Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending April 13, 2018:
  • BC and Alberta play a game of chicken ...
    ... while the federal government ponders a path forward
  • Heavy oil discount continues to narrow
  • Cdn oil producers swing back to black this year ...
    ... after three years of losses
  • Devon and ConocoPhillips plan more job cuts
  • Oil prices soar on tensions in Syria
  • Global stockpiles headed back to 5-year average
  • North America's largest refinery about to get a lot bigger
  • Big Oil makes big investments in the US, Australia, Saudi Arabia and Oman.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
BULLISH
  • The US and its allies launched a missile attack on Syria this weekend in response to suspected poison gas attack.
  • Saudi Arabia also intercepted more missiles over Riyadh this week.
USD INDEX
NEUTRAL
  • The US dollar continues to go nowhere, and remains stuck in a very narrow trading range since the beginning of the year.
SUPPLY
NEUTRAL
  • US output rose to a record 10.5 million bbl/day last week, with production out of the Lower 48 and Gulf of Mexico both hitting record highs.
  • The IEA says OPEC 's production cuts have been successful in reducing global stockpiles closer to the 5-year average.
  • OPEC's output declined by 200,000 bbl/day in March on lower production out of Venezuela and Africa. Output is now estimated at 31.96 million bbl/day, the lowest in about a year.
  • OPEC's Secretary-General told the media this week that his cartel is open to extending its production cuts into 2019.
DEMAND
NEUTRAL
  • According to the IEA, demand growth out of India has been stronger that anticipated, with growth revised to 1.5 million bbl/day this year. However, demand out of China has not been as robust as expected and is at risk of further weakening in the event of a trade war with the US.
  • OPEC revised its world oil demand growth higher by 30,000 bbl/day to 1.63 million bbl/day for 2018 while the IEA left their oil demand forecast unchanged this month.
SENTIMENT
BULLISH
  • Traders continue to pair back their long positions in WTI but remain highly bullish on Brent futures.
  • Both Brent and WTI broke out to new multi-year highs this week, surpassing the highs of late 2017 and the spring of 2015, now mack to the levels of late 2014.
CURRENCIES & BONDS

In its Spring Business Outlook Survey, the Bank of Canada (BoC) says it remains cautiously optimistic despite uncertainty over trade with the US. Sentiment dipped slightly during the first quarter of this year but the BoC says its outlook remains "positive." The bank is not expected to raise rates next week but two more hikes are still on the table before the end of this year.

This week's notable US economic data:

  • US inflation continues to show signs of acceleration as the CPI rose from 2.1% to 2.4% annually. Excluding food and energy, CPI rose from 1.8% to 2.1%.
  • According to the Congressional Budget Office (CBO), the US government is expected to run a federal deficit of US$804 billion this year, rising to US$981 billion next year and topping US$1 trillion after that. The CBO also revised its GDP expectations higher due to recently enacted tax cuts and economic stimulus.

US bond yields ticked higher this week after minutes were released from the last FOMC meeting, signalling intentions to speed up the pace of rate hikes.

Commodity-related currencies all gained for the week, led by the loonie which rose 1.4% to 79.27. The US Dollar Index had another choppy week, ending the week slightly lower at 89.50.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
72.58
67.39
68.24
61.46
50.66
44.82
42.53
40.88
39.64
30.41
72.58
67.39
68.24
61.53
50.66

Oil prices posted spectacular gains this week, with both Brent and WTI returning to the levels of late 2014. Western Canadian Select (WCS) gained over 13% this week, returning to the levels of mid-2015.

Scotiabank warns the Canadian heavy oil discount has narrowed too far too fast, having declined from US$27 a barrel in mid-March to below US$17 on Friday. The bank says rising production out of Western Canada should support further widening of the differential to WTI.

Credit Suisse raised its forecast for Brent to an average of US$71 per barrel this year, up from a previous estimate of US$60. WTI is expected to average US$66, revised higher by US$10. For 2019, the bank is forecasting a Brent and WTI price of US$70 and US$65, respectively.

The EIA says it expects Brent to average about US$63 in both 2018 and 2019, with WTI trading at a US$4 discount. Henry Hub natural gas prices are forecasted to average US$2.99/MMBtu in 2018, rising to US$3.07 next year.

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)

The EIA says US crude oil production averaged 10.4 million bbl/day in March, up 260,000 bbl/day from the previous month. Full year 2018 production is expected to average 10.7 million bbl/day rising to 11.4 million bbl/day next year, revised higher by 170,000 bbl/day from its previous forecast.

The US added another 7 oil rigs this week, bring the total to 815, the highest since March 2015. Canada lost 7 rigs due to the spring thaw, falling to 41 this week.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

APR 11, 2018

CRUDE PRODUCTION OUT OF THE LOWER 48 SOARS PAST THE 10 MILLION BBL/DAY MARK

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

Global equity markets recovered from last week's meltdown after China's President Xi Jinping reiterated his country's commitment to open up the Chinese economy and reduce tariffs, perhaps in an effort to appease escalating trade tensions with President Trump. 

The tech-heavy NADAQ was the best performer this week, gaining almost 3%, while the TSX underperformed global market, eking out a 0.4% gain for the week on a poor showing from heavily-weighted financial stocks.

Energy stocks had a very good week on both the TSX and S&P 500, gaining about 5% and 6%, respectively.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

According to the Conference Board of Canada (CBoC), Canada's oil sector will return to profitability in 2018 after three years of losses. The CBoC expects WTI to average US$59.20 this year while Canadian production is expected to rise 3.4%, with most of the gains coming from the oil sands. Higher prices and higher output will increase profits 8% this year to about $1.4 billion.

UK-bank Barclays says energy stocks are undervalued, given a 50% rise in the price of crude over the past six months. The banks top picks for international majors include BP (BP), Royal Dutch Shell (RDS.A) and Total (TOT), seen as likely to increase their dividends. Closer to home, Barclays recommends ConocoPhillips (COP) and Suncor Energy (SU) as potential candidates for large share buyback programs.

Meanwhile over at Goldman Sachs, the investment firm says eight stocks are set to benefit from the shale boom due to increased efficiencies and fewer players. Top picks in the shale patch include EOG Resources (EOG), Pioneer Natural Resources (PXD) and WPX Energy (WPX). Goldman's "under-appreciated" picks include Suncor Energy (SU), Andeavor (ANDV), NextEra Energy (NEE), Williams Co (WMB) and Occidental Petroleum (OXY).

Gains were broadly based across the energy subsectors, led by producers and service stocks. Midstream players continue to underperform due to the potential for rising interest rates.

CANADIAN ENERGY NEWS

Kinder Morgan Canada (KML) is giving all levels of government until the end of May to settle any outstanding issues around its Trans Mountain Expansion Project (TMEP). BC Premier John Horgan has backed himself into a corner, promising both voters and the province's Green Party to stop the project at any cost. TMEP's federal approval is still awaiting on a ruling by the Supreme Court of Canada. 

Alberta's NDP government is introducing legislation to cut off petroleum supplies to BC, however, the feasibility of shutting down the existing Trans Mountain line is questionable. Although both provinces have some stockpiling capacity, stopping flow in the 300,000 bbl/day line would hurt Alberta's producers and refiners, and likely send the heavy oil discount soaring.

TransCanada (TRP) announced the start-up of its Sundre Crossover Project in central Alberta, boosting capacity on its NOVA Gas Transmission System (NGTL) to markets in the Pacific Northwest and California. The $100 million project adds another 228 MMcf/day of capacity on NGTL.

Activist investor Cation Capital has requested four seats on Crescent Point Energy's (CPG) board of directors. The firm says it was "compelled to take this action given the significant destruction of shareholder value and the abject failure of current leadership across all aspects of the company." CPG calls the move "unreasonable and reckless" and insists it already has the "right board in place" to achieve its 5-year plan.

Obsidian Energy (OBE) says it has found "common ground" with its activist investor FrontFour Capital Group, allowing the activist investment firm to nominate two directors to Obsidian's board at the company's next AGM.

US ENERGY NEWS

TransCanada (TRP) has launched Open Season for its Marketlink pipeline that runs from Cushing, Oklahoma to the US Gulf Coast. The company says it is seeking "new, short-term transportation service agreements" on the line.

The Wall Street Journal is reporting that the government of Qatar is in talks with ExxonMobil (XOM) to form a joint venture to develop its US gas reserves, which stretch from West Texas to North Dakota. Exxon already has a good working relationship with the Middle Eastern country, who remains under economic sanctions by Saudi Arabia and its Gulf Allies. The negotiations include the future development of the Golden Pass LNG export facility in East Texas, which is owned by Qatar Petroleum.

Devon Energy (DVN) announced plans to lay-off about 300 workers, or roughly 9% of its workforce. The Oklahoma-based company says the cuts will affect all areas of operation and will likely be executed in the next few weeks. The company expects to save US$105 to US$200 million annually by 2020.

State regulators in Pennsylvania have delayed the restart of Energy Transfer Partners' (ETP) Mariner East 1 NGL pipeline until late April after sinkholes were discovered near the line in early March. The delay has is forcing shippers to find alternative route for their ethane and propane volumes. 

Saudi Aramco took another step forward in its plans to build a US$10 billion petrochemicals plant at its Motiva refinery in the US Gulf Coast, signing two MOU's with Honeywell (HON) and Technip FMC (FTI) to study petrochemical production technology. Motiva's CEO Brian Coffman also announced plans to boost capacity at the Port Arthur refinery from the current 603,000 bbl/day to as much as 1.5 million bbl/day, which would make it the largest refinery in the world. A final investment decision is expected some time next year.

French energy major Total (TOT) announced the purchase of several assets in the US Gulf of Mexico from now defunct Cobalt International Energy for US$300 million. The deal includes a stake in the North Platte and Anchor discoveries, as well as another 13 offshore exploration blocks. The properties were purchased as part of Cobalt's 's bankruptcy auction.

SandRidge Energy (SD) says it will evaluate any offers to buy the company from activist investor Carl Icahn after the hedge fund manager offered to pay cash for the company. SandRidge has already made some concessions at Icahn's request, including ousting both its CEO and CFO.

Around the world this week:

  • Chevron (CVX) and partners have sanctioned an expansion of their massive Gorgon LNG project off the coast of Western Australia. The US$54 billion Gorgon project came online in March 2016. This second phase of expansion is expected to cost US$18-20 billion annually through 2020. Chevron holds a 47.3% stake in the project, with partners ExxonMobil (XOM) and Shell (RDS.A) each owning a 25% interest.
  • Total (TOT) announced plans to expand its 400,000 bbl/day SATORP refinery in Jubail, Saudi Arabia along with partner Saudi Aramco. The company plans to increase refining capacity to 440,000 bbl/day and add a "world-size mixed-feed steam cracker" capable of producing 1.5 million t/yr of ethylene and other petrochemical products. Total capital costs are estimated at US$9 billion.
  • ExxonMobil (XOM) says its natural gas reserves in Papua New Guinea is almost double previous estimates. The P'nyang field now holds an estimated 4.36 trillion cubic feet of gas, which the company says should support a three-train LNG plant expansion near Port Moresby. The company also resumed production at its PNG LNG facility this week after a 7.5 magnitude earthquake took the facility offline in February.
  • ConocoPhillips (COP) is planning more than 450 job cuts in the UK by the spring of 2020 as it prepares to shutdown its North Sea production through the Theddlethorpe Gas Terminal. The staff reductions represent about 30% of its workforce in the UK. 
  • BP (BP) and the government of Oman have given the green light for Ghazeer, the second phase of development at the massive Khazzan gas field in Oman. BP says the first phase, which started up ahead of schedule and under budget last fall, is currently running at its design capacity of 1 Bcf/day of natural gas and 35,000 bbl/day of condensate. Phase two will add another 500 MMcf/day of natural gas and over 15,000 bbl/day of condensate by 2021. BP also sanctioned two new projects in the North Sea this week, which should add another 30,000 boe/day of production post-2020.
  • BP also signed a MOU with Brazil's PetroBras (PBR) to jointly develop upstream and downstream assets, expand energy trading activities, collaborate on technology transfer, R&D and low-carbon initiatives, both inside and outside of Brazil.
  • Schlumberger (SLB) and Kenya's National Oil Corporation have signed a deal to develop several oil blocks in the northwestern part of the country. Recoverable reserves in the region are estimated at 750 million barrels. Financial terms of the agreement were not disclosed.
  • China's Sinopec (SNP) says it will shutdown its 460,000 bbl/day refinery for 40 days starting in May, along with four other Chinese refineries will a total refining capacity of 200,000 bbl/day. The refineries run largely on Saudi crude, which is expected to dent demand for the duration of the shutdowns.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
GAINERS
• Baytex Energy (BTE)
• CES Energy Solutions (CEU)
• Crew Energy (CR)
• MEG Energy (MEG)
• Nuvista Energy (NVA)
• Concho Resources (CXO)
• Marathon Oil (MRO)
• Pioneer Natural Res (PXD)
• TechnipFMC (FTI)
• Transocean (RIG)
12-MO
HIGHS
• Gran Tierra (GTE)
• Parex Resources (PXT)
• Suncor Energy (SU)
• Anadarko Petroleum (APC)
• ConocoPhillips (COP)
• Hess Corp (HES)
• Marathon Petroleum (MPC)
• National-Oilwell Varco (NOV)
• Valero Energy (VLO)
ALL-TIME
HIGHS
• None • Valero Energy (VLO)
GOLDEN
CROSSES
• None • None
BEARISH INDICATORS
TSX
S&P 500
TOP 5
LOSERS
• Peyto Exploration (PEY) • None
12-MO
LOWS
• None • None
ALL-TIME
LOWS
• None • None
DEATH
CROSSES
• None • Schlumberger (SLB)
ANALYST RATINGS

UPGRADES

  • ENI (NYSE:E): Upgraded from Hold to Buy at Deutsche Bank.
  • EQT Midstream Partners (NYSE:EQM): Upgraded from Neutral to Buy at Seaport Global Securities.
  • Helmerich & Payne (NYSE:HP): Upgraded from Underperform to Market Perform at Wells Fargo.
  • HollyFrontier (NYSE:HFC): Upgraded from Underweight to Equal Weight at Morgan Stanley.
  • Magellan Midstream Partners (NYSE:MMP): Upgraded from Sector Perform to Outperform at RBC.
  • Noble Midstream Partners (NYSE:NBLX): Upgraded from Neutral to Buy at Mizuho.
  • Northern Oil & Gas (NYSE:NOG): Upgraded from Underweight to Equal Weight at Capital One Financial.
  • Patterson-UTI Energy (NASDAQ:PTEN): Upgraded from Market Perform to Outperform at Wolfe Research and from Market Perform to Outperform at Cowen.
  • Pioneer Natural Resources (NYSE:PXD): Upgraded from Buy to Conviction Buy at Goldman Sachs.
  • Plains All American Pipeline (NYSE:PAA): Upgraded from Hold to Buy at SunTrust Banks.
  • TechnipFMC (NYSE:FTI): Upgraded from Neutral to Buy at Goldman Sachs.
  • WPX Energy (NYSE:WPX): Upgraded from Hold to Buy at National Alliance Securities and from Neutral to Overweight at Piper Jaffray.

DOWNGRADES

  • Antero Midstream Partners (NYSE:AM): Downgraded from Buy to Neutral at Seaport Global Securities.
  • Carrizo Oil & Gas (NASDAQ:CRZO): Downgraded from Outperform to Sector Perform at Scotiabank.
  • Devon Energy (NYSE:DVN): Downgraded from Focus Stock to Sector Outperform at Scotiabank.
  • Kinder Morgan Canada (TSX:KML): Downgraded from Outperform to Neutral at CIBC and from Buy to Hold at TD Securities.
  • Mammoth Energy Services (NASDAQ:TUSK): Downgraded from Buy to Hold at Tudor Pickering.
  • Resolute Energy (NYSE:REN): Downgraded from Buy to Neutral at Goldman Sachs.
  • RSP Permian (NYSE:RSPP): Downgraded from Buy to Neutral at Stifel Nicolaus.
  • Total (NYSE:TOT): Downgraded from Buy to Hold at Deutsche Bank.
  • Western Gas Partners (NYSE:WES): Downgraded from Buy to Neutral at Seaport Global Securities.
  • Valero Energy (NYSE:VLO): Downgraded from Sector Outperform to Sector Perform at Howard Weil.
NEXT WEEK'S EVENTS

Sunday:

Tuesday:

Wednesday:

Thursday:

Friday:

  • March Consumer Price Index (CPI) released by StatsCan @ 8:30am ET
  • February retail trade data released by StatsCan @ 8:30am ET
  • Baker Hughes Rig Count released @ 1:00pm ET
  • OPEC/Russia Ministerial Monitoring Meeting in Jeddah, Saudi Arabia
  • IEA presents "Energy Efficiency Potential in Canada to 2050" in Ottawa, ON
  • Q1/2018 earnings: Baker Hughes, Schlumberger
  • May contract expiry for WTI
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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