Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending March 16, 2018:
  • Suncor warns of Q1 production shortfall
  • Kinder Morgan & Keyera add storage capacity at Hardisty
  • Enbridge seeks dance partner for Narrows Lake
  • Encana CEO moving to Denver
  • Teck taps former Cenovus exec as new head of energy
  • Cdn crude output hits new record of 4.2 million bbl/day
  • TSX energy stocks play catch-up to US counterparts
  • TransCanada starts-up Cameron Access natgas line
  • Enbridge clears major hurdle in Minnesota on Line 3
  • MLPs get creamed on elimination of US tax credits
  • Global crude stockpiles start rising again, after 7 months of declines
  • Statoil's plan to become a little less oily.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
BULLISH
  • US Secretary of State Rex Tillerson was sacked from his position this week, to be replaced with CIA head Mike Pompeo. Tillerson was seen as being largely supportive of Iran's nuclear deal, while Pompeo might be more inclined to support President Trump's desire to potentially re-instate sanctions, which would make crude exports more difficult for the OPEC member.
  • Saudi Arabia threatened to develop nuclear weapons if Iran does the same, raising the potential for a nuclear arms race between the two big oil producers.
USD INDEX
NEUTRAL
  • The US dollar still remains in a very tight trading range, showing no signs of life.
SUPPLY
BEARISH
  • According to the WSJ, Iran is looking to exit its pact with OPEC and Russia to cut output. The country's energy minister expressed concerns that high prices are encouraging US shale producers to boost production.
  • Saudi Arabia has pledged to keep production below 10 million bbl/day for the month of April.
  • OPEC said its combined output dropped by 77,000 bbl/day to 32.186 million bpd in February, led by declines in Iraq, the UAE and Venezuela. Venezuela's output declined another 10% in February to 1.6 million bbl/day, the lowest since the 1950s.
  • OPEC says it expects non-OPEC producers to boost supply by 1.66 million bbl/day this year.
  • The IEA raised its global supply forecast by 700,000 bbl/day to 97.9 million bbl/day, warning that supply is outstripping demand, causing global inventories to begin rising again.
DEMAND
BULLISH
  • The IEA also raised its 2018 demand forecast by another 90,000 bbl/day this week to 99.3 million bbl/day.
  • OPEC marginally raised their global demand forecast for this year to 1.6 million bbl/day, now expected to average 98.63 million bbl/day.
SENTIMENT
BULLISH
  • Net longs on WTI continue to slowly decline from the highs of mid-January. However, money managers remain overwhelmingly bullish, as few are taking short positions on oil prices.
  • Oil prices declined earlier in the week, but once again rallied off support levels, forming higher lows.
CURRENCIES & BONDS

This week's notable Canadian economic news:

  • Manufacturing sales declined 1% in January, falling to $54.9 billion. Declines were led by auto, aerospace and base metals. Alberta sales rose 1.1% to $6.3 billion, the sixth consecutive monthly increase, on higher prices for petroleum products and petrochemicals.
  • Higher asset values dropped Canada's debt-to-income ratio to 170.4% in the fourth quarter, down from a record high 170.5% in Q3/2017. Canadian households owed $2.1 trillion at the end of last year, about $1.4 trillion in the form of mortgage debt.

Bank of Canada Governor Stephen Poloz gave a rather dovish speech this week, again dampening expectations for more rate hikes later this year. Canadian bond yields for 10-year notes fell from 2.27% to 2.14%. Most global bond yields also ended the week lower. The loonie was this week's worst performer in currency markets, falling over 2%. 

This week's notable US economic news:

  • US retail sales declined again in February, led by a drop in auto sales and gasoline.
  • The consumer price index (CPI) rose 0.2% in February, bringing the full year CPI from 2.1% to 2.2%.
  • Industrial production rebounded 1.1% in February, the strongest showing since October.
  • Household confidence continues to improve, now back to the highs of January 2004.

President Trump has selected CNBC personality Larry Kudlow as his next economic advisor, replacing outgoing advisor Gary Cohen. Kudlow served as advisor to the Reagan Administration and has repeatedly stated his preference for a stronger greenback. However, the US dollar was once again roughly unchanged for the week, remaining in a very narrow trading range. US short term yields rose again this week, continuing their strong uptrend. However, long bond rates declined, flattening the yield curve.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
66.21
62.34
63.84
57.34
37.74
44.82
42.53
40.88
39.64
30.41
70.53
66.14
65.19
59.16
44.22

The Canadian heavy crude differential narrowed by US$1 this week, falling to US$24.60/bbl on Friday. The differential on Canadian Light widened due to contract expiry on Thursday, while the premium on Edmonton condensate (C5+) narrowed from almost US$3 to US$1.50/bbl.

Backwardation on WTI continues to narrow from the highs of February, particularly in near-month contracts. Brent prices remain firmly in backwardation, with a slight easing in recent months.

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)

According to Statistics Canada, the country produced a record 4.198 million bbl/day of crude oil in December, up 68,000 bbl/day from the previous month. Most of those gains came from light/sweet upgraded bitumen, rising 147,000 bbl/day to 1.237 million bbl/day.

US natural gas inventories fell 93 bcf last week, now down 718 bcf from the same time last year. This is the seventeenth weekly drawdown.

According to Baker Hughes, the US added four oil rigs this week, bringing the total to 800. Canada lost 52 oil rigs likely due to the spring thaw, bringing the total to 144.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

MAR 14, 2018

Crude inventories rise another 5 million bbls as stockpiles rise in Cushing and the Gulf Coast

 
EQUITY MARKETS
    TSX SECTORS
52-WK
    SPX SECTORS
52-WK

US equity markets ended the week lower on concerns over a potential trade war with China. Declines were led by large cap Dow components and broadly based, with materials and financial stocks leading the declines. Utility stocks had a rare positive showing this week, gaining ground due to lower long-term rates.

The TSX managed to eke out a 1% gain this week. Gains were also broadly based, led by energy, materials and health care stocks.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

Midstream stocks took a hit earlier this week after US regulators ruled that MLPs that operate interstate pipelines can no longer receive a credit for income taxes they don't pay. MLPs are tax-exempt corporate structures that don't pay taxes but instead pay out profits to shareholders dividend-style. Last year, a US Appeals Court ruled that MLPs were double-dipping on tax savings. The ruling does not affect pipelines held within corporations. The industry is expected to appeal the decision.

Canadian energy stocks posted a good week on a slight narrowing of the heavy oil differential. Service stocks were this week's worst performers on both sides of the border.

CANADIAN ENERGY NEWS

Suncor Energy (SU) warned that first quarter production will be a little light this year, as the Syncrude facility moves up its 8-week maintenance turnaround one month ahead of schedule, now planned for mid-March to mid-May. However, Suncor says its full-year 2018 production guidance remains unaffected.

Kinder Morgan Canada (KML) announced the completion of two new 400,000 barrel oil storage tanks at its Base Line Terminal near Edmonton. The new addition boosts the company's capacity in the region to 2.4 million barrels. KML says it plans to add another six tanks, bringing total storage capacity to 4.8 million barrels by the end of this year. The Base Line Terminal is a joint-venture with Keyera Corp (KEY).

KML was also granted indefinite injunctions at both its Burnaby and Westridge Terminals, allowing the company to continue construction on its Trans Mountain Expansion project. The judge ruled that although citizens have the right to protest, they cannot interfere or block construction activity.

According to Reuters, Cenovus Energy (CVE) is looking for a partner to help it develop its Narrows Lake SAGD project near Christina Lake. Cenovus has already invested about $700 million to advance the project. Phase A of Narrows Lake is expected to produce as much as 65,000 bbl/day.

Encana (ECA) CEO Doug Suttles will be relocating from the Calgary head office to Encana's office in Denver. The company says no other executives will be relocating and it has no intentions of moving its head office outside of Canada.

Teck Resources (TECK.A) announced the appointment of Kieron McFadyen as Senior VP, Energy, effective next week. McFadyen was most recently President of Upstream Oil and Gas at Cenovus (CVE).

Canadian Natural Resources (CNQ) announced intentions to potentially buy back and cancel up to 61.3 million shares over the next 12-months, representing about 5% of its current float.

Obsidian Energy (OBE) is at risk of being delisted from the NYSE as OBE shares have traded below US$1 per share for 30 consecutive days. Obsidian says it will ask shareholders to vote on a reverse share-split at its next annual general meeting.

Parkland Fuel (PKI) announced plans to issue $500 million in senior unsecured notes due in 2026. The company says it will use the proceeds to pay down funds drawn from its credit facility.

This week's fourth quarter earnings releases:

  • NuVista Energy (NVA) reported record production for the fourth quarter, rising to 37,400 boe/day, a 51% increase from the previous year. Funds from operations rose 85% to $75.9 million. For the full year 2018, NuVista plans to spend between $270 to $310 million in capital while production is expected to average between 35,000 and 40,000 boe/day.
  • Seven Generations Energy (VII) reported record funds from operations of $1.23 billion for the full year 2017 and $404 million in the fourth quarter, up 66% and 84%, respectively. Total production averaged 197,300 boe/d in the fourth quarter and 175,000 boe/d in 2017. 7Gen posted a profit of $83.6 million for the fourth quarter and $562.5 million for the year.
  • Bellatrix Exploration (BXE) averaged 37,077 boe/day in Q4 (weighted 74% natural gas), up 16% from the same quarter last year. The company posted a loss of $13 million in Q4 and $91.4 million for the full year 2017.
US ENERGY NEWS

TransCanada (TRP) announced the start-up of its Cameron Access project in SW Louisiana. The US$300 million pipeline will transport 800 MMcf/day of natural gas to the Cameron LNG export terminal, which is currently under construction.

Minnesota's Public Utilities Commission has unanimously ruled that the Final Environmental Impact Statement for Enbridge's (ENB) Line 3 Replacement Project is adequate, and addresses all of their environmental concerns. A final certificate is due in June, clearing the way for construction to begin in the state. The $8.2 billion project will increase capacity on the line from the current 400,000 bbl/day to 760,000 bbl/day.

A US appeals court is allowing Energy Transfer Partner (ETP) to continue construction of its Bayou Bridge crude oil pipeline in Louisiana. A lower court had put a temporary injunction in place after opponents expressed concerns over potential effects on wildlife and the economy. The appeals court ruled that the pipeline has already been thoroughly reviewed and approved by federal regulators, overturning the lower court ruling. The 261 km pipeline extension to St. James, LA will have the capacity to transport up to 480,000 bbl/day.

EQT Corp (EQT) announced the immediate resignation of its President and CEO Steven Schlotterbeck, citing personal reasons. Schlotterbeck has been replaced by former board chair David Porges, until a permanent replacement is found.

Net losses at American Midstream Partners (AMID) widened to US$131 million for the full year 2017, versus a US$51 million loss for 2016. Full year revenues rose 11% to US$656 million.

Across the pond this week:

  • Italian energy major Eni (E) has agreed to sell a 10% stake in the Shorouk concession to Mubadala Petroleum for US$934 million. The field is located within Egypt's massive Zohr's gas field, which began production at the of last year and currently produces about 400 MMcf/day. Eni will retain a 50% stake, along with partners Rosneft (30%) and BP (10%).
  • According to Reuters, BP (BP) is looking to offload its mature oil fields in Egypt, shifting its focus towards offshore natural gas. BP's Gulf of Suez assets are reported to be worth about US$1 billion. BP says it hopes to divest up to US$3 billion in non-core assets this year.
  • As part of its ongoing mission to "simplify" its upstream portfolio and divest US$30 billion in assets by the end of this year, Royal Dutch Shell (RDS.A) has agreed to sell its interests in New Zealand to Vienna-based OMV for US$587 million.
  • Norwegian energy major Statoil (STO) announced plans to change its name to "Equinor" reflecting less of a focus on oil and more investments towards renewable energy. The company says the new name reflects how it sees people, the future of energy and its heritage in Norway.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
GAINERS
• Birchcliff Energy (BIR)
• Crew Energy (CR)
• Raging River (RRX)
• Seven Generations (VII)
• Spartan Energy (SPE)
• Apache (APA)
• Baker Hughes (BHGE)
• Murphy Oil (MUR)
• Newfield Exploration (NFX)
• Transocean (RIG)
12-MO
HIGHS
• None • None
ALL-TIME
HIGHS
• None • None
GOLDEN
CROSSES
• None • None
BEARISH INDICATORS
TSX
S&P 500
TOP 5
LOSERS
• Mullen Group (MTL)
• Paramount Resources (POU)
• Pason Systems (PSI)
• PrairieSky Royalty (PSK)
• Secure Energy Services (SES)
• EQT Corp (EQT)
• Helmerich & Payne (HP)
• Noble Energy (NBL)
• Range Resources (RRC)
• Schlumberger (SLB)
12-MO
LOWS
• Enbridge (ENB)
• Imperial Oil (IMO)
• PrairieSky Royalty (PSK)
• Shawcor (SCL)
• Exxon Mobil (XOM)
• Kinder Morgan (KMI)
• Williams Co (WMB)
ALL-TIME
LOWS
• None • None
DEATH
CROSSES
• Cenovus Energy (CVE)
• Pembina Pipeline (PPL)
• Shawcor (SCL)
• Cabot Oil & Gas (COG)
• Cimarex Energy (XEC)
• Newfield Exploration (NFX)
ANALYST RATINGS

UPGRADES

  • ExxonMobil (NYSE:XOM): Upgraded from Reduce to Buy at HSBC and from Sell to Neutral at UBS.
  • Freehold Royalties (TSX:FRU): Upgraded from Hold to Buy at Canaccord Genuity.
  • Kosmos Energy (NYSE:KOS): Upgraded from Hold to Buy at Jefferies Group.
  • Noble Energy (NYSE:NBL): Upgraded from Hold to Buy at Argus.
  • Seven Generations Energy (TSX:VII): Upgraded from Neutral to Buy at Eight Capital.
  • Total (NYSE:TOT): Upgraded from Equal Weight to Overweight at Barclays.

DOWNGRADES

  • Dominion Energy Midstream Partners (NYSE:DM): Downgraded from Outperform to Peer Perform at Wolfe Research.
  • Enbridge Energy Partners (NYSE:EEP): Downgraded from Buy to Neutral at Ladenburg Thalmann Financial Services.
  • Peyto Exploration & Development (TSX:PEY): Downgraded from Outperform to Market Perform at BMO.
  • Ranger Energy Services (NYSE:RNGR): Downgraded from Outperform to Market Perform at Wells Fargo.
  • Wildhorse Resource Development (NYSE:WRD): Downgraded from Outperform to Market Perform at BMO.
NEXT WEEK'S EVENTS

Monday:

Tuesday:

  • January Wholesale Trade Data released by StatsCan @ 8:30am ET
  • API Weekly Statistical Bulletin released at 4:30pm ET
  • Last trading day for WTI (April contract)

Wednesday:

Thursday:

  • January Employment Insurance data released by StatsCan @ 8:30am ET
  • BoC Sr Deputy Governor Carolyn Wilkins delivers speech at Rotman School of Management in Toronto, ON
  • EIA Weekly Natural Gas Storage Report released @ 10:30pm ET
  • Bank of England interest rate decision

Friday:

  • January Retail Sales data released by StatsCan @ 8:30am ET
  • February CPI data released by StatsCan @ 8:30am ET
  • Baker Hughes Rig Count released @ 1:00pm ET
UPDATED: EVERY WEEKEND
NOTES:
  • CRB = THOMSON REUTERS/CORECOMMODITY CRB INDEX
  • TLT = iSHARES 20+ YEAR TREASURY BOND ETF
  • XBB = iSHARES CANADIAN UNIVERSE BOND INDEX ETF
  • SHARE PRICE CHANGES (INCL. NEW HIGHS & LOWS) EXCLUDE DIVIDENDS
  • SECTOR & SUBSECTOR PERFORMANCES WEIGHTED BY MARKET CAP
  • GOLDEN CROSS: 10-WK SMA CROSSES ABOVE 40-WK SMA
  • DEATH CROSS: 10-WK SMA CROSSES BELOW 40-WK SMA
  • 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
  • FUTURES & OPTIONS CONTRACTS FROM ICE/CFTC (WEEKLY DATA FOR PREVIOUS TUESDAY)
  • CHARTPACKS COURTESY STOCKCHARTS.COM
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