TSX energy posts fourth week of declines as Canadian crude prices sink almost 30%
This week's notable Canadian economic data:
Canada added 11,200 new jobs in October. Saskatchewan saw a small uptick, while most other provinces were unchanged for the month. The unemployment rate dropped from 5.9% to 5.8% as more people exited the labour force.
GDP by industry edged up 0.1% in August. Oil and gas extraction rose almost 2%, led by a 3.2% gain in non-conventional production. Support activities for mining and energy declined 3.8%, the fourth consecutive monthly drop, due to less drilling and rigging services.
Canada's merchandise trade deficit narrowed to $416 million in September, down from $551 million in August. Imports of energy products fell 11.5% to $3.0 billion. Crude imports declined 13.2% while imports of refined products fell almost 19%. Export of energy products rose 2.3%. Crude exports rose 1% while exports of refined products rose almost 11%.
This week's notable US economic data:
The latest labour figures showed 250,000 new jobs created in October. The jobless rate was unchanged at 3.7%. Hourly wages are now up 3.1% for the past 12 months.
US productivity grew at an annualized rate of 2.2%, slower than the previous quarter but relatively decent for the year.
The US trade deficit widened to US$54.0 billion in September, up from US$53.3 billion in August. This is the fourth month of widening deficits.
The ISM Manufacturing index dipped 2.1 points in October, falling to the lows of April.
Better than expected US jobs data sent interest rates rising around the world, including Canada, the UK, Japan and Germany. Longer durations bond yields were the winners this week, with the US 30-year spiking to highs last seen in 2014. Yields on 10-year bonds are still hovering near the highs of 2011. The yield curve remains relatively flat, but firmly above the lows of last August.
On currency markets, the Japanese yen retreated 1%. The pound sterling and Aussie dollar were big winners for the week, rising 1.0% and 1.5%, respectively. The loonie ended Friday about unchanged from the previous week.
This week's supply update:
According to Reuters, OPEC increased production by 390,000 bbl/day to 33.3 million bbl/day in October, the highest since December 2016. The biggest increase came from the UAE, where production rose 200,000 bbl/day and is expected to rise by another 250,000 bbl/day before the end of 2018.
Production out of Libya also rose 170,000 bbl/day to an average of 1.22 million bbl/day. Nigeria also added 30,000 bbl/day for the month. Output from Iran declined 100,000 bbl/day, while production out of Venezuela also slid lower for the month.
According to Bloomberg, crude oil and condensate production out of Russia reached a record 11.4 million bbl/day in October. Russia's energy minister has rejected calls to freeze or cut output, in light of newly reinstated sanctions on Iran.
According to the EIA, US production out of the Lower 48 has recovered from the effects of Hurricane Michael, sending total US production back to its old record high of 11.2 million bbl/day.
This week's demand update:
The world's largest oil trader warns that demand for crude is likely to fall next year due to weakness in emerging markets. Vitol revised its 2019 growth forecast from 1.5 to 1.3 million bbl/day, and reduced this year’s forecast from 1.7 to 1.3 million bbl/day.
According to Reuters, a recent survey of 46 economists expect oil demand to grow by 1.1 to 1.5 million bbl/day next year, lower than the IEA's October forecast of 1.4 million bbl/day.
Although US sanctions on Iranian crude exports take effect on Monday, the Trump Administration has granted waivers to eight of the country's largest buyers, including China, India, South Korea, Japan and possibly Turkey, allowing exports to continue and easing fears of supply shortages in the near term.
According to Baker Hughes, the US lost one oil rig this week, falling to 874, while Canada lost three rigs, falling to 121. The number of gas rigs were unchanged on both sides of the border.
This week's Brent price forecasts:
Goldman Sachs blames the October meltdown on demand concerns and diminishing fears of supply disruption from Iran. The investment bank maintains its year-end Brent forecast of US$80 a barrel.
According to the Wall Street Journal's October survey of 11 investment banks, the average Brent forecast has been bumped up slightly to US$75 a barrel for 2018.
Oil trader Vitol says it expects oil prices to hover closer to US$70 in 2019, warning that crude markets are "not that tight in the immediate term." Diesel demand should get a boost in the second half of next year as new marine fuel standards curb usage of high-sulphur bunker fuels.
The Canadian light and heavy benchmarks took a beating this week, both falling almost 30%. Condensate prices also sank 18% in Edmonton. Canadian oil prices are now back to the lows of early 2016, when WTI and Brent were trading closer to US$30/bbl. Analysts at Scotiabank say things will get better in 2019, as Midwest refineries return to normal rates, crude-by-rail capacity increases and Enbridge's Line 3 expansion gets completed, which should bring the heavy oil discount from the current US$45 a barrel to less than US$25.
Gasoline and heating oil also took a hit this week, declining almost 6%. Alberta's AECO gas prices shot up almost 30% this week, ending Friday at US$1.91/MMBtu, due in part to expiry of its November contract.
Brent and WTI peaked at the beginning of October but sank about 15% by Halloween, making it the worst month for global oil prices since the middle of 2016.
For the month of October, oil prices averaged as follows (USD/bbl):
Brent $80.63 +1.47
WTI $70.76 +0.67
Edmonton Condensate (C5+): $60.85 -2.30
Canadian Light $43.69 -9.48
Western Canadian Select $27.47 -12.10
The October monthly average discounts versus WTI were as follows (USD/bbl):
WTI discount to Brent: $9.87 +$0.79 (12% discount)
WCS discount to WTI: $43.29 +12.77 (61% discount)
Canadian Light discount to WTI: $27.06 +10.15 (38% discount)
C5+ discount to WTI: $9.91 +2.97 (14% discount)
Henry Hub and AECO averaged US$3.21 and US$1.63 MMBtu for the month of October.
October turned out to be an ugly month for stocks with the S&P 500 and TSX declining about 7%. Emerging markets were also hit hard last month, with the MSCI world index sinking almost 9%. The Nasdaq was one of the worst performers in North American markets, also falling 9% for the month.
Global markets kicked off November in the green, all posting gains for the week as stocks staged a modest recovery. Asian markets were the best performers, with Hong Kong rising 7% and the Nikkei gaining 5%. US markets outperformed Canada, with the S&P 500 rising 2.4% on gains across most sectors. The TSX rose 1.6%, held back by declines in energy and utility stocks.
Oodles of Canadian producers and a handful of midstream and services stocks hit multi-year lows on the TSX this week. Producers were the worst performers, particularly Encana, sinking 17% after announcing its US$5.5 billion acquisition of Newfield Exploration. The TSX energy sector lost over 2% for the week, its fourth consecutive weekly decline.
The S&P 500 energy sector ended Friday in the green, rising almost 2%. Mega-cap integrated names and refiners were the best performing subsectors.
According to Moody's Investors Service, debt levels at oilfield services and drilling companies have become "unsustainable," forcing many firms to slash expenses. The ratings agency says the offshore services sector "is probably years away from rationalizing and fully recovering," assigning a negative outlook to Diamond Offshore, Hornbeck Offshore, Weatherford and Transocean, seen as being most at risk of default.
Goldman Sachs says it expects gasoline prices to remain weak through the fourth quarter due to seasonality and higher refinery utilization rates. Wide differentials between the different crude feedstocks will drive refineries to "run hard" in order to take advantage of good crack spreads. In the US refining space, the investment firm says it prefers Marathon Petroleum, Phillips 66, Delek and CVR Energy over Valero Energy and PBF Energy.
|Imperial Oil||IMO||42.03||▲1.3||33.43||44.91||86||D W|
|Husky Energy||HSE||17.94||▼-4.0||15.09||22.99||23||D W|
|Pembina Pipeline||PPL||43.26||▼-0.1||37.60||47.84||68||D W|
|Inter Pipeline||IPL||21.59||▼-1.1||20.68||27.92||34||D W|
|Gibson Energy||GEI||20.87||▼-0.5||15.68||23.04||96||D W|
|LARGE CAP E&P|
|Cdn Natural Res||CNQ||37.50||▲1.6||35.31||49.08||18||D W|
|Cenovus Energy||CVE||11.47||▲3.1||9.03||14.84||24||D W|
|Seven Generations||VII||13.68||▼-1.1||12.82||21.25||13||D W|
|Pason Systems||PSI||19.54||▼-2.2||16.05||22.10||54||D W|
|Mullen Group||MTL||13.81||▼-1.1||13.43||16.95||25||D W|
|Secure Energy||SES||8.38||▲1.3||6.98||9.82||87||D W|
|REFINING & MARKETING|
|Parkland Fuel||PKI||40.95||▼-3.6||24.97||47.45||97||D W|
|Exxon Mobil||XOM||81.95||▲5.7||72.16||89.30||71||D W|
|Kinder Morgan||KMI||16.86||▲1.6||14.69||19.83||61||D W|
|Williams Co||WMB||25.58||▲5.2||23.54||33.67||44||D W|
|LARGE CAP E&P|
|EOG Resources||EOG||102.35||▼-4.0||96.54||133.53||10||D W|
|Occidental Petroleum||OXY||68.31||▲0.6||62.47||87.67||16||D W|
|Anadarko Petroleum||APC||53.21||▼-9.6||46.80||76.70||3||D W|
|Concho Resources||CXO||141.05||▲4.3||123.63||163.11||36||D W|
|Ntl-Oilwell Varco||NOV||36.11||▲0.6||31.47||49.08||13||D W|
|Baker Hughes||BHGE||26.07||▼-4.7||25.53||37.76||2||D W|
|Phillips 66||PSX||99.01||▼-0.4||89.14||123.97||15||D W|
|Valero Energy||VLO||91.83||▲7.0||80.00||126.98||8||D W|
|Marathon Petroleum||MPC||69.49||▲0.9||60.10||88.45||21||D W|