Energy Market Review

Energy Market Review

This week's Energy Market Summary for the week ending May 18, 2018:
  • Feds dangle taxpayer funds to get TMEP built
  • Keyera carves out storage space in Cushing
  • Gasoline sales suffer as prices rise 14% y/y
  • Oil prices post 6th consecutive weekly gains
  • OPEC proclaims victory over global oil glut
  • IEA warns of demand destruction ...
    ... as demand nears 100 million bbl/day
  • Morgan Stanley very bullish on refining stocks
  • BP CEO not buying US$80 oil.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
BULLISH
  • Oil markets continue to digest the impact of ongoing political turmoil in Venezuela and the potential for renewed sanctions on Iran.
USD INDEX
BEARISH
  • The US dollar posted decent gains this week on positive economic data south of the border. The greenback is now up almost 5% from the lows of mid-April.
SUPPLY
BULLISH
  • The IEA warns refining capacity will likely not be able to keep up with rising demand through the summer, which should help reduce product stockpiles globally.
  • Shell declared force majeure on Bonny Light crude exports from Nigeria for undisclosed reasons. Nigeria's Forcados pipeline was also shutdown after a leak was discovered.
  • Barclays is adding to the voices predicting additional production declines out of Venezuela. Output fell 130,000 bbl/day in April. The UK bank sees production falling another 500,000 bbl/day, to less than 1 million bbl/day.
  • Production out of the Lower 48 rose another 20,000 bbl/day this week, bringing total US output to a record 10.72 million bbl/day.
DEMAND
NEUTRAL
  • In its monthly Oil Market Report, OPEC raised its demand forecast by 25,000 bbl/day to 98.85 million bbl/day.
  • The IEA pegs global oil demand at 99.2 million bbl/day this year, down 100,000 bbl/day from its previous forecast on concerns of demand destruction from higher oil prices.
  • Goldman Sachs remains very optimistic on oil prices, predicting that consumption will likely cross top 100 million bbl/day this summer.
SENTIMENT
NEUTRAL
  • Brent and WTI posted their sixth consecutive weekly gains, each hitting fresh multi-year highs on Thursday before pulling back by the end of the week.
  • Net longs are declining in both Brent and WTI managed money futures, with Brent showing an increase in the number of short positions.
  • Backwardation in the Brent futures curve continues to narrow, particularly in near month contracts.
CURRENCIES & BONDS

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.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
78.51
71.28
69.18
64.48
54.13
44.82
42.53
40.88
39.64
30.41
79.30
71.49
70.73
64.82
56.21

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.

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)

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.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

May 16, 2018

CRUDE AND PRODUCT STOCKPILES DECLINE 5.3 MILLION BBLS AS EXPORTS CONTINUE TO RISE

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

Energy and cannabis stocks helped the TSX rise over 1%. US markets were subdued due to rising rates and a higher dollar, except for small caps that are generally more insulated from a strengthening currency. Core European and Japanese markets posted gains due to a lower Euro and yen.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

Interest-rate sensitive midstream stocks posted losses this week, particularly on the TSX. Producers, refiners and service company mostly posted good gains.

CANADIAN ENERGY NEWS

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.

Canadian Natural Resources (CNQ) announced plans to repurchase up tp 61.4 million shares over the next 12 months, representing 5% of all outstanding common shares.

Whitecap Resources (WCP) also announced plans to buy back up to 20.9 million of its shares over the next 12 months.

US ENERGY NEWS

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.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
GAINERS
• 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)
• TechnipFMC (FTI)
12-MO
HIGHS
• Canadian Natural Res (CNQ)
• Enerplus (ERF)
• 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)
• Andeavor (ANDV)
• ConocoPhillips (COP)
• EOG Resources (EOG)
• Hess Corp (HES)
• Marathon Oil (MRO)
• National-Oilwell Varco (NOV)
• Noble Energy (NBL)
• Occidental Petroleum (OXY)
• ONEOK (OKE)
• Phillips 66 (PSX)
• Pioneer Natural Res (PXD)
• Valero Energy (VLO)
10-YR
HIGHS
• None • Andeavor (ANDV)
• EOG Resources (EOG)
• ONEOK (OKE)
• Valero Energy (VLO)
GOLDEN
CROSSES
• Tourmaline Oil (TOU) • None
BEARISH INDICATORS
TSX
S&P 500
TOP 5
LOSERS
• CES Energy Solutions (CEU)
• Crew Energy (CR)
• Enbridge (ENB)
• Keyera (KEY)
• TransCanada (TRP)
• Chevron (CVX)
• Cimarex Energy (XEC)
• Kinder Morgan (KMI)
12-MO
LOWS
• None • None
10-YR
LOWS
• None • None
DEATH
CROSSES
• None • None
ANALYST RATINGS

UPGRADES

  • 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.

DOWNGRADES

  • 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.
NEXT WEEK'S EVENTS

Monday:

  • Cdn markets closed for Victoria Day

Tuesday:

Wednesday:

Thursday:

Friday:

  • 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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