Energy Market Review

Energy Market Review

This week's Energy Market Summary for the week ending June 1, 2018:
  • Feds acquire Trans Mountain assets ...
    ... and hope to flip it post-expansion
  • Petro-Canada stations run dry in Calgary
  • Petronas buys big chunk of $40B LNG Canada ...
    ... renewing hopes for at least one mega-project in BC
  • Canadian heavy oil discount starts to widen again ...
    ... taking WCS prices down 20%
  • Trump targets Canadian steel and aluminum
  • Total petroleum inventories return to 5-year average
  • WTI discount to Brent blows out on rising Permian production
  • OPEC and friends continue to mull output increases.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
NEUTRAL
  • Nothing new on the geopolitical front this week.
USD INDEX
NEUTRAL
  • The greenback strengthened early in the week, reaching a 6-month high on Tuesday, but gave back all the gains by Friday.
SUPPLY
BEARISH
  • Russia's energy minister floated the idea of returning to its October 2016 production levels as a way of curbing imbalances in the market.
  • Analysts estimates oil markets will be short 825,000 bbl/day in the second half of the year.
  • US crude production hit another record high of 10.77 million bbl/day last week on gains in both Alaska and the Lower 48 region.
DEMAND
NEUTRAL
  • No new news on the demand front.
SENTIMENT
BEARISH
  • Net shorts on both Brent and WTI have started to creep up. Net longs from fund managers are down about 180 million contracts from the highs for both Brent and WTI.
  • Brent failed to reach the US$80 mark this week, but has managed to hold up relative well compared to other crude benchmarks.
CURRENCIES & BONDS

The Trump Administration reinstated tariffs on steel (25%) and aluminium imports (10%) from Canada, Mexico and the EU, citing national security concerns to avoid having to pass legislation through Congress. Trump accuses China of dumping cheap steel to the US via Canada. Canada says it will retaliate with over $16 billion in tariffs of its own, but has yet to provide specifics on which imports will be targetted. Both Canada and the EU says they will take the case to the WTO. The new tariffs take effect July 1st. US companies can make a plea to the Commerce Department for exemptions.

The on-again/off-again romance between President Trump and Chinese officials also went sour this week, renewing concerns of a trade war between the two nations. The US says it will press ahead with tariffs and restrictions on Chinese investments, while China once again threatened to retaliate in kind. Commerce Secretary Wilbur Ross heads to China to continue negotiations next week.

This week's notable Canadian economic data from Statistics Canada:

  • The Industrial Product Price Index (IPPI) rose 0.5% in April, mainly due to higher energy prices. Gasoline prices gained 7.2%, light oil fuels rose 3.4% while diesel gained 3.5%. Excluding energy, IPPI declined 0.1% for the month. Over the past 12 months, IPPI is up 2.4%, or 0.4% ex-energy.
  • The Raw Materials Price Index (RMPI) rose 0.7% in April, also due to a 3.2% increase in crude oil prices. Ex-energy, RMPI declined 1.3% for the month. Over the past 12 months, RMPI is up almost 9% due to a 21% increase in oil prices. Ex-energy, RMPI is up 0.6% for the year. 
  • Real gross GDP rose 0.3% in March, with the largest gains seen in the natural resources sectors. Oil and gas extraction rose 2.1%, the fourth increase in five months. Extraction from the oil sands rose 3.1% while conventional oil and gas extraction rose 1.3% on gains in natural gas production. Conventional crude production posted declines for the month.
  • Real gross GDP for the first quarter decelerated to 0.3%, bringing the annualized rate to 1.3%, much lower than economists were expecting. Higher export volumes and business investment offset declines in household and consumer spending.
  • Average weekly earnings were once again unchanged in March at $997, bringing the annualized increase to 3.1%.

The Bank of Canada held interest rates unchanged this week, but warned (again) a rate hike is imminent. Higher oil prices have helped stimulate inflation, but concerns linger over US protectionism.

This week's notable US economic data:

  • The US Labour Department delivered another stellar jobs report for the month of May, posting a gain of 223,000 jobs for the month.
  • Average hour earnings are up 2.7% y/y while the jobless rate declined from 3.9% to 3.8%, the lowest since 1969.
  • GDP growth was estimated at 2.2% for the first quarter, slightly less than the 2.3% economists were expecting.

After spiking earlier in the week, European bond yields softened later in the week after Italy's right-leaning parties formed a coalition government, rather than forcing yet another election. The Euro sank to the lows of mid-2017 but recovered their losses by Friday. Most currencies ended the week roughly unchanged.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
76.79
65.81
64.53
56.85
39.59
44.82
42.53
40.88
39.64
30.41
79.80
72.24
70.73
65.44
56.21

The WTI discount to Brent topped US$11 this week, the highest since March 2015. Rapidly rising production out of the Permian basin has stranded light sweet crude in West Texas. The discount on Texas Midland crude spiked to over US$12 earlier in the week. 

The Canadian heavy oil discount also widened considerably, rising from US$17 last Friday to over US$26 a barrel this week, taking WCS prices down over 20% for the week.

Strike action by CP Rail (CP) earlier in the week raised concerns of reduced crude-by-rail export capacity to the US. The National Energy Board (NEB) and US Energy Information Administration (EIA) reported conflicting crude-by-rail import/export data for the month of March. The NEB reported an increase of 37,000 bbl/day in exports to the US, rising to 171,000 bbl/day, while the EIA reported a 68,000 bbl/day decline in imports, falling to 81,000 bbl/day in March. CP Rail reached a tentative agreement with its workers on Thursday.

This week's OPEC chatter:

  • Brent prices managed to eke out a small gain after Reuters reported that OPEC and friends have agreed to stick to their production cuts, at least to the end of this year. OPEC and Russia have reduced output by more than 1.8 million bbl/day since the beginning of 2017.
  • Saudi Arabia, Kuwait and the UAE will meet informally this weekend. OPEC formally meets again in Vienna on June 22 to decide if and when to gradually raise production.
  • OPEC production declined to 13-month low of 32.0 million bbl/day in May, down 70,000 bbl/day from April on falling output out of Venezuela and outages in Nigeria.
  • Venezuela's production fell to a new low of 1.45 million bbl/day in May while Saudi Arabia and Iraq boosted output slightly for the month.

This week's notable oil price forecasts:

  • According to Financial Times, oil is more likely to head to US$50 instead of US$100 a barrel. The Times points out that there is no shortage of supply and no imbalance in the supply/demand curve. Any production shortfalls out of Venezuela or Iran can easily be covered by OPEC or Russia, while US output continues to grow each and every week due to the "continuing shale revolution." The Times says "speculation got ahead of the reality."
  • Analysts at RBC, however, remain decidedly more bullish, noting that oil prices could easily hit US$100 due to rapidly dwindling production out of Venezuela, turmoil in the Middle East, renewed sanctions in Iran and possibly lower demand in China due to trade tensions.
  • Desjardins is forecasting a "return to equilibrium" with WTI expected to average US$67 a barrel in 2018. The bank's forecast for natural gas remains subdued towards the end of this year despite low inventories, thanks to rising production in the US and stranded production out of Western Canada.

For the month of May, oil prices averaged as follows (USD/bbl):

  • Brent: US$77.08 (+7.4%)
  • West Texas Intermediate (WTI): US$69.98 (+5.5%)
  • Edmonton Condensate (C5+): US$68.88 (+3.5%)
  • Canadian Light: US$62.87 (+4.6%)
  • Western Canadian Select (WCS): US$52.73 (+8.1%)

The heavy oil discount narrowed from an average of US$17.55 in April to US$17.25 a barrel in May. The WTI discount to Brent widened to an average of $7.10 in May, up from US$5.44 a barrel in April.

Alberta's near month natural gas prices averaged just US$0.57/MMBtu in May (-17% m/m) while Henry Hub averaged about US$2.83/MMBtu (+3.9% m/m).

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)

A recovery in crude runs helped lower crude oil stockpiles south of the border. US crude production hit another record high of 10.77 million bbl/day last week on gains in both Alaska and the Lower 48. According to the EIA, total liquid fuel inventories have now returned to their 5-year average in the US and OECD countries.

The US added another 2 oil rigs this week, bringing the total to 861. Canada gained 21 rigs, rising to a total of 56.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

May 31, 2018

EIA REPORTS 3.6 MILLION BBL INVENTORY DECLINE AS REFINERIES BOOST CRUDE RUNS

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

Small caps and technology stocks pushed the Russell and Nasdaq to new record highs. The NYSE and TSX ended the week roughly unchanged. Technology and energy stocks led gains on both Canadian and US markets. Large caps were the worst performers on US markets due to concerns new tariffs will raise input costs.

Outside of North America, global markets mostly posted losses for the week.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

Echoing a similar sentiment from several other investment firms, Wells Fargo says new marine shipping fuel standards that come into effect in 2020 will be "a clear positive for the refining sector" as a whole. About 3.2 million bbl/day of high sulphur bunker fuel will have to be switched to low sulphur fuel oil, which will also be very good for LNG demand. The bank says Marathon Petroleum (MPC) and Phillips 66 (PSX) offer the "most potential upside."

Service stocks lagged the broader energy sector this week on lower prices for North American crude benchmarks. Large cap integrated names and US refiners were the best performers.

CANADIAN ENERGY NEWS

This week's Canadian energy news:

  • The federal government announced a buy-out of Kinder Morgan Canada's (KML) Trans Mountain network for $4.5 billion, including the existing 300,000 bbl/day Trans Mountain pipeline, the Westridge Marine Terminal in Burnaby and the 590,000 bbl/day Trans Mountain expansion project (TMEP). KML says it plans to restart construction of TMEP in the summer, after which the government will take over responsibility and finance costs to completion. Capital costs for TMEP are estimated at $7.4 billion, with about $1 billion already spent. The Liberals say they have no intention of holding the assets for the long term and hope to find a suitable buyer for the pipelines and marine terminal. 
  • An outage of Suncor Energy's (SU) Edmonton refinery has led to gas shortages at several Petro-Canada gas stations in Calgary. Some stations reported being out of gas for several days. A spokesperson for Suncor says they are working to restore gasoline supply to the affected retail locations.
  • A Canadian subsidiary of Malaysia's state-owned Petronas has agreed to purchase a 25% stake in LNG Canada, led by Royal Dutch Shell (NYSE:RDS.A). Shell and its partners stress that this announcement does not necessarily mean the project will be sanctioned. The company says a positive final investment decision will be based on "overall competitiveness and affordability of the project." Once the transaction closes, ownership of LNG Canada changes to 40% Shell, 25% Petronas, 15% Mitsubishi, 15% PetroChina (NYSE:PTR) and 5% KOGAS.
  • Keyera Corp (KEY) says it plans to proceed with phase two of its Wapiti Gas Plant currently under construction south of Grande Prairie, Alberta. The expansion will add 150 MMcf/day of sour gas processing capacity by the middle of 2020. Estimated capital costs for phase two are pegged at $150 million. Keyera also says it plans to boost compression capacity at Wapiti for an additional $85 million.
  • ConocoPhillips (NYSE:COP) was fined $180,000 for a 2016 pipeline leak, spilling 2,400 barrels of condensate near the company's Resthaven gas plant northeast of Grande Cache, Alberta. According to Alberta's energy regulator, the company failed to immediately report the release, which delayed remediation of the site. The asset was was sold to Cenovus Energy (CVE) in 2017, who has since taken over remaining clean-up activities.

This week's Canadian investing news:

  • Superior Plus (SPB) announced the acquisition of NGL Propane from its parent company NGL Energy Partners (NYSE:NGL) for US$900 million. NGL Propane sells propane and distillate production in 22 states.
  • Vermilion Energy (VET) has closed on its acquisition of Spartan Energy (SPE) for $1.23 billion in VET shares plus the assumption of $175 million in debt. Vermilion also increased its revolving credit facility from $1.4 to $1.6 billion, now extended to the end of May 2022. SPE shares will be delisted from the TSX.
  • Connacher Oil & Gas reported a 28% decline in first quarter revenues, falling to $33.9 million. The drop was blamed on a widening heavy oil discount, partially offsetting higher sales volumes. Production rose 5% to 12,670 bbl/day. Net losses for the quarter more than doubled to $57.2 million, including an unfavourable forex charge. Connacher remains under creditor protection, which has been extended to the end of June.
  • Calfrac Well Services (CFW) says its US subsidiary Calfrac Holdings has closed on US$650 million in senior unsecured notes yielding 8.50% due in 2026, with proceeds to be used to purchase outstanding 7.50% senior notes and repay $196.5 million on a senior secured term loan facility. Calfrac also responded to criticism from activist investor Wilks Brothers, accusing them of breaching their confidentiality agreement and purposefully trying to devalue Calfrac Holdings. CFW says it is commencing legal action against Wilks, who own almost 20% of the company.
  • Pembina Pipeline (PPL) has raised its outlook for the full year 2018, based on a strong performance so far this year. CEO Mick Dilger says the company is seeing strong customer demand for its services, higher utilization for its pipelines and higher oil prices, which should all drive earnings higher.
  • Ratings agency DBRS reaffirmed Cenovus Energy's (CVE) Senior Unsecured Debt rating at BBB. DBRS says outlook on the company remains "Negative" due to uncertainty surrounding the company's "ability to reduce financial leverage," required to sustain its BBB rating. The ratings agency says the company's outlook could be upgraded to "Stable" if net debt to earnings improves.
  • Pengrowth Energy (PGF) has received a delisting notice from the NYSE now that its US shares (NYSE:PGH) have traded below US$1 for more than 30 consecutive days. Pengrowth's board has decided against a reverse share split and instead have opted to delist from the NYSE after the markets close on June 1st. US investors will now have the option of buying shares on OTC markets under the ticker symbol PGHEF after June 4th. PGF shares on the TSX are not affected.
  • Suncor Energy (SU) filed for a mixed shelf offering of up to US$3 billion, including debt, shares and warrants, to be executed over the next 25 months. Net proceeds will be used for general corporate purposes.
US ENERGY NEWS

This week's US energy news:

  • Energy Transfer Partners (ETP) has received approvals from federal regulators (FERC) to place additional phase 2 facilities into service on its Rover Pipeline. Rover began service in August of 2017 and delivers about 1.7 Bcf/day of natural gas from the Marcellus and Utica shale into Ontario and parts of the US. The company is still waiting on FERC approvals for a supply connector and two laterals, where construction was halted due to non-compliance with environmental regulations. The company insists the entire network will be completed by the end of this summer.
  • Royal Dutch Shell (RDS.A) announced the start of production at the first phase of its Kaikias deepwater facility in the US Gulf of Mexico (GoM), one year ahead of schedule. The company says to has reduced costs at Kaikias by 30% and lowered the break-even price to less than US$30 a barrel.
  • Exxon Mobil (XOM), Shell (RDS.A) and Chevron (CVX) shut-in production in the US GoM earlier this week as Tropical Storm Alberto battered the region. The GoM accounts for 17% of total US crude production and about 5% of natural gas output. All companies are now returning to normal operation.
  • Ethanol producers in the US Midwest have filed a lawsuit against the Environmental Protection Agency (EPA) challenging biofuel waivers issued to CVR Energy (CVI) and HollyFrontier (HFC). The coalition of corn farmers are claiming the refiners do not qualify for ethanol blending exemptions since they produce more than 100,000 bbl/day, and neither company is under financial hardship. The EPA maintains they "correctly followed the law" when issuing the waivers.
  • LyondellBasell (LYB) says it plans to buy back up to 10% of its shares over the next 18 months. At the current share price, the plan would cost the company as much as US$4.4 billion.

Around the world this week:

  • French energy major Total (TOT) and its partners have made a positive final investment decision on the launch of the 40,000 bbl/day Zinia 2 deepwater block located offshore Angola. The company says Zinia 2 is the first of several "short-cycle developments" in the same block, jointly owned with ExxonMobil (XOM), BP (BP), Equinor (EQNR). Total and state-owned Sonangol also signed several agreements to develop another ultra-deepwater offshore block and network of service stations throughout Angola.
  • Iran's oil minister has given Total (TOT) two months to secure exemptions from US sanctions once the Trump Administration formally withdraws from the nuclear agreement. The Iranian government says if no deal is reached after 60 days, China's CNPC will take over Total's operations in the South Pars gas field, increasing its stake from 30 to 80%. Total has already invested US$1 billion in the field, and says it will have no choice but abandon its operations in the region if sanctions are reinstated.
  • Brazilian oil workers began strike action on Wednesday, affecting oil rigs, refineries, plants and ports, mostly operated by state-owned PetroBras (PBR). Petrobras says the strike will not have a major impact on production or its operations. PBR shares tanked earlier this week after the government agreed to fuel subsidies for its truckers and CEO Pedro Parente abruptly resigned. Brazil produces about 2.1 million bbl/day and is Latin America’s largest crude producer.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
GAINERS
• Enerplus (ERF)
• Keyera (KEY)
• Paramount Resources (POU)
• Parex Resources (PXT)
• Tourmaline Oil (TOU)
• Kinder Morgan (KMI)
• Marathon Petroleum (MPC)
• Murphy Oil (MUR)
• Newfield Exploration (NFX)
• Range Resources (RRC)
12-MO
HIGHS
• Parex Resources (PXT) • Andeavor (ANDV)
• ONEOK (OKE)
• Valero Energy (VLO)
10-YR
HIGHS
• None • Andeavor (ANDV)
• ONEOK (OKE)
• Valero Energy (VLO)
GOLDEN
CROSSES
• None • Devon Energy (DVN)
BEARISH INDICATORS
TSX
S&P 500
TOP 5
LOSERS
• CES Energy Solutions (CEU)
• Encana (ECA)
• Freehold Royalties (FRU)
• Precision Drilling (PD)
• Whitecap Resources (WCP)
• Cimarex Energy (XEC)
• Concho Resources (CXO)
• Halliburton (HAL)
• Helmerich & Payne (HP)
• Williams Co (WMB)
12-MO
LOWS
• None • Cimarex Energy (XEC)
10-YR
LOWS
• None • None
DEATH
CROSSES
• None • None
ANALYST RATINGS

UPGRADES

  • Cenovus Energy (TSX:CVE): Upgraded from Sector Perform to Outperform at National Bank.
  • ExxonMobil (NYSE:XOM): Upgraded from Sector Perform to Outperform at RBC.
  • Husky Energy (TSX:HSE): Upgraded from Market Perform to Outperform at BMO.
  • Marathon Petroleum (NYSE:MPC): Upgraded from Market Perform to Outperform at Wells Fargo.
  • Occidental Petroleum (NYSE:OXY): Upgraded from Equal Weight to Overweight at Capital One.
  • PetroChina (NYSE:PTR): Upgraded from Market Perform to Outperform at Bernstein.
  • Phillips 66 (NYSE:PSX): Upgraded from Market Perform to Outperform at Wells Fargo.

 

DOWNGRADES

  • Noble Energy (NYSE:NBL): Downgraded from Outperform to Neutral at Credit Suisse.
  • Noble Corp (NYSE:NE): Downgraded from Outperform to Neutral at Credit Suisse.
  • Petrobras (NYSE:PBR): Downgraded from Buy to Hold at Santander.
NEXT WEEK'S EVENTS

Tuesday:

Wednesday:

Thursday:

Friday:

  • May Labour Force Survey released by StatsCan
  • Baker Hughes Rig Count released @ 1:00pm ET
  • 2018 G7 Leaders' Summit begins in Charlevoix, Quebec
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
  • Energy Market Review

    Energy Market Review

    Energy Market Review

    Energy Market Review

    0