Energy Market Review

Energy Market Review

This week's Energy Market Summary for the week ending May 25, 2018:
  • Kinder Morgan wins a small victory in BC courts ...
    ... as TMEP deadline looms
  • Keyera continues its push into Oklahoma
  • Trump Administration defends Keystone XL
  • Exxon's plan to reduce flaring and methane emissions
  • Hurricane season kicks-off in the Gulf Coast
  • Venezuelan sanctions return to the spotlight
  • OPEC and Russia mull 1 million bbl/day output increase
  • Oil prices retreat for the first time in two months ...
    ... as Brent-WTI spread continues to widen
  • Energy stocks finally take a breather.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
BULLISH
  • Venezuela moved back into the spotlight this week after President Nicolas Maduro was re-elected in what some are calling a "sham" election. President Trump signed an executive order prohibiting US residents from purchasing Venezuelan debt or account receivables, including those for the purchase of crude oil.
USD INDEX
BEARISH
  • Despite weak economic data south of the border, the greenback strengthened again this week, rising to a 5-month high on a weakening of global currencies.
SUPPLY
BEARISH
  • According to Reuters, OPEC may decide to raise output by as much as 1 million bbl/day at their next meeting in June, allegedly over concerns oil prices have run up too far too fast. Under the current agreement, OPEC and Russia have agreed to take 1.8 million bbl/day of production offline. The cartel remains concerned over falling output from Venezuela and potential losses from Iran if sanctions are reinstated in November. Russia's energy minister says production cuts could be eased "softly" if oil markets return to balance in June.
DEMAND
NEUTRAL
  • No new news on the demand front this week.
SENTIMENT
BEARISH
  • Brent prices failed to top the US$80 mark, retreating to less than US$77 late in the week.
  • The number of short positions on Brent futures continues to rise, reducing the number of net longs. Net longs on WTI remain relatively stable, despite a small increase in net shorts.
CURRENCIES & BONDS

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

  • The number of Canadians collecting Employment Insurance (EI) benefits declined 1.5% in March, falling to 481,500. Declines were led by BC, Quebec and Alberta. Year-over-year, the number of EI recipients is now down 14%.
  • After falling 0.4% in February, wholesale sales rebounded 1.1% to $62.8 billion in March, on strong sales of auto parts and building materials.
  • Canadian corporations registered $99.3 billion in corporate profits in the first quarter of this year, up 2.7% from the previous quarter and 7.0% from Q1/2017. Most of the gains were led by financial institutions. The energy sector, including coal, posted a 28.3% gain from Q4, while oil & gas extraction posted a $288 million decline due to higher differentials for Canadian crude.

The Bank of Canada is expected to hold interest rates steady next week on concerns over President Trump's protectionist stance, particularly for the auto sector. However, two rate hikes are still on the table for the second half of the year. Canadian bond yields and the loonie sank this week on a stronger US dollar, lower oil prices and concerns over NAFTA negotiations.

US interest rates retreated this week, on weak housing and durable goods numbers for the month of March. In their latest FOMC meeting minutes, the US Federal Reserve now says they wouldn't be rattled if inflation peaks over their 2% target. Markets are now pricing in a 100% chance of a rate hike in June. The greenback rose to a 5-month high this week on weaker global currencies, gaining 0.6%.

The Euro softened again this week on slower economic activity in the Eurozone and concerns over the formation of a radical coalition government in Italy. The Euro retreated 1.1% while the British pound declined 1.2%.

The Turkish lira continues to free-fall on concerns that its government has taken over control of the country's monetary policy. Turkey's central bank increased its overnight lending rates to 16% in an effort to stabilize the currency, which has fallen 20% so far this year.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
76.44
67.88
66.73
60.78
49.78
44.82
42.53
40.88
39.64
30.41
79.80
72.24
70.73
65.44
56.21

Oil prices posted their first decline in almost two months, with Brent pulling back 2.6% and WTI falling almost 5%. The Brent-WTI spread continues to widen, reaching a high of US$8.50 a barrel. The Canadian heavy oil discount also widened to over US$18 this week, while the discount on Canadian Light also rose to over US$7.

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)

Crude oil inventories unexpectedly rose almost 6 million barrels last week, with East Coast and Gulf Coast stockpiles both showing significant builds. Abnormally low crude runs were to blame. Despite lucrative crack spreads, refineries have been experiencing difficulties returning to normal after the spring maintenance turnaround.

Baker Hughes reported 15 additional oil rigs in service this week, rising to 859, the highest since March 2015. Canada lost 3 rigs, falling to a total of 35.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

May 23, 2018

Crude stockpiles rise 6 million barrels as refineries struggle to recover from spring maintenance turnarounds

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

A mixed bag in US markets this week, with technology stocks leading the NASDAQ higher. The more broadly-based S&P 500 eked out a 0.3% gain for the week. Energy and materials stocks were the biggest losers on US markets, falling 4.5% and 1.5%, respectively.

The TSX posted a 0.5% loss on a major pullback of energy stocks. Industrial stocks were the best performers, with the sector breaking out to new highs.

The Nikkei was one of this week's worst performing markets due to a strengthening yen.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

Energy stocks posted losses across all sub-sectors, giving back some of the gains from the previous weeks.

CANADIAN ENERGY NEWS

Kinder Morgan Canada (KML) won a small legal victory this week after BC's Supreme Court rejected two court cases from the City of Vancouver and Squamish Nation challenging the environmental certificate issued by the province for the Trans Mountain Expansion (TMEP), under the previous Liberal government. The courts ruled the province's decision was "reasonable and lawful" and First Nations communities were adequately consulted. A legal challenge of the federal government's approval still awaits a decision from Federal Courts, while BC's latest constitutional challenge over its ability to control bitumen exports is expected to go to a provincial court in the fall. Finance Minster Bill Morneau will give a speech in Calgary next week, the day before KML's May 31 deadline on TMEP's fate.

The National Energy Board (NEB) has approved TransCanada's (TRP) $1.4 billion North Montney Mainline Project Variance, provided a new tolling methodology is approved. The project is an expansion of the NOVA Gas Transmission System (NGTL), which delivers 1.5 Bcf/day of natural gas out of Western Canada, into the US and Eastern Canada. The NEB says NGTL's current tolling methodology would not "result in just and reasonable tolls", asking the company to maintain separate accounting records for the North Montney section of line.

After announcing plans to build a new storage terminal in Cushing last week, Keyera Corp (KEY) announced the purchase of logistics and liquids blending terminal located near Tulsa, Oklahoma for US$80 million plus up to US$10 million in contingencies. The terminal receives, blends and delivers diluent, which is mostly shipped by pipeline from the Mont Belvieu area into Chicago and ultimately into Alberta. 

Ontario's Court of Appeal has upheld a lower court ruling that fines levied against Chevron (NYSE:CVX) in an Ecuadorian court cannot be enforced against its Canadian subsidiary, since Chevron Canada is a separate legal entity from its parent company. Since Chevron has no assets in Ecuador, an American litigation team is trying to seize the company's assets in other countries, including Canada and the US. The US$9.5 billion judgement against Chevron for alleged environmental violations was found to be fraudulent, accusing the legal team of extortion, money laundering, wire fraud, witness tampering and obstruction of justice. Lawyers representing some 30,000 Ecuadorian villagers say they will take the case to the Supreme Court of Canada.

US ENERGY NEWS

Attorneys for the Trump Administration were in a Montana court this week, defending their approval of TransCanada's (TRP) Keystone XL. The US government argued that the pipeline's approval reflected a shift in economic policies, calling Obama's rejection of the project was an "arbitrary" decision. Several groups are still in court trying to overturn both the federal permit and approvals from the State of Nebraska.

According to Reuters, Marathon Petroleum (MPC) has asked the Environmental Protection Agency (EPA) for a hardship waiver exempting one of its facilities from having to blend ethanol into gasoline. The EPA has expanded its use of waivers under the Trump Administration after many refiners complained of the cost of compliance with national biofuel standards. MPC is the second largest refiner in the US.

Magellan Midstream Partners (MMP) announced a 50,000 bbl/day expansion of the western leg of its refined products pipeline in Texas, bringing gasoline and diesel fuel to West Texas and New Mexico. Capital costs for the expansion are estimated at US$300 million, and should be completed by mid-2020, bringing total capacity on the line to 150,000 bbl/day.

Cheniere Energy (LNG) announced a positive investment decision on Train 3 at its Corpus Christi LNG export facility. Each LNG train has a design capacity of 4.5 million t/yr of LNG. Bechtel was awarded the construction contract for the project.

UK-major BP (BP) signed a 20-year agreement to purchase 2 million t/year of LNG from the Venture Global Calcasieu Pass LNG export facility, currently under construction in Louisiana. The new LNG terminal is expected to come online in 2022.

The first tropical storm of the season has forced Royal Dutch Shell (RDS.A) to evacuate some of its oil platform workers in the US Gulf of Mexico this week. Tropical Storm Alberto is expected to make landfall on Monday, somewhere between New Orleans and Florida's panhandle. BP (BP), Chevron (CVX) and Valero (VLO) say they are monitoring the situation, but production has so far not been impacted.

Around the world this week:

  • ExxonMobil (XOM) says it plans to reduce its global methane emissions by 15% by 2020 (versus 2016 levels), while reducing flaring by 25%. The company says it has already cut emissions by 2% this past year, with the largest reductions focused on its natural gas fields.
  • Royal Dutch Shell (RDS.A) announced its sixth discovery in the US Gulf of Mexico in its deep-water Dover exploration well. The size of the field was not disclosed but the company says it plans to start production by the end of next year. By 2020, Shell expects its global deep-water output to exceed 900,000 boe/day day.
  • French energy major Total (TOT) acquired another 10% stake in Arctic LNG 2, bringing its share to about 20%. Novatek operates the terminal, located in northern Siberia, and has left the door open for Total to take a bigger stake in Arctic LNG 2 or purchase addition interest in its future LNG projects. Arctic LNG 2 has a production capacity of almost 20 million t/y.
  • According to The Financial Times, UK-major BP (BP) is planning to cut 3% of its exploration and production staff by year-end, as part of a restructuring of its upstream operations. BP's global E&P workforce is about 18,000, putting the job cuts at about 540.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
GAINERS
• None • Chesapeake Energy (CHK)
• Range Resources (RRC)
12-MO
HIGHS
• Canadian Natural Res (CNQ)
• Enerplus (ERF)
• Gran Tierra (GTE)
• Imperial Oil (IMO)
• Kelt Exploration (KEL)
• MEG Energy (MEG)
• Nuvista Energy (NVA)
• Whitecap Resources (WCP)
• Anadarko Petroleum (APC)
• ConocoPhillips (COP)
• Hess Corp (HES)
• Marathon Oil (MRO)
• National-Oilwell Varco (NOV)
• Noble Energy (NBL)
• Occidental Petroleum (OXY)
10-YR
HIGHS
• None • EOG Resources (EOG)
• Valero Energy (VLO)
GOLDEN
CROSSES
• Imperial Oil (IMO) • None
BEARISH INDICATORS
TSX
S&P 500
TOP 5
LOSERS
• Baytex Energy (BTE)
• Birchcliff Energy (BIR)
• Crew Energy (CR)
• Nuvista Energy (NVA)
• Precision Drilling (PD)
• Apache (APA)
• Concho Resources (CXO)
• Pioneer Natural Res (PXD)
• TechnipFMC (FTI)
• Transocean (RIG)
12-MO
LOWS
• PrairieSky Royalty (PSK) • None
10-YR
LOWS
• None • None
DEATH
CROSSES
• None • None
ANALYST RATINGS

UPGRADES

  • ENI (NYSE:E): Upgraded from Neutral to Outperform at BNP Paribas.
  • MEG (TSX:MEG): Upgraded from Equal Weight to Overweight at Morgan Stanley.
  • Newfield Exploration (NYSE:NFX): Upgraded from Neutral to Buy at Seaport Global Securities.
  • Oasis Petroleum (NYSE:OAS): Upgraded from Equal Weight to Overweight at Morgan Stanley.
  • Occidental Petroleum (NYSE:OXY): Upgraded from Sector Perform to Outperform at Scotiabank.
  • Northern Oil & Gas (NYSE:NOG): Upgraded from Hold to Buy at SunTrust Banks.
  • Oceaneering International (NYSE:OII): Upgraded from Underperform to Market Perform at Wells Fargo.
  • Parsley Energy (NYSE:PE): Upgraded from Neutral to Buy at Seaport Global Securities.
  • Rowan Companies (NYSE:RDC): Upgraded from Market Perform to Outperform at Wells Fargo.
  • Sempra Energy (NYSE:SRE): Upgraded from Hold to Buy at Argus.
  • Whiting Petroleum (NYSE:WLL): Upgraded from Equal Weight to Overweight at Morgan Stanley.
  • WPX Energy (NYSE:WPX): Upgraded from Neutral to Buy at Seaport Global Securities.

 

DOWNGRADES

  • Andeavor Logistics (NYSE:ANDX): Downgraded from Overweight to Neutral at JPMorgan.
  • BP (NYSE:BP): Downgraded from Hold to Underperform at Santander.
  • NuVista Energy (TSX:NVA): Downgraded from Outperform to Sector Perform at National Bank.
  • Petrobras (NYSE:PBR): Downgraded from Outperform to MArket Perform at UBS, from Overweight to Equal Weight at Morgan Stanley, from Outperform to Hold at Credit Suisse Group and from buy to Neutral at BofA.
  • Sasol (NYSE:SSL): Downgraded from Buy to Hold at Deutsche Bank.
  • Total (NYSE:TOT): Downgraded from Buy to Hold at Santander.
  • Williams Pipeline Partners (NYSE:WPZ): Downgraded from Buy to Hold at Stifel Nicolaus and from Strong Buy to Outperform Raymond James.
NEXT WEEK'S EVENTS

Monday:

Tuesday:

  • Pembina Pipeline Investor Day Meeting in Toronto, ON
  • Husky Energy Investor Day Meeting in Toronto, ON

Wednesday:

  • Finance Minister Bill Morneau gives speech at the Calgary Chamber of Commerce
  • Bank of Canada Interest Rate Announcement @ 10:00am ET
  • April Industrial and Raw Materials Product Indices released by StatsCan @ 10:30am ET
  • ExxonMobil 2018 AGM in Dallas, TX
  • US Q2 GDP (second reading)
  • OECD Economic Outlook
  • API Weekly Statistical Bulletin released @ 4:30pm ET (holiday schedule)

Thursday:

  • Kinder Morgan's deadline for continuing construction of Trans Mountain Expansion
  • MEG Energy 2018 AGM in Calgary, AB
  • March and Q1/2018 GDP released by StatsCan @ 8:30am ET
  • March weekly earnings released by StatsCan @ 8:30am ET
  • EIA Weekly Natural Gas Storage Report released @ 10:30pm ET
  • EIA Weekly Petroleum Status Report released @ 11:00am ET (holiday schedule)
  • Working and Net Available Shell Storage Capacity released by the EIA
  • US crude-by-rail data released by the EIA (Mar data)
  • G7 Finance Minister meet in Whistler, BC
  • Contract expiry for gasoline (June contract) and Brent crude oil (July contract)

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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