Energy Market Review

Energy Market Review

This week's Energy Market Summary for the week ending May 11, 2018:
  • Shell dumps 97 million CNRL shares
  • Alberta and Ottawa mull financial stake in TMEP
  • Enbridge starts offloading non-core assets ...
    ... and sticks to its Line 3 preferred route in Minnesota
  • US looks to add another 1 million bbl/day by next year ...
    ... as net imports fall to 60 year lows
  • Higher gas prices stir-up inflation concerns
  • Oil prices break out to multi-year highs ...
  • Energy markets digest impact of renewed sanctions on Iran.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
BULLISH
  • President Trump threatened to reinstate "the highest level of economic sanctions" against any country helping Iran develop its nuclear weapons. Although the US is not an importer of Iranian crude, it is unclear whether oil majors already doing business in Iran will be allowed to continue. If reinstated, sanctions could take effect as early as November.
  • Israeli military struck Iranian forces stationed in Syria this week, adding to concerns that supplies out of the Middle East could be negatively impacted.
  • Output from Venezuela continues to deteriorate and is expected to weaken further, declining from 2.5 million bbl/day a few years ago, to the current 1.4 million bbl/day, and potentially falling to 1 million bbl/day next year.
USD INDEX
NEUTRAL
  • No change in the US dollar index this week.
SUPPLY
BEARISH
DEMAND
NEUTRAL
  • No change on the demand front this week. Revised supply/demand forecasts are expected out of both OPEC and the IEA next week.
SENTIMENT
NEUTRAL
  • Oil prices all broke out to multi-year highs this week, before retreating slightly on Friday.
  • Net longs on both Brent and WTI continued to unwind last week.
  • Backwardation has begun to ease in both Brent and WTI, particularly in near month contracts.
CURRENCIES & BONDS

Canada unexpectedly lost 1,100 jobs in April, as 28,800 new full-time jobs offset 30,000 part-time job losses. The national unemployment rate was unchanged at 5.8%. Wage growth accelerated to 3.3% annually, while labour participation declined from 65.5% to 65.4%.

The consumer price index (CPI) south of the border rose 0.2% in April, blamed mostly on a 3% rise in gas prices. The CPI is now up 2.5% annually, the highest since February 2017. Core inflation, ex-food and energy, remains at 2.1%. Bond yields creeped higher again this week, as the 10-year once again touched 3% earlier in the week. The yield curve continues to flatten, falling to 0.43%.

The Bank of England kept interest rates unchanged this week, as the UK economy appears weaker than expected. However, Governor Mark Carney warns a rate hike is likely to occur before the end of the year. Weak economic data out of Germany pulled the Euro lower early in the week, but recovered most of those losses by Friday.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
77.12
70.70
70.03
63.85
55.27
44.82
42.53
40.88
39.64
30.41
77.47
71.36
70.73
64.57
55.85

Domestic and international oil prices all posted decent gains this week, with each breaking out to multi-year highs. The differential between Brent and WTI inched closer to US$6.50 on concerns of rapidly rising production out of the US. The Canadian heavy oil discount remains unchanged this week at just under US$15.50 a barrel.

This week's revised oil price forecasts:

  • According to the Energy Information Administration's (EIA) latest oil price forecast, Brent prices are expected to average US$71/bbl this year, falling to US$66 in 2019, up US$7 and US$3, respectively, from its previous forecast. WTI prices are expected to trade at a US$5 discount to Brent in both 2018 and 2019. 
  • Goldman Sachs is sticking to its US$82.50 per barrel summer price forecast for Brent, noting that the loss of Iranian supply could easily be made up by other OPEC members, the release of US strategic petroleum reserves or even US shale producers.
  • Bank of America says Brent could return to US$100 a barrel next year, or maybe sooner, due to falling output out of Venezuelan and risks to Iranian exports. The bank lifted its forecast for Brent to an average of US$70 in 2018, rising to US$75 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)

Analysts are still digesting the impact of sanctions possibly being reinstated on Iran. Iran exports about 2.6 million bbl/day, up 1 million bbl/day since sanctions were lifted, while production has risen to almost 4 million bbl/day. China is the biggest buyer of Iranian oil and will likely step in to support production if European oil majors are forced to pull out of the region. Other OPEC members have also offered to fill in the supply gap if production out of Iran is curtailed. Aside from the US, the Iran nuclear deal also includes the UK, France and Germany, who all say they remain committed to the pact.

This month's revised US production forecast from the EIA:

  • US crude oil production is expected to average 10.7 million bbl/day this year, rising to 11.9 million bbl/day in 2019, revised higher by 400,000 bbl/day from its previous forecast.
  • Crude production will likely top 12 million bbl/day by the end of next year.
  • Net imports of crude oil and petroleum products are expected to fall by 1 million bbl/day this year, and another 1 million bbl/day in 2019, bringing the total to 1.5 million bbl/day, the lowest level since 1958.

Lower crude oil imports helped drawdown inventories south of the border. The EIA estimates total net imports of crude and petroleum products averaged 3.2 million bbl/day last week.

According to Baker Hughes, the US added another 10 oil rigs this week, rising to 844, the highest since March 2015. Canada lost 5 oil rigs, to a total of 32.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

May 9, 2018

Falling imports help drop total petroleum stockpiles by 8 million barrels

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

Global equity markets all posted gains, led by US markets, particularly small caps and technology names, helping the NASDAQ return to its all-time highs. The TSX had a decent week, rising 1.6%.

In the US and Canada, all sectors posted gains except for the more defensive staples and utilities stocks. US energy stocks were the best performers, gaining on average 3.8%, while Canadian energy stocks gained 1.4%.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

Large cap integrated names were the best performers this week on both the TSX and S&P 500, while Canadian oilfield service providers continue to suffer. On US markets, all energy sub-sectors posted gains for the week.

CANADIAN ENERGY NEWS

Royal Dutch Shell (NYSE:RDS.A) has signed an agreement with four lending institutions to sell its entire stake in Canadian Natural Resources (CNQ), worth an estimated $4.3 billion. Shell acquired 97.6 million CNQ shares when it sold a majority of its oil sands assets in Alberta. The company says it will use net proceeds to pay down debt.

Alberta Premier Rachel Notley says she remains confident Kinder Morgan Canada's (KML) Trans Mountain Expansion (TMEP) will resume construction this summer. Alberta and the federal government are considering the formation of a joint-venture financial arrangement to ensure the pipeline gets built. The Alberta government has been granted full status in its fight against BC's attempt to throttle bitumen exports, allowing it to present new evidence in the court case. After being rejected by the Federal Court of Appeal in March, the City of Burnaby is making yet another attempt to block the expansion pipeline, insisting municipal bylaws cannot be over-ruled by the National Energy Board.

Enbridge (ENB) has agreed to sell a 49% stake in several North American onshore renewable power assets and 49% of two German offshore wind projects to the Canada Pension Plan Investment Board for $1.75 billion. The company also announced the sale of its US gas pipelines subsidiary Midcoast Operating LP, to ArcLight Capital Partners for US$1.12 billion. Enbridge continues to shop around for the sale of various Canadian midstream assets, worth an estimated $4.5 billion. Late last year, the company announced plans to divest about $10 billion in non-core assets to pay down debt incurred in its $37 billion purchase of Spectra Energy. At the end of 2017, Enbridge's debt stood at $61 billion.

Enbridge also says replacing Line 3 in place, as recommended by a Minnesota judge, would require a 9 to 12 month shutdown, disrupting supplies to refineries in the state and creating a shortage of refined products. The company is still holding out hope Minnesota's Public Utilities Commission will approve its preferred route in its final ruling, which is expected in June.

This week's notable first quarter earnings:

  • First quarter profits at Enbridge (ENB) declined 30% y/y to $445 million due to higher taxes and higher debt-servicing costs. The company moved 2.63 million bbl/day of crude on its Mainline network, up 2% from the same quarter last year. Enbridge says it has $7 billion of new projects slated to come into service by the end of this year.
  • MEG Energy (MEG) reported a 21% increase in bitumen production out of its Christina Lake SAGD facility, rising to 93,207 bbl/day in the first quarter. Adjusted funds from operations almost doubled to $83 million on higher bitumen sales volumes and lower interest expenses. Net operating losses for the quarter narrowed to $18 million, down from a loss of $79 million for the same quarter last year.
  • First quarter revenues at Inter Pipeline (IPL) rose to $646 million, up 12% from the same time last year. Net income was roughly unchanged at $143 million. Pipeline throughput volumes hit a record 1.488 million bbl/day in Q1 (+2%), including 1.279 million bbl/day of volumes from the oil sands (+2%).
  • First quarter net earnings at Keyera (KEY) declined 8% y/y to $88 million, blamed on higher taxes and depreciation costs. The company has set a 2018 capital budget of about $1 billion for growth projects currently under development and the South Grand Rapids diluent pipeline.
  • Ensign Energy Services (ESI) reported revenues of $259 million in the first quarter, up 3% from the same time last year. Net losses widened to $26.7 million, up from a loss of $13.8 million in Q1/2017. Business in the US was improved due to higher oil and gas prices. The company's Canadian segment saw a slowdown due to "geopolitical factors and the lack of access for oil and natural gas to markets."
  • Bellatrix Exploration (BXE) reported first quarter revenues of $66 million, resulting in a net loss of $12.9 million (versus a profit of $13 million for the same quarter last year). Production rose 6% y/y to 36,740 boe/day, weighted 74% gas. The company says production should average 34,000 to 35,500 boe/day for the full year.
  • Gibson Energy (GEI) reported first quarter revenues of $1.74 billion, up 24% y/y. Net profits for the quarter rose to $12.8 million, up from a $3.1 million loss for the same time last year. The company says it is continuing on its corporate strategy to transition itself into an oil infrastructure company, while growing its cash flow and dividend.
  • Obsidian Energy (OBE) swung to a loss in the first quarter, blamed on bad winter weather. Net losses were reported at $65 million in Q1, down from a profit of $27 million for the same time last year. The company produced 29,443 boe/day in the quarter, down 6% y/y.
  • Peyto Exploration (PEY) reported net earnings of $47.7 million in the first quarter, up 19% from the same time last year. Revenues rose 7% to $200 million while funds from operations increased 7% to $149 million.
  • Birchcliff Energy (BIR) reported a first quarter profit of $14.1 million, down about 50% from the same time last year. The decline was blamed on higher depletion expenses and write-downs of financial instruments. Q1 production averaged 76,323 boe/day, up 24% y/y. Full year production is expected to average 76,000 to 78,000 boe/day.
  • NuVista Energy (NVA) reported a 42% decline in net earnings, falling to $22.4 million in the first quarter. Production averaged 36,100 boe/day, weighted 31% condensate. The company says they continue to work towards their goal of growing production to 60,000 bbl/day.
  • Athabasca Oil Corp (ATH) reported a net loss of $93 million in the first quarter, up from a $29 million loss for the same time last year. Q1 production averaged 40,572 boe/day, up 52% y/y. The company also says it is looking to monetize its thermal oil infrastructure, which includes dilbit and diluent pipelines between Cheecham and Leismer, as well as a 300,000 barrel tank farm at the Cheecham terminal.
  • Paramount Resources (POU) reported a net loss of $81 million in the first quarter, down from a $21 million profit for the same time last year. Sales volumes averaged 92,203 boe/day in Q1. Cold weather, pipeline outages and unplanned maintenance took 6,000 boe/day of production offline.
  • First quarter revenues at Trican Well Service (TCW) rose to $307 million, more than double the same time last year. Net losses narrowed to $28.4 million, including a $54 million devaluation of its shares in Keane.
US ENERGY NEWS

State-owned Alaska Gasline Development Corp has signed a long-term gas sales agreement to purchase BP's (BP) share of production from Prudhoe Bay, to be exported out of the planned Alaska LNG terminal. A final investment decision on the US$43 billion project is expected sometime next year.

Energy Transfer Partners (ETP) now says it plans to put its 1,150 km (713 miles) Rover Pipeline into service by the middle of this year, after regulators in West Virginia have cleared the company to continue construction. Rover is currently the largest natural gas pipeline under construction in the US, designed to carry up to 3.25 Bcf/day of gas from the Marcellus and Utica shale to the US Midwest and Ontario's Dawn Storage Hub. Completion of the US$4.2 billion project has been delayed several times due to a number of violations and stop-work orders. Parts of the line are already operational. Last week, ETP received approval from federal regulators (FERC) to commission several more sections of the system.

ExxonMobil's (XOM) 560,500 bbl/day Baytown refinery in Texas is running at reduced rates after the company took two fluidic catalytic cracking units (FCCU) offline, as part of an overhaul of its Flexicoker which began at the beginning of April. The company says it is continuing to meet it contractual commitments but declined to comment on the status of the units.

This week's notable first quarter earnings:

  • Andeavor (ANDV) reported first quarter earnings of US$164 million, more than triple the same time last year. Last week, the company announced a merger with Marathon Petroleum (MPC), which is expected to close sometime in the second half of this year.
  • Occidental Petroleum (OXY) reported a net profit of US$708 million in the first quarter, up 42% from the same time last year. Total production averaged 609,000 boe/day in Q1, down 2% from the fourth quarter of last year.
  • Energy Transfer Partners (ETP) reported first quarter revenues of US$8.3 billion, up from US$7.0 billion for the same quarter last year. Net income more than doubled to US$715 million.

Around the world this week:

  • ConocoPhillips (COP) has taken over several Caribbean assets owned by Venezuela's PDVSA to enforce a US$2 billion arbitration award over Venezuela's nationalization of its projects in 2007. The facilities located in various Caribbean islands accounted for about a quarter of Venezuela's oil exports last year. The company is also working towards seizing some of PDVSA's assets in Curacao, including crude volumes held in storage.
  • The state of Western Australia has ordered an inquiry into Chevron's (CVX) carbon capture commitments at its US$54 billion Gorgon LNG project. Gorgon was approved in 2009 provided at least 80% of CO₂ emissions would be captured and sequestered, based on a five-year rolling average. Chevron has delayed the start of carbon capture to the fourth quarter of this year due to equipment deficiencies discovered during commissioning of its US$1.9 billion carbon capture and storage (CC&S) facility. Once operational, the Gorgon CC&S plant will be the largest in the world.
  • Iraq’s state-run North Oil Company has signed an agreement with BP (BP) to triple output from the Kirkuk fields, boosting capacity to more than 1 million bbl/day. Kirkuk is one of the biggest and oldest oilfields in the Middle East, estimated to contain about 9 billion barrels of recoverable oil.
  • Algeria's state-owned SONATRACH has agreed to purchase ExxonMobil's (XOM) 175,000 bbl/day refinery in Sicily and three Italian oil terminals, including pipeline infrastructure. The North African country says it want to process its crude in the Italian refinery, and re-export refined products back into Algeria. Terms of the deal were not disclosed.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
GAINERS
• Cenovus Energy (CVE)
• Crew Energy (CR)
• Enbridge (ENB)
• MEG Energy (MEG)
• Raging River (RRX)
• Chesapeake Energy (CHK)
• Devon Energy (DVN)
• Hess Corp (HES)
• Occidental Petroleum (OXY)
• Transocean (RIG)
12-MO
HIGHS
• Baytex Energy (BTE)
• Enerplus (ERF)
• Kelt Exploration (KEL)
• MEG Energy (MEG)
• Nuvista Energy (NVA)
• Parex Resources (PXT)
• Suncor Energy (SU)
• TORC Oil & Gas (TOG)
• Anadarko Petroleum (APC)
• ConocoPhillips (COP)
• EOG Resources (EOG)
• Hess Corp (HES)
• Marathon Oil (MRO)
• Noble Energy (NBL)
• Occidental Petroleum (OXY)
• ONEOK (OKE)
• Phillips 66 (PSX)
• Pioneer Natural Res (PXD)
• Valero Energy (VLO)
10-YR
HIGHS
• None • EOG Resources (EOG)
• ONEOK (OKE)
• Valero Energy (VLO)
GOLDEN
CROSSES
• None • None
BEARISH INDICATORS
TSX
S&P 500
TOP 5
LOSERS
• CES Energy Solutions (CEU)
• Paramount Resources (POU)
• Peyto Exploration (PEY)
• Seven Generations (VII)
• Trican Well (TCW)
• Baker Hughes (BHGE)
• Cabot Oil & Gas (COG)
• Concho Resources (CXO)
• Helmerich & Payne (HP)
• TechnipFMC (FTI)
12-MO
LOWS
• Paramount Resources (POU) • None
10-YR
LOWS
• None • None
DEATH
CROSSES
• None • None
ANALYST RATINGS

UPGRADES

  • Basic Energy Services (NYSE:BAS): Upgraded from Neutral to Overweight at Piper Jaffray.
  • Black Diamond Group (TSX:BDI): Upgraded from Market Perform to Outperform at Raymond James and from Underperform to Market Perform at BMO.
  • CVR Refining (NYSE:CVRR): Upgraded from Neutral to Buy at Citigroup.
  • Energen (TSX:EGN): Upgraded from Neutral to Buy at BoA.
  • EOG Resources (NYSE:EOG): Upgraded from Neutral to Buy at JPMorgan.
  • Halliburton (NYSE:HAL): Upgraded from Neutral to Buy at BofA.
  • Marathon Petroleum (NYSE:MPC): Upgraded from Neutral to Buy at BofA.
  • Oasis Petroleum (NYSE:OAS): Upgraded from Underperform to Neutral at BofA.
  • Occidental Petroleum (NYSE:OXY): Upgraded from Underperform to Neutral at BofA and from Neutral to Buy at BofA.
  • Petrobras (NYSE:PBR): Upgraded from Neutral to Buy at BofA.
  • Rowen Companies (NYSE:RDC): Upgraded from Underperform to Neutral at BofA.
  • SM Energy (NYSE:SM): Upgraded from Hold to Buy at Tudor Pickering.
  • TechnipFMC (NYSE:FTI): Upgraded from Hold to Buy at DNB Markets.
  • Valero Energy (NYSE:VLO): Upgraded from Hold to Buy at BofA.
  • Whiting Petroleum (NYSE:WLL): Upgraded from Neutral to Buy at BofA.

DOWNGRADES

  • Andeaver (NYSE:ANDV): Downgraded from Overweight to Equal Weight at Morgan Stanley and from Buy to Neutral at Citigroup.
  • Baker Hughes (NYSE:BHGE): Downgraded from Buy to Neutral at BofA.
  • Calfrac Well Services (TSX:CFW): Downgraded from Neutral to Underweight at Piper Jaffray.
  • Chinook Energy (TSX:CKE): Downgraded from Outperform to Sector Perform at National Bank.
  • Cimarex Energy (NYSE:XEC): Downgraded from Buy to Neutral at BofA.
  • Cobalt Oil & Gas (NYSE:COG): Downgraded from Buy to Underperform at BofA.
  • Encana (TSX:ECA): Downgraded from Buy to Hold at Tudor Pickering.
  • EOG Resources (NYSE:EOG): Downgraded from Buy to Hold at Tudor Pickering.
  • Kosmos Energy (NYSE:KOS): Downgraded from Buy to Hold at Jefferies Group.
  • Laredo Petroleum (NYSE:LPI): Downgraded from Buy to Hold at Tudor Pickering.
  • Newfield Exploration (NYSE:NFX): Downgraded from Buy to Hold at Tudor Pickering.
  • PHX Energy Services (TSX:PHX): Downgraded from Market Perform to Underperform at BMO.
  • Paramount Resources (TSX:POU): Downgraded from Strong Buy to Outperform at Raymond James and from Outperform to Sector Perform at Scotiabank.
  • Plains All American Pipeline (NYSE:PAA): Downgraded from Buy to Hold at Stifel Nicolaus.
  • Sanchez Energy (NYSE:SN): Downgraded from Buy to Accumulate at Johnson Rice.
  • Seven Generations Energy (TSX:VII): Downgraded from Outperform to Market Perform at BMO.
NEXT WEEK'S EVENTS

Monday:

  • OPEC Monthly Oil Market Report

Tuesday:

Wednesday:

  • IEA Oil Market Report
  • Kinder Morgan Canada 2018 AGM in Calgary, AB
  • EIA Weekly Petroleum Status Report released @ 10:30am ET
  • Contract expiry for Canadian Light, Edmonton Condensate and Western Canadian Select (June contracts)

Thursday:

Friday:

  • April Consumer Price Index (CPI) and March retail trade data released by StatsCan
  • 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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