2,200 boe/day (weighted 21% liquids).

Other Canadian investing news:

  • Creditors of bankrupt producer Connacher Oil and Gas have unanimously approved the company's pending sale to East River Oil and Gas. Connacher says it is now working towards satisfying other conditions required to close on the sale, which is expected sometime after November 8, 2018. Connacher's main asset is the Great Divide SAGD facility, located south of Fort McMurray.

  • AltaGas has filed an amended prospectus for the pending IPO of its Canadian utilities and renewable power assets. The company expects to raise $2.5 billion, which will be put towards repayment of its bridge loan, acquired during its $8.4 billion purchase of WGL Holdings.

  • S&P Global Ratings has placed Husky Energy on CreditWatch Negative, due to the potential addition of another $3.6 billion in debt from its planned takeover of MEG Energy. The credit ratings agency says the assumption of MEG's debt will "materially weaken" Husky's balance sheet, which will likely cut its debt rating from BBB+ to BBB.

  • Moody's Investors Service has upgraded Cenovus Energy's debt rating from Ba2 to Ba1, thanks to an "an improved cost structure" which should support further debt reduction.

  • Enbridge Income Fund has suspended its DRIP program and share repurchases, in light of its pending buyout from parent-company Enbridge.

US ENERGY NEWS

This week's US midstream news:

  • Enbridge and the State of Michigan have signed a second agreement for its Line 5 pipeline, which runs under the Straits of Mackinac. Enbridge has agreed to replace a river crossing, suspend operations during bad weather and explore the construction of a tunnel, which will contain a new pipeline. Line 5 has been in operation for more than 60 years, carrying 540,000 bbl/day of light oil and NGLs into Michigan.

  • The Western Build of TransCanada's WB XPress natural gas pipeline in West Virginia has been put into service, after being cleared by federal regulators (FERC) earlier this week. The 760 MMcf/day line is part of the Columbia Gas Transmission network, connecting the Marcellus and Utica shale basins with customers in the US and Canada.

  • Williams Co has also received approval from FERC to place its Atlantic Sunrise Project into full service this week. Atlantic Sunrise is part of the Transco pipeline network, the largest natural gas pipeline system in the US by volume, transporting 15.8 Bcf/day.

  • FERC also approved the expansion of Kinder Morgan's Sierrita Gas Pipeline, which runs from Arizona to a power plant in northern Mexico.

  • Enbridge says the in-service date for its 2.6 Bcf/day Valley Crossing Pipeline will be delayed to the end of April 2019, six months later than planned. Construction on the line, which runs from Texas to Mexico, has been hampered by bad weather.

  • EQT Corp insists its US$4.6 billion Mountain Valley pipeline will be operational by the fourth quarter of next year, despite a recent cancellation of federal river crossing permits in the state of West Virginia. The company says it is looking at rerouting the line in the affected areas.

  • EPIC Midstream says it will temporarily convert one of its NGL pipelines into crude oil service, in order to help alleviate congestion out of the Permian Basin. The 730-mile NGL line is currently under construction and is expected to be completed in the third quarter of 2019. The line will run on "crude mode" until about January 2020, when an adjacent crude oil pipeline is out into service.

  • Noble Midstream Partners announced plans for a 50/50 joint venture with privately held Salt Creek Midstream  to construct a 200,000 bbl/day pipeline in the Delaware Basin. Salt Creek has commenced construction of the line, which has an expected operational date of Q2/2019.

This week's notable US M&A activity:

  • According to Reuters, ExxonMobil is looking at selling several of its deepwater assets in the US Gulf of Mexico, producing an estimated 50,000 bbl/day. The company says it remains committed to the region, but plans to focus on more promising acreages offshore Guyana and Brazil, as well the Permian in West Texas. Exxon's Gulf of Mexico production is currently estimated at about 200,000 bbl/day of liquids and 730 MMcf/day of natural gas.

  • Encana has sold its San Juan assets in New Mexico to privately-held DJR Energy for US$480 million. The assets include 182,000 net acres producing around 5,400 barrels of oil equivalent per day.

  • Williams Co has closed on the US$1.125 billion sale of its Four Corners Area business in New Mexico and Colorado to Harvest Midstream. The assets include include 3,700 miles of pipeline, two gas processing plants, and one CO₂ treating facility.

  • Marathon Petroleum closed on its US$23 billion acquisition of Andeavor, now making Marathon the largest independent refiner in the US by capacity. The new company says it expects to save US$1 billion due to cost synergies within the first three years. Andeavor stock has since been delisted from the NYSE.

GLOBAL ENERGY NEWS

For the first time in 7 years, England plans to begin fracking for natural gas, much to the dismay of anti-frackers and environmental groups. Cuadrilla Resources plans to frack two wells in Lancashire, located in the northwestern part of the country. The company drilled two wells in 2011, believed to have triggered two tremors in the region. A court case is pending next week to try and stop the three-month exploratory campaign. The government says it would like to reduce its reliance of gas imports, which currently accounts for about half of its supplies. Fracking is banned throughout the rest of the UK and most European countries, due in part to the threat of earthquakes and an extensive propaganda campaign launched by the Russians. Northern England is estimated to hold about 1,300 Tcf of gas. 

Equinor has agreed to buy Chevron’s 40% operated interest in the Rosebank project in the UK Continental Shelf, for an undisclosed amount. Rosebank is one of the largest undeveloped fields in the region, located 130 km northwest of the Shetland Islands. The project has an estimated development cost of US$6 billion, and is jointly-held with Suncor Energy and Siccar Point Energy. According to Reuters, Chevron is looking to divest several other assets in the UK North Sea.

ConocoPhillips' has sold its 30% stake in the Greater Sunrise gas field to the government of East Timor for US$350 million. The field was discovered in 1974 but has yet to be developed, in part due to a maritime dispute with neighbouring Australia. The field is jointly owned with Woodside Petroleum, Royal Dutch Shell and Japan's Osaka Gas, who would all prefer to build a natural pipeline and LNG export terminal in Darwin, Australia, much to the dismay of the Timor government. Timor is one of the world's poorest countries, and is banking on LNG to generate much needed government revenues.

ExxonMobil is reportedly considering a multi-billion dollar upgrade to its 592,000 bbl/day refinery in Singapore, as it moves to adjust to lower sulphur limits in global shipping fuels. The International Maritime Organization has cut the maximum sulphur content in marine fuels from the current 3.5% to 0.5% by 2020.

Marathon Oil has reportedly put its oil and gas assets in the UK North Sea up for sale. Marathon produces about 15,000 boe/day in the region. The properties could be worth as much as US$200 million, likely to be put towards onshore shale production in the US.

Equinor says its reserves in Norwegian Sea have more than doubled, thanks to another 50 to 70 million barrels of oil found in the Norne field. The field was originally planned to be shut down in 2014 but production has now been extended to 2036.

Baker Hughes (BHGE) is preparing an offer for a production-sharing agreement with Petrobras, as the Brazilian oil major seeks to boost output from mature fields. According to Reuters, the bid may include a joint-venture with BHGE's main competitor, Schlumberger.

UPDATED: EVERY WEEKEND
NOTES:
  • CRB = THOMSON REUTERS/CORECOMMODITY CRB INDEX
  • US BNDS = BONDS = TLT = iSHARES 20+ YEAR TREASURY BOND ETF
  • CA BNDS = XBB = iSHARES CANADIAN UNIVERSE BOND INDEX ETF
  • SECTOR & SUBSECTOR PERFORMANCES WEIGHTED BY MARKET CAP
  • SOURCES:
  • COMMODITY PRICES REFLECT NEAR MONTH CONTRACT FROM THE NYMEX/CME GROUP
  • EQUITY PRICES & SECTOR PERFORMANCE PROVIDED BY NYSE & TMX GROUP
  • FUTURES & OPTIONS CONTRACTS FROM ICE/CFTC (WEEKLY DATA FOR PREVIOUS TUESDAY)
  • CHARTPACKS COURTESY STOCKCHARTS.COM
  • Cdn crude prices get slaughtered as discounts to WTI go from wide to ridiculous

    Cdn crude prices get slaughtered as discounts to WTI go from wide to ridiculous

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