Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending April 20, 2018:
  • Bank of Canada warns of economic fallout from pipeline wars
  • BC questions Alberta's right to block energy exports
  • Heavy oil discount starts to widen again
  • All eyes on crude-by-rail to pick up the pipeline slack
  • Macquarie sees green shoots in Canada's energy patch
  • US oil prices get dinged on North America's pipeline crunch
  • Gasoline prices on a tear
  • Trump complains about high oil prices ...
    ... while US oil production hits another record high
  • OPEC eyes US$100 oil.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
BULLISH
  • Libya's al-Waha pipeline feeding the port of Es Sider was set on fire this weekend, taking as much as 100,000 bbl/day offline. The same pipeline was attacked at roughly the same location last December.
USD INDEX
NEUTRAL
  • The US dollar index posted a rare gain this week, but still remains stuck in a very narrow trading range.
SUPPLY
BULLISH
  • At their joint monitoring meeting this week, OPEC and Russia concluded the global oil glut has been eliminated but oil markets are not yet balanced. The group did not hint if and when it plans to exit its production pact.
  • Earlier in the week, Saudi Arabia also told world markets it would be happy with US$80 or even US$100 oil, signalling intentions to extend its production cuts well into next year.
  • US crude production out of the Lower 48 hit another record high of 10.05 million bbl/day last week, bring total output to 10.54 million bbl/day.
DEMAND
BULLISH
  • In a note to clients this week, Goldman Sachs says it expects oil demand growth to remain strong this year, helping to further reduce inventories. The investment firm expects demand to grow another 1.85 million bbl/day this year.
  • In this week's Petroleum Status Report, the EIA reported robust product consumption numbers, once again topping 21 million bbl/day.
  • Strong demand is helping to reduce both crude and product stockpiles south of the border. The Cushing storage hub in Oklahoma also reported inventory declines for the first time in several weeks.
SENTIMENT
BULLISH
  • Brent crude continues to break out to multi-year highs. WTI is also showing strength, but continues to be held back by a widening discount.
  • Net longs on WTI rose this week, indicating bullishness among traders. Net longs on Brent retreated slightly from record levels, but show no real sign of weakening just yet.
CURRENCIES & BONDS

The Bank of Canada (BoC) maintained its overnight rate at 1.25% this week, noting that the recent rise in inflation due to higher gasoline prices and a hike in the minimum wage is likely to be "transitory." The BoC says first quarter GDP growth was weaker than expected but should rebound in the second quarter. The bank also warns that both energy exports and new capital investments will be held back by "ongoing competitiveness challenges" and transportation bottlenecks.

This week's Canadian economic data out of Statistics Canada:

  • Canada’s CPI rose 0.3% in March, bringing the annualized rate from 2.2% to 2.3%, the highest since October 2014. Excluding gasoline, CPI is up 1.8% y/y.
  • Retail sales rose 0.4% in February to $49.8 billion on higher sales of new motor vehicles and general merchandise. Ex-auto and auto parts, retail sales were roughly unchanged.
  • After two consecutive monthly declines, manufacturing sales rose 1.9% to $55.8 billion in February, rising in 14 out of 21 sectors. Autos and auto parts once against posted the biggest gains.
  • The number of Canadians collecting regular Employment Insurance (EI) benefits declined by 11,300 in February to 480,200. Declines were led by Atlantic provinces, Quebec and Alberta. Year-over-year, the number of EI recipients has fallen by 13%.

Decent economic data south of the border helped boost US bond yields and the greenback. The US 10-year ended the week at 2.96%, closing in on the highs of December 2013. Canada's 10-year also ended the week higher at 2.33%.

The British pound was one of this week's biggest losers on currency markets, falling 1.7% after Bank of England Governor Mark Carney hinted he may not raise rates anytime soon. 

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
74.06
68.38
67.93
61.33
49.53
44.82
42.53
40.88
39.64
30.41
74.06
68.47
68.24
61.53
51.82

President Trump expressed his displeasure over OPEC's coordinated production cuts and desires to drive oil prices closer to US$100 a barrel. Trump lamented over twitter "looks like OPEC is at it again ... oil prices are artificially very high! No good and will not be accepted!" 

Representatives for OPEC responded that the cartel's role is to correct market imbalances, adding that prices are not artificially high. The group also pointed out that the US is now the world's second largest crude oil producer, and its industry has benefited the most from higher oil prices and OPEC's production cuts.

Brent posted another week of solid gains, rising 2%. WTI gained 1.5% as the discount to Brent widened to US$5.70 a barrel. Canadian oil prices declined this week, led by a 2.2% drop in Western Canadian Select (WCS) as the heavy oil discount increased to just under US$19.

Gasoline prices had another stellar week, gaining 1.7% and approaching the highs of June 2015.

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 Baker Hughes, US drillers added another 5 oil rigs this week, to a total of 820, the highest in about 3 years. Canada lost another 3 oil rigs, falling to just 38.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

APR 18, 2018

Higher crude exports and strong gasoline demand push US stockpiles lower

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

Global equity markets mostly posted modest gains this week. Gains were broadly based outside of large-cap technology names. Staples were the notable losers on the S&P 500 this week, falling 4.4% due to rising interest rates. Energy stocks gained 2.1% and 2.6% on Canadian and US exchanges, respectively.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

According to Macquarie, now is a good time to plow into Canadian energy stocks. The company says it sees "green shoots for energy in Canada" which should help boost share prices in the months ahead. Macquarie upgraded the Canadian energy sector from equal weight to overweight.

According to Goldman Sachs, refining stocks still have room to run despite a very strong showing in the past year. The firm points to hefty price discounts for Canadian crude, production out of the Permian and even WTI given exploding production and not enough pipeline capacity throughout North America. The recent run-up in wholesale gasoline prices (due to strong demand) is translating into juicy crack spreads for independent refiners, which posted the biggest gains again this week.

Fidelity Investments recommends CP Rail (CP) as the big winner in Canada's interprovincial pipeline spat, noting that Alberta's producers will have little choice in the coming years, with or without Trans Mountain. The earlier possible date for more pipeline capacity is the end of 2019, when Enbridge (ENB) hopes to complete their replacement of Line 3, increasing capacity going east by 370,000 bbl/day. Unfortunately, ramping up crude-by-rail has not been without its growing pains. CP now faces strike action from some 3,000 employees, which could dampen service in the coming months.

CANADIAN ENERGY NEWS

In its first quarter earnings release this week, Kinder Morgan Canada (KML) reported a 5% decline in profits, blamed on delays in shipping commodities to its Vancouver Wharves terminal. The company says demand for pipeline deliveries remains strong with its Trans Mountain line once again oversubscribed each month during the first quarter. Revenues were roughly unchanged for the year at $164 million.

The company has confirmed it has begun negotiations with Alberta and Ottawa on its paused Trans Mountain Expansion (TMEP), but nothing has changed so far. BC says it plans to file a new case with the province's Court of Appeal to determine if it has any jurisdiction over the project on environmental grounds. Both Alberta and the federal government say they remain open to taking a financial stake in the pipeline, although KML points out money won't help it resolve its permitting roadblocks and questions over jurisdiction. Alberta has also provided more details on its proposed legislation to block petroleum exports to BC, which BC claims is unconstitutional. Speaking in London this week, PM Trudeau says he remains confident interprovincial pipelines fall under federal jurisdiction and the project will get built. KML has set a May 31st deadline to get all outstanding litigation issues resolved. The federal government is preparing legislation to make sure that date is met.

Vermilion Energy (VET) has agreed to acquire Spartan Energy (SPE) for $1.40 billion in shares, including $175 million in debt. Spartan shareholders will receive 0.1476 VET shares for each SPE share, representing a 5% premium to the previous day's close. If the deal closes as planned in mid-June, Vermilion's 2018 guidance increases from 75,000-77,500 boe/day to 86,000 to 90,000 boe/day, while the company's capital budget rises from $325 to $430 million. Vermilion also plans to suspend its DRIP program in June. Both boards have already approved the deal, which is subject to a $40 million breakup fee.

Paramount Resources (POU) reported a release of 630 barrels of crude oil and 1,200 barrels of saline water from a pipeline near Zama City, in the far northwestern corner of Alberta. According to the Alberta Energy Regulator, no waterbodies were affected and there are no reports on impacts to wildlife. The line has since been isolated and depressurized, and clean-up is currently underway. 

ExxonMobil (XOM) and Imperial Oil (IMO) have officially put their jointly-owned Horn River shale gas asset up for sale, located in northeastern BC. The 230,000 acres property has 8 producing wells and a 40 MMcf/day gas handling facility. The pilot plant ceased operation in the spring of 2015. The company says it is accepting bids until May 31, 2018.

Activist investor Cation Capital is urging Crescent Point Energy (CPG) shareholders to vote for a change of leadership at CPG's next AGM on May 4th. The firm says it has developed a business plan to turn the company around, and boost its share prices. Crescent Point maintains Cation's nominees bring nothing new to the table, and is instead urging shareholders to vote for its "refreshed" board appointees.

Pengrowth Energy (PGF) says it will delist its shares from the NYSE on June 1st, unless share prices return back above US$1. The company received a delisting notice from the NYSE earlier this month after its US-listed PGH shares closed below US$1 for 30 consecutive days. Shares listed on the TSX will not be affected.

US ENERGY NEWS

Valero Energy's (VLO) 225,000 bbl/day Texas City refinery was hit by an explosion this week. The blaze allegedly originated from a 12,000 bbl/day alkylation unit, which produces high-octane components blended into gasoline. No injuries were reported. Valero has yet to confirm any impacts to production. The exact cause of the fire is still under investigation.

Texas-based Fluor (FLR) was awarded an EPC contract for Marathon Petroleum's (MPC) South Texas Asset Repositioning (STAR) program at its Galveston Bay refinery in Texas City. STAR will see the integration of Marathon's Texas City refinery into the adjacent Galveston Bay refinery, and includes adding more residual oil processing capabilities, upgrading the crude unit and integrating facility logistics. The project is scheduled to be completed by 2022. Financial terms of the deal were not disclosed.

A US judge has approved Seadrill's (SDRL) plan to exit Chapter 11 bankruptcy proceedings. The company has extended maturities on over US$5 billion in bank loans, converted US$2.3 billion worth of debt into equities and managed to raise US$1 billion in new investment.

This week's first quarter earnings:

  • First quarter earnings at Schlumberger (SLB) dipped slightly from the previous quarter despite a strong performance in its North American operations. The company says earnings were negatively impacted by higher costs and bad weather. Net profits rose to US$525 million, up from US$279 million for the same time last year but down 21% from the fourth quarter of last year. SLB says it sees strong demand for its horizontal drilling services and a pick-up of activity in Canada.
  • The new Baker Hughes (BHGE) reported a first quarter profit of US$70 million, up from US$31 million the previous quarter. Revenue rose to US$5.40 billion, up 1% on a combined basis from the previous year. Less than a year ago, GE combined its oilfield services business with Baker Hughes, creating the second largest oilfield services company in the world. CEO Lorenzo Simonelli says the combined company achieved US$144 million in synergies in Q1 and is on track to save US$700 million for the full year. The company says "market fundamentals remain supportive ... providing stability to customers as they evaluate projects."

This week's dividend increases in the midstream space:

Around the world this week:

  • SNC-Lavalin (SNC) has sealed a deal with Saudi Aramco to install additional facilities for the Arabiah Condensate Handling Facility and Sour Water Disposal Unit Project at the Wasit Gas Plant in Saudi Arabia. The company says work is already underway and should be completed by the end of next year. Financial terms of the deal were not disclosed.
  • BP (BP) and Indian conglomerate Reliance have sanction the second of three phases in the development of Block KG D6, which holds an estimated 3 trillion cubic feet of natural gas. All three phases of development have an estimated price tag of US$6 billion and is expected to come online from 2020 through 2022.
  • Talks between ExxonMobil (XOM) and the Iraqi government appear to have gone sour after two years of negotiations to build infrastructure required to boost oil output from several southern oilfields. If Exxon loses the contract, Iraq's plans to eventually boost output to 5 million bbl/day could be postponed as it is forced to find a new dance partner.
  • Chevron (CVX) says two of its executives were arrested in Venezuela for alleged wrongdoing and disagreements with their PDVSA counterparts over procurement processes. Chevron says their legal team is evaluating the situation and working towards the release of its employees.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
GAINERS
• Baytex Energy (BTE)
• Crescent Point (CPG)
• Spartan Energy (SPE)
• TORC Oil & Gas (TOG)
• Whitecap Resources (WCP)
• Cimarex Energy (XEC)
• Kinder Morgan (KMI)
• Marathon Petroleum (MPC)
• Newfield Exploration (NFX)
• Phillips 66 (PSX)
12-MO
HIGHS
• Baytex Energy (BTE)
• Gran Tierra (GTE)
• Husky Energy (HSE)
• Kelt Exploration (KEL)
• Parex Resources (PXT)
• Suncor Energy (SU)
• Anadarko Petroleum (APC)
• ConocoPhillips (COP)
• Hess Corp (HES)
• Marathon Petroleum (MPC)
• Phillips 66 (PSX)
• Pioneer Natural Res (PXD)
• Valero Energy (VLO)
ALL-TIME
HIGHS
• None • None
GOLDEN
CROSSES
• Baytex Energy (BTE)
• MEG Energy (MEG)
• Pason Systems (PSI)
• Schlumberger (SLB)
BEARISH INDICATORS
TSX
S&P 500
TOP 5
LOSERS
• Advantage Oil & Gas (AAV)
• ARC Resources (ARX)
• Birchcliff Energy (BIR)
• Cenovus Energy (CVE)
• Enerflex (EFX)
• Cabot Oil & Gas (COG)
• Chesapeake Energy (CHK)
• EQT Corp (EQT)
• National-Oilwell Varco (NOV)
• Range Resources (RRC)
12-MO
LOWS
• None • None
ALL-TIME
LOWS
• None • None
DEATH
CROSSES
• None • None
ANALYST RATINGS

UPGRADES

  • ENI (NYSE:E): Upgraded from Underperform to Neutral at BNP Paribas.
  • Pioneer Natural Resources (NYSE:PXD): Upgraded from Hold to Buy at SunTrust Banks.
  • Sinopec (NYSE:SNP): Upgraded from Hold to Buy at Jefferies Group.
  • Whiting Petroleum (NYSE:WLL): Upgraded from Underweight to Equal Weight at Morgan Stanley.

DOWNGRADES

  • Cabot Oil & Gas (NYSE:COG): Downgraded from Buy to Neutral at Citigroup.
  • Chesapeake Energy (NYSE:CHK): Downgraded from Neutral to Sell at Citigroup.
  • ConocoPhillips (NYSE:COP): Downgraded from Buy to Hold at Jefferies Group.
  • Continental Resources (NYSE:CLR): Downgraded from Buy to Hold at KLR Group.
  • National Oilwell Varco (NYSE:NOV): Downgraded from Buy to Hold at B. Riley and Socite Generale.
  • Patterson-UTI Energy (NASDAQ:PTEN): Downgraded from Buy to Hold at Societe Generale.
  • Pioneer Natural Resources (NYSE:PXD): Downgraded from Buy to Hold at KLR Group.
  • Range Resources (NYSE:RRC): Downgraded from Buy to Neutral at Citigroup.
  • RSP Permian (NYSE:RSPP): Downgraded from Buy to Neutral at Roth Capital.
  • Resolute Energy (NYSE:REN): Downgraded from Buy to Hold at SunTrust Banks.
  • Sanchez Energy (NYSE:SN): Downgraded from Buy to Hold at KLR Group.
  • Spartan Energy (TSX:SPE): Downgraded from Outperform to Market Perform at BMO, from Outperform to Sector Perform at National Bank, from Outperform to Neutral at CIBC, from Outperform to tender at Scotiabank and from Outperform to Market Perform at Raymond James.
  • Tallgrass Energy Partners (NYSE:TEP): Downgraded from Overweight to Equal Weight at Capital One.
  • Vermilion Energy (TSX:VET): Downgraded from Outperform to Market Perform at BMO.
NEXT WEEK'S EVENTS

Monday:

  • February wholesale trade data released by Statistics Canada
  • Positive Energy Conference kicks-off in Ottawa, ON
  • Q1/2018 earnings: Halliburton

Tuesday:

Wednesday:

  • EIA Weekly Petroleum Status Report released @ 10:30am ET
  • Cenovus Energy 2018 AGM in Calgary, AB
  • Marathon Petroleum 2018 AGM in Findlay, OH
  • Q1/18 earnings: Western Energy Services

Thursday:

  • February payroll, earnings and hours released by Statistics Canada
  • Husky Energy 2018 AGM in Calgary, AB
  • EIA Weekly Natural Gas Storage Report released @ 10:30pm ET
  • Q1/18 earnings: Husky Energy, Royal Dutch Shell, ConocoPhillips and Valero Energy
  • Last trading day for Henry Hub (May contract)

Friday:

  • TransCanada 2018 AGM in Calgary, AB
  • Imperial Oil 2018 AGM in Calgary, AB
  • Baker Hughes Rig Count released @ 1:00pm ET
  • US Q1/2018 GDP (initial estimate)
  • Q1/2018 earnings: Imperial Oil, ExxonMobil, Chevron and Phillips 66
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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