Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending March 2, 2018:
  • Rising rates and US protectionism spooks global markets
  • Energy commodity prices take a tumble
  • Canada's heavy oil discount continues to ease ...
    ... boosting the price of WCS
  • US imports of Cdn crude hits new record in December
  • Energy stocks take a big step back
  • IMO, ENB and KMI hit new 12-month lows
  • CNRL joins the million barrel club
  • Husky finally reinstates dividend.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
BULLISH
USD INDEX
BEARISH
  • The USD index continue to slowly recover from the lows of mid-February. Rising rates should be supportive of a stronger greenback.
SUPPLY
BULLISH
  • Saudi Arabia's energy minister says crude production for the first quarter of this year will be below the country's production quota, with exports averaging less than 7 million bbl/day.
  • The minister also signalled intentions to extend OPEC's production cuts into 2019.
DEMAND
NEUTRAL
  • Demand for refined products in the US fell below 20 million bbl/day last week, likely due to seasonality. Consumption rates in the US remains above average for this time of year.
  • No new news on the global demand front this week.
SENTIMENT
BULLISH
CURRENCIES & BONDS

This week's notable economic data from Statistics Canada:

  • Gross domestic product (GDP) expanded 0.4% in the fourth quarter of 2017, bring the full year growth rate to 1.7%. StatsCan says much of that growth occurred in the first two quarters of 2017, but the economy decelerated towards the end of the year. As a point of comparison, US GDP growth was 2.5% last year.
  • Canada's current account deficit declined by $2.2 billion in Q4 to $16.3 billion, bringing the full year 2017 deficit to $63.9 billion, down 8% from 2016. Exports of energy products rose by $2.8 billion last year, while imports rose $1.2 billion, both due to higher prices. 
  • Canada's Industrial Product Price Index (IPPI) rose 0.3% in January due to higher prices for energy and petroleum products. In contrast, the Raw Materials Price Index (RMPI) rose 3.3%, also due to higher crude oil prices.
  • Capital expenditures for oil and gas extraction (including exploration) rose 23.5% y/y to $12.1 billion in the fourth quarter of 2017. For the full year, capital spending totalled $43.0 billion in 2017, up 13.0% over 2016.
  • Capital spending in the oil and gas sector is forecasted to decline 12% in 2018. Spending in the non-conventional sector is expected to drop 20% while conventional extraction will likely fall 7%.

Lacklustre economic data, lower commodity prices and uncertainty over US trade negotiations dragged on the loonie this week, falling almost 2%. Consensus among economists is for two more rate hikes from the Bank of Canada (BoC) this year. The BoC will announced its next interest rate decision on Wednesday.

US short-term yields continued to trend higher this week, as Fed Chair Jerome Powell expressed optimism over the country's economic outlook. Longer duration rates corrected slightly this week, flattening the yield curve once again. Markets are expecting four rate hikes in the US this year.

The Japanese yen was this week's big winner in currency markets, rising 1.1% as the Bank of Japan signalled intentions to eventually lighten up on its bond purchases. A rising yen is generally considered a bad sign for equity markets.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
64.37
61.25
63.21
57.01
36.75
44.82
42.53
40.88
39.64
30.41
70.53
66.14
64.73
59.14
44.22

Oil prices declined across the board this week, except for WCS. The heavy oil discount narrowed to US$24.50 a barrel, boosting Canada's heavy oil price by over 3%. Most other energy commodities also retreated this week, with gasoline and heating oil falling 4.4% and 4.7%, respectively. Henry Hub gas prices got a small boost, gaining 1.4%. In contrast, Alberta's AECO gas declined over 20% this week, falling below US$1 per MMBtu ($1.22/GJ).

For the month of February, oil prices averaged as follows (change from January):

  • Brent: US$65.73 -3.29
  • WTI: US$62.18 -1.48
  • Cdn Light: US$56.26 -0.24
  • WCS: US$33.89 -3.77

Brent, WTI and Canadian Light posted their first monthly decline since last summer, while WCS is back to the lows of November 2016. The heavy oil discount widened to US$28.30 in January, representing a 46% discount to WTI, a new record high for the month.

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)

Updated energy statistics for the month of December:

  • US imports of Canadian oil rebounded to 4.37 million bbl/day (including condensate and NGLs), up 384,000 bbl/day from the previous month.
  • US imports of Canadian crude averaged 3.65 million bbl/day, up 340,000 bbl/day from November. With the exception of South America, imports from other countries mostly posted declines in December.
  • Canadian crude-by-rail export volumes to the US also rose for the fifth consecutive month in December. The National Energy Board reported 152,000 bbl/day of exports to the US while the Energy Information Administration (EIA) reported 178,000 bbl/day of imports from Canada.
  • For the month of January, Alberta's total crude production dropped to 3.326 million bbl/day, down 160,000 bbl/day from December levels. Heavy oil production from the oil sands grew by 32,000 bbl/day to 1.748 million bbl/day while upgraded synthetic crude declined 185,000 bbl/day to 1.042 million bbl/day.

US gasoline inventories rose again last week, now up almost 50 million barrels from the lows of last November. Commercial crude oil inventories declined another 1.2 million barrels at the Cushing storage, partially offsetting a 4.6 million barrel gain in the Gulf Coast.

According to Baker Hughes, drillers added one oil rig in the US and two in Canada this week, binging the North American total to 1011.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

FEB 28, 2018

Crude inventories rise by 3 million barrels on big gains in the Gulf Coast

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

North American markets declined this week on rising interest rates and threats from the Trump Administration to introduce tariffs on steel and aluminum imports. The move, if implemented, would raise the cost of imported materials, potentially adding to inflationary pressures in the US. Canada is the largest supplier of steel into the US, providing over 5 million tonnes annually.

The Dow large caps were the most impacted this week, falling over 3%. Declines were broadly based, with technology stocks remaining the best performers in both Canadian and US markets. North American markets recovered slightly on Friday, potentially signalling a short-term bottom.

European markets posted an ugly week, with many falling below the lows of last fall. The Nikkei also tumbled 3.3% this week due to a rising yen.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

Energy stocks were the worst performers on the TSX, falling 4.5% for the week and giving back most of the gains from the past two weeks. Losses were broadly based, with refining stocks remaining the strongest subsector. Heavily indebted midstream players remain under pressure due to rising bond yields.

CANADIAN ENERGY NEWS

This week's notable Canadian energy news:

  • Tourmaline Oil (TOU) closed on the sale of various undeveloped assets for net proceeds of $72 million, to be used to reduce corporate debt. The company also announced plans to accelerate its Peace River High project into the first half of this year, allowing for additional production out of the Lower Montney and Charlie Lake. Tourmaline says it expects to exit 2019 at about 75,000 bbl/day.
  • ExxonMobil (NYSE:XOM) has put its 19% stake in the Terra Nova project up for sale. Terra Nova is a Suncor (SU) operated offshore oil platform located 350 km off the coast of Newfoundland. The field produced over 170,000 bbl/day in 2003 but averaged only 31,000 bbl/day at the end of last year. Despite plans to divest the asset, Exxon says it remains committed to the region.
  • TransCanada (TRP) has launched a new Open Season on its NOVA Gas Transmission (NGTL) System at the Empress/McNeill Export Delivery Point. The Open Season is for 280 MMcf/day of binding commitments starting in November 2021. This is in addition to the 1.0 Bcf/day of expansion capacity that was bid in January.
  • NuVista Energy (NVA) has closed on the issuance of $220 million in senior unsecured notes due in 2023 bearing 6.5% interest. The issuance was upsized from a previously announced offering of $150 million.
  • Encana (ECA) announced plans to buy back $400 million of its outstanding shares, or roughly 35 million shares over the next 12 months. The purchase represents 3.6% of the company's outstanding shares.

This week's fourth quarter earnings on the TSX:

  • Canadian Natural Resources (CNQ) posted a net profit of $396 million in the fourth quarter, down from a $566 million profit for the same quarter last year. Funds from operations grew 37% to $2.3 billion due its acquisition of Shell's Western Canadian assets last year. The company produced 1 million boe/day in Q4, up 16% from Q4/2016. CNQ expects to produce between 815,000 and 885,000 bbl/day of oil this year and about 1,700 MMcf/day of natural gas. The company's product blend is now weighted 50% light crude, 25% heavy crude and 25% natural gas, much improved over its previous blend of 32%/33%/35%.
  • Husky Energy (HSE) reported net earnings of $672 million for the fourth quarter, including a $436 million gain on US tax reform. Net income more than doubled to $672 million while free cash flow rose 8.5% to $294 million. Production dropped over 2% to 320,400 boe/day due to asset divestitures in Western Canada. The company also reinstated a quarterly dividend of $0.075 per share.
  • Funds from operations at Vermilion Energy (VET) grew 18% to $603 million, thanks to higher production and higher commodity prices. Production increased 8% y/y to 72,821 boe/day in Q4 and is expected to average 75,000 to 77,500 boe/day this year. The company's 2018 capital budget was increased to $325 million.
  • Net losses at Crescent Point Energy (CPG) narrowed to $56.4 million in Q4, down from a $511 million loss for the same time last year. Production rose 8% to about 179,900 boe/day, while full year output averaged 176,014 boe/day. The company says it exited 2017 at over 183,000 boe/day, representing a 10% annual growth rate.
  • Calfrac Well Services (CFW) posted 152% increase in fourth quarter revenues, rising to $486 million. Profits rose to $41.8 million, up from a $62.5 million loss for the same time last year. Fourth quarter numbers were negatively impacted by bad winter weather, particularly in Canada. The company says it has ceased all activities in Mexico due to lack of demand.
  • Net losses at Secure Energy Services (SES) widened to $24 million in the fourth quarter, up from a $10 million loss for the same quarter last year. Revenues grew 28% to $679.6 million on higher activity levels in Canada and the US. The company took a non-cash impairment charge of $29.2 million on its Alida crude oil terminalling facility and higher tax expenses.
  • Parkland Fuel (PKI) posted a record fourth quarter, as operating revenues more than doubled to $3.37 billion. Petroleum and fuel deliveries increased 59% to 4.4 billion litres due to its recent acquisition of Chevron and Ultramar retail outlets. The company raised its dividend 2% to $1.174 per share.
  • Whitecap Resources (WCP) reported a fourth quarter loss of $232 million, down from a $191 million profit for the same time last year. Production averaged 59,707 boe/day in Q4,  up 21% y/y, while proved and probable reserves rose 36% to 483 million boe. The company says it will focus on cutting debt and increasing its dividend this year.
  • Pengrowth Energy (PGF) posted a net loss of $210.4 million in the fourth quarter, up from a $92.4 million loss for the same quarter last year, including foreign exchange losses and debt restructuring charges. Funds from operations declined 84% to $13.5 million due to asset divestitures. Fourth quarter production averaged 24,702 boe/day. The company says it plans to exit 2018 at 24,000 boe/day.
  • Q4 revenues at PrairieSky Royalty (PSK) rose 35% to $91.5 million. Fourth quarter royalty production averaged 24,406 boe/day, weighted 49% liquids.
  • Fourth quarter revenues at Peyto Exploration (PEY) increased 12% to $212 million, while earnings increased 34% to $51.5 million. Total production grew 8% to 109,793 boe/day in Q4.
  • AltaGas (ALA) reported a net loss of $11 million for the fourth quarter. Revenues grew 13% y/y to $745 million. Capital expenditures are expected to be in the range of $500 to $600 million.
  • Crew Energy (CR) posted a net profit of $2.3 million, up from a $40 million loss for the same time last year. Fourth quarter production averaged 25,270 boe/day, up 13% y/y, while full year 2017 production averaged 23,061 boe/day.  
  • Bonavista Energy (BNP) reported a $159 million loss in Q4, up from a $12 million loss for the same quarter last year. Production averaged 74,799 boe/day in the fourth quarter, up 8% y/y.
US ENERGY NEWS

This week's notable US energy news:

  • Andeavor (ANDV) and Savage Co officially terminated plans to build a crude-by-rail loading terminal at the Port of Vancouver, WA. At the end of January, Washington State Governor Jay Inslee denied the company a permit to build the Vancouver Energy project, which would have been designed to transport 360,000 bbl/day of crude by rail from the US Midwest into the West Coast. Andeavor booked a $40 million impairment charge on the cancellation.
  • Construction of Energy Transfer Partners' (ETP) Bayou Bridge pipeline through a Louisiana swamp was halted this week after a federal judge concluded the risks of irreversible environmental damage outweighs the costs of project delays. The company argued it would lose US$25 million for every month of delay on the line's in-service date. ETP is free to continue construction for the rest of the 162 mile pipeline, which runs from Lake Charles to St. James Parish, LA. The 480,000 bbl/day Bayou Bridge pipeline is a joint venture between ETP and Phillips 66 (PSX).
  • Dominion Energy (D) reported its first LNG export out of Cove Point LNG in Lusby, Maryland, just south of Baltimore. The facility is designed to liquefy about 750 MMcf/day of natural gas. Cove Point is the second LNG export terminal in the US after Cheniere Energy’s (LNG) Sabine Pass terminal in Louisiana.

Around the world this week:

  • ExxonMobil (XOM) announced plans to exit some of its exploration and research joint ventures with Rosneft due to US and EU sanctions against Russia. The company says it will take an after-tax impairment charge of US$200 million. Exxon says it will retain its 30% stake in Sakhalin-1. Rosneft warned the move will result in serious losses for the US energy major, but says it will continue to cooperate on its other JVs.
  • Exxon also declared force majeure on its Papua New Guinea (PNG) LNG export terminal this week, after a powerful earthquake hit the region last week. The company has not reported any damage to the facility but says surrounding infrastructure was likely affected. PNG LNG exports about 8 million t/yr of LNG, mostly to Asian buyers. The facility could be down for another 6 weeks.
  • Exxon also announced its seventh oil discovery off the coast of Guyana this week in the Staroek Block. The field is jointly owned with Hess (HES) and China's CNOOC/Nexen (CEO).
  • Total (TOT) has agreed to purchase Marathon Oil's (MRO) 16.3% stake in Libya's Waha field for US$430 million in cash. Waha currently produces about 300,000 boe/day and is expected to ramp up to 400,000 boe/day by 2020. The acquisition adds 500 million boe of reserves to Total's portfolio. Marathon says it got a good price for the asset and it no longer has any operations in Libya.
  • Total is also reportedly in discussion with the Iraqi government to construct a 150,000 bbl/day oil refinery. The refinery would be integrated with the Nassirya oilfield, which is expected to produce 200,000 bbl/day in the next 3 years.
  • Royal Dutch Shell (RDS.A) warns of a global LNG shortage within a decade due to lack of investment in new projects. The market for LNG grew by 29 million tons last year to 293 million tons. Demand is expected to grow to 500 million t/yr by 2030 while supply is expected to be only 300 million t/yr due to a lack of new projects.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP
GAINERS
• Cenovus Energy (CVE)
• Parkland Fuel (PKI)
• Pason Systems (PSI)
• Trican Well (TCW)
• Cabot Oil & Gas (COG)
• National-Oilwell Varco (NOV)
• Range Resources (RRC)
12-MO
HIGHS
• Enerplus (ERF) • None
ALL-TIME
HIGHS
• None • None
GOLDEN
CROSSES
• None • None
BEARISH INDICATORS
TSX
S&P 500
TOP
LOSERS
• Birchcliff Energy (BIR)
• MEG Energy (MEG)
• Peyto Exploration (PEY)
• Raging River (RRX)
• Spartan Energy (SPE)
• Chesapeake Energy (CHK)
• EOG Resources (EOG)
• Pioneer Natural Res (PXD)
• TechnipFMC (FTI)
• Williams Co (WMB)
12-MO
LOWS
• Altagas (ALA)
• Birchcliff Energy (BIR)
• Crew Energy (CR)
• Enbridge (ENB)
• Imperial Oil (IMO)
• Raging River (RRX)
• Whitecap Resources (WCP)
• Apache (APA)
• Kinder Morgan (KMI)
• Williams Co (WMB)
ALL-TIME
LOWS
• Crew Energy (CR) • None
DEATH
CROSSES
• PrairieSky Royalty (PSK) • None
ANALYST RATINGS

UPGRADES

  • Apache (NYSE:APA): Upgraded from Neutral to Overweight at Mitsubishi UFL Financial Group.
  • Baker Hughes (NYSE:BHGE): Upgraded from Underperform to Neutral at Bank of America.
  • BP (NYSE:BP): Upgraded from Sector Perform to Outperform at RBC.
  • Calfrac Well Services (TSX:CFW): Upgraded from Speculative Buy to Buy at Canaccord Genuity and from Sector Perform to Outperform at Scotiabank.
  • Chevron (NYSE:CVX): Upgraded from Neutral to Buy at Bank of America.
  • CNX Resources (NYSE:CNX): Upgraded from Hold to Buy at Tudor Pickering.
  • Mammoth Energy Services (NYSE:TUSK): Upgraded from Equal Weight to Overweight at Barclays and from Accumulate to Buy at Johnson Rice.
  • Pason Systems (TSX:PSI): Upgraded from Sector Perform to Outperform at National Bank.
  • PraireSky Royalty (TSX:PSK): Upgraded from Hold to Buy at GMP Securities.
  • Schlumberger (NYSE:SLB): Upgraded from Neutral to Buy at BofA.
  • Whitecap Resources (TSX:WCP): Upgraded from Outperform to Strong Buy at Raymond James.

DOWNGRADES

  • Altagas (TSX:ALA): Downgraded from Outperform to Neutral at CIBC.
  • Bonavista Energy (TSX:BNP): Downgraded from Outperform to Sector Perform at RBC.
  • Calfrac Well Services (TSX:CFW): Downgraded from Outperform to Sector Perform at National Bank Financial.
  • Clean Harbors (NYSE:CLH): Downgraded from Market Perform to Outperform at Oppenheimer.
  • ENI (NYSE:E): Downgraded from Outperform to Sector Perform at RBC.
  • EnLink Midstream Partners (NYSE:ENLK): Downgraded from Outperform to Neutral at Rober W. Baird.
  • Halliburton (NYSE:HAL): Downgraded from Buy to Neutral at BofA.
  • Sanchez Energy (NYSE:SN): Downgraded from Outperform to Market Perform at Northland Securities.
NEXT WEEK'S EVENTS

Monday:

Tuesday:

Wednesday:

Thursday:

Friday:

  • February Labour Force Survey 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
  • Weekly Energy Market Review

    Weekly Energy Market Review

    Weekly Energy Market Review

    Weekly Energy Market Review

    0