Energy Market Review
This week's Canadian economic data:
- Canada's Consumer Price Index eased to 2.2% in April, down from an annualized rate of 2.3% in March. A 6.3% rise in energy components remain the largest drivers of inflation, particularly gasoline, up 14% y/y. Residential electricity rates in Alberta are now up almost 40% y/y.
- Retail sales rose 0.6% in March to $50.2 billion, the third consecutive monthly increase. Higher sales of autos and clothing offset declines in food and gasoline. The volume of gasoline sold declined 2.5% due to higher prices at the pump.
- Manufacturing sales rose 1.4% to $57.1 billion in March, on higher sales of primary metals, aerospace components, transportation equipment, lumber and grains.
The Philadelphia Fed Business Outlook Index surged to new highs this week, warning of a strengthening economy and tight labour market. Coupled with better than expected Empire State figures from the New York Fed, US 10-year bond yield surged above 3% again this week, the highest since January 2014. The greenback gained rose 1%, its best performance since 2016. Since the lows of April, the US Dollar Index is up almost 5%.
The Bank of France hinted that QE may soon come to an end in Europe, giving the ECB permission to begin raising rates. Japan posted another quarter of negative GDP growth, raising the risk of yet another recession. Most international bond yields, including Canada, jumped higher this week due to rising long-bond rates in the US.
Morgan Stanley says Brent crude will likely hit US$90 by 2020 due to new international shipping regulations, that will reduce the sulphur content in shipping fuels from a maximum of 3.5% to just 0.5%. The bank says the new regulations, which take effect in 2020, will create higher demand for middle distillate products, driving crack spreads higher.
Goldman Sachs remains extremely bullish on the commodity sector, especially crude oil. Goldman points out that energy remains the best performing asset class this year to date, and likely has more room to run. The investment firm thinks higher production from US shale will not be enough to offset losses that stem from renewed sanctions in Iran.
BP CEO Bob Dudley warns investors not to get too excited about US$80 oil due to the threat of rising production out of US shale and potentially OPEC members. Dudley says he expects oil to fall back to a range of US$50 to US$65 a barrel, but concedes the US withdrawal from the Iran nuclear deal has "brought a lot of uncertainty" to oil markets.
Oil prices posted their sixth consecutive weekly gains this week, with Brent briefly touching US$80 a barrel on Thursday and WTI hitting US$72 for the first time since late 2014. The spread between WTI and Brent widened to US$8 a barrel this week, the highest since last December.
After touching a low of US$15 on Wednesday, the Canadian heavy oil discount widened to about US$17/bbl by the end of the week due to contract expiry.
OPEC says the global oil glut has almost disappeared, pledging to "support oil market stability" in the event of output declines out of Iran due to renewed sanctions. Inventories in OECD countries stand at 9 million barrels above the five-year average, down from a 340 million barrel gap at the beginning of last year.
The International Energy Agency (IEA) warned that higher oil prices will slightly dent oil demand, revising its global demand growth forecast from 1.5 to 1.4 million bbl/day this year, to an average of 99.2 million bbl/day. Global oil supply held steady at 98 million bbl/day in April, up 1.78 million bbl/day from the same time last year, mostly attributed to higher output from the US. OPEC production declined by 130,000 bbl/day in April, with both Venezuela and Africa reporting lower production. Global refining throughput is expected to hit a record 83 million bbl/day this summer, which will likely not cover global refined products demand.
Baker Hughes reported no change in US rigs this week, holding steady at 844. Canada added 6 oil rigs to a total of 38.
Interest-rate sensitive midstream stocks posted losses this week, particularly on the TSX. Producers, refiners and service company mostly posted good gains.
Federal Finance Minister Bill Morneau says his government is ready to backstop the Trans Mountain Expansion Project, offering to indemnify Kinder Morgan Canada (KML) or any other company willing to takeover the project. KML says it "appreciates" the gesture but won't negotiate in public. The company insists construction will not be restarted until it receives clarity on path forward. Talks continue ahead of KML's May 31st deadline.
The CEO of LNG Canada says a final investment decision on the $40 billion export terminal in Kitimat is on track for sometime this year. Andy Calitz confirmed construction will begin in 2018 and a dispute over tariffs recently imposed on modules imported from Asia is no longer an issue. BC Premier Horgan recently provided a number of tax breaks to help get the project approved, much to the dismay of Green Party Leader Andrew Weaver, who has threatened to topple the fragile NDP government over their support of LNG exports. A decision from project-lead Royal Dutch Shell (NYSE:RDS.A) and it partners was expected in 2016 but delayed due to falling LNG prices.
Assuming LNG Canada gets the green light sometime this year, TransCanada (TRP) says it will commence construction of the $4.8 billion Coastal GasLink pipeline at the beginning of next year. The 670 km pipeline will transport gas from shale fields in Alberta and northeastern BC to the export terminal in Kitimat. TransCanada also says it will provide an updated cost estimate on the project once the contracts are awarded.
Husky Energy (HSE) signed two production sharing agreements with China's CNOOC (CEO) for several blocks in the South China Seas. The company also says it drilled a successful exploration well in the region and also announced a new discovery off the coast of Newfoundland and Labrador, about 10 km north of its SeaRose platform.
Enbridge (ENB) announced a simplification of its corporate structure this week, rolling four of its MLPs back into the parent company in exchange for 272 million ENB common shares, worth about $11.4 billion. The deal includes its US-subsidiaries Spectra Energy Partners (NYSE:SEP), Enbridge Energy Partners (NYSE:EEP) and Enbridge Energy Management (NYSE:EEQ), which lost their US income tax allowances back in March. Canadian subsidiary Enbridge Income Fund (ENF) will also be bought-out due to its inability to "cost-effectively" raise capital.
Surge Energy (SGY) announced the purchase of various crude-producing assets in Central Alberta for $28.4 million. The assets produce about 620 boe/day, weighted 83% oil. The company says it now expects to exit 2018 at about 17,175 boe/day. Surge's Board of Directors also approved a dividend increase, rising from $0.095 to $0.10 per share annually.
Whitecap Resources (WCP) also announced plans to buy back up to 20.9 million of its shares over the next 12 months.
Keyera Corp (TSX:KEY) announced plans to build a crude oil storage and blending terminal in Cushing, Oklahoma. The Wildhorse Terminal will include 12 storage tanks with 4.5 million barrels of working storage capacity. Lama Energy Group will own a 10% stake in the terminal, which is expected to come into service by the middle of 2020. Keyera's share of the capital costs are estimated at US$185 million.
Williams Company (WMB) says it will acquire all outstanding shares of MLP subsidiary Williams Partners (WPZ) in an all-stock deal worth US$10.5 billion. The move is in response to the elimination of various income tax breaks for US MLPs back in March.
Pennsylvania-based Rexx Energy (REXX) has filed for Chapter 11, allowing it to sell off its remaining natural gas assets in a bankruptcy sale. The company says drilling and production will continue as usual, and it has the necessary staffing and resources to meet its contractual commitments.
Around the world this week:
- Valero Energy (VLO) has agreed to purchase Pure Biofuels Del Peru from private equity firm Pegasus Capital Advisors. The deal includes 1 million barrels of liquid storage, a biodiesel production facility, and two refined products terminals. Financial terms were not disclosed. This is Valero's first infrastructure investment in South America. The company also signed a long-term agreement to supply refined products into northern Mexico from its Texas refineries and terminal expansion in Nuevo Laredo, Mexico. Terms of the deal were also not disclosed.
- Reuters is reporting that ConocoPhillips (COP) is in talks to sell some or all of its North Sea assets, as the company focuses on its shale operations closer to home. The assets are worth an estimated US$2 billion. According to Bloomberg, BP is interested in swapping the assets for several of its Alaskan properties.
- Anadarko Petroleum (APC) is looking to raise a record US$14 to US$15 billion to help finance its US$20 billion LNG project in Mozambique. The US$20 billion export facility will initially produce 12.88 million t/yr of LNG, and will be designed to be expandable to 50 million t/yr. Advisor Societe Generale has already raised US$14 billion from various credit agencies in China, South Africa, Italy and Japan. Anadarko says it will sanction the project once it secures enough binding contracts.
- French energy major Total (TOT) signed an MOU with the government of Oman to develop the country's natural gas resources. Under terms of the deal, Total and partner Royal Dutch Shell (RDS.A) will develop a gas reserve located in the Greater Barik area while Total will build a regional hub for LNG supply to marine vessels.
- Total has also asked US authorities for a waiver against Iranian sanctions for its South Pars project. The company says it agreed to develop the field, along with partner PetroChina (PTR), in full compliance with UN resolutions. The company is asking to be shielded from any secondary sanctions from any pending US legislation. If a waiver is not received by November 4th, Total warns it will unwind all related operations in the region.
- Norwegian oil major Statoil (STO) officially changed its name and website to Equinor this week, changing its ticker symbol to EQNR for both its Norwegian listings and ADRs listed on the NYSE. The company also raised its dividend from US$0.2201 to US$0.23 per share.
Advantage Oil & Gas (AAV)|
Birchcliff Energy (BIR)
Precision Drilling (PD)
Seven Generations (VII)
Tourmaline Oil (TOU)
Chesapeake Energy (CHK)|
EOG Resources (EOG)
National-Oilwell Varco (NOV)
Range Resources (RRC)
Canadian Natural Res (CNQ)|
Gran Tierra (GTE)
Imperial Oil (IMO)
Kelt Exploration (KEL)
MEG Energy (MEG)
Nuvista Energy (NVA)
Suncor Energy (SU)
TORC Oil & Gas (TOG)
Anadarko Petroleum (APC)|
EOG Resources (EOG)
Hess Corp (HES)
Marathon Oil (MRO)
National-Oilwell Varco (NOV)
Noble Energy (NBL)
Occidental Petroleum (OXY)
Phillips 66 (PSX)
Pioneer Natural Res (PXD)
Valero Energy (VLO)
EOG Resources (EOG)
Valero Energy (VLO)
| Tourmaline Oil (TOU)|| None|
- Anadarko Petroleum (NYSE:APC): Upgraded from Market Perform to Outperform at Wolfe Research.
- Cenovus Energy (TSX:CVE): Upgraded from Market Perform to Outperform at BMO.
- Energy Transfer Equity (NYSE:ETE): Upgraded from Neutral to Buy at BofA.
- ENI (NYSE:E): Upgraded from Underweight to Equal Weight at Barclays and from Neutral to Buy at UBS.
- Kosmos Energy (NYSE:KOS): Upgraded from Equal Weight to Overweight at Barclays.
- Transglobe Energy (TSX:TGL): Upgraded from Sector Perform to Outperform at RBC.
- Valero Energy (NYSE:VLO): Upgraded from Equal Weight to Overweight at Morgan Stanley and from Hold to Buy at Tudor Pickering.
- Williams Companies (NYSE:WMB): Upgraded from Sector Perform to Outperform at Scotiabank.
- Andeaver (NYSE:ANDV): Downgraded from Overweight to Neutral at JPMorgan, from Outperform to Neutral at Credit Suisse and from Buy to Hold at Tudor Pickering.
- Carrizo Oil & Gas (NASDAQ:CRZO): Downgraded from Buy to Hold at Jefferies Group.
- Enable Midstream Partners (NYSE:ENBL): Downgraded from Outperform to Market Perform at Wells Fargo.
- Enbridge Energy, Ltd Partnership (NYSE:EEP): Downgraded from Buy to Neutral at UBS.
- Enbridge Income Fund (TSX:ENF): Downgraded from Sector Perform to Tender at CIBC and National Bank.
- Just Energy (TSX:JE): Downgraded from Buy to Hold at Canaccord Genuity.
- Marathon Petroleum (NYSE:MPC): Downgraded from Buy to Hold at Tudor Pickering.
- TC Pipelines (NYSE:TCP): Downgraded from Buy to Neutral at Citigroup.
- Total (NYSE:TOT): Downgraded from Buy to Neutral at UBS.
- Total Energy Services (TSX:TOT): Downgraded from Outperform to Neutral at CIBC.
- Cdn markets closed for Victoria Day
- March wholesale trade data released by StatsCan
- 2018 MLP & Energy Infrastructure Conference kicks-off in Orlando, FL
- UBS Global Oil and Gas Conference kicks-off in Austin, Texas
- Minutes from May FOMC meeting released @ 2:00pm ET
- Royal Dutch Shell 2018 AGM in The Hague, Netherlands
- API Weekly Statistical Bulletin released @ 4:30pm ET
- EIA Weekly Petroleum Status Report released @ 10:30am ET
- March Employment Insurance (EI) data released by StatsCan
- EIA Weekly Natural Gas Storage Report released @ 10:30pm ET
- Baker Hughes Rig Count released @ 1:00pm ET