Energy Market Review
This week's notable Canadian economic data:
- Canadian manufacturing sales declined 1.3% in April (m/m) due to maintenance shutdowns at several Alberta refineries. Sales of petroleum and coal products fell 11% to $5.2 billion.
- The ratio of debt to disposable income fell to 168.0% in the first quarter of this year, down from a peak of 170% due to a small dip in mortgage debt. Disposable income rose by 1.3% while consumer debt edged up by 0.3%.
- Foreign investment in Canadian securities reached a five-month high in April, led by gains in the bond market. Foreigners bought $9.13 billion in securities while Canadian investors reduced their holdings of foreign securities by $652 million.
This week's US economic data:
- CPI data out of the US is still running hotter than expected, rising to 2.8% y/y, the highest in about 6 years. Higher gas prices led most of the gains. Core inflation (ex-energy and food) remains subdued at 2.2% y/y.
- Weekly jobless claims totalled 218,000, Economists had been expecting about 224,000.
- Retail sales rose 0.8% in May, the largest increase since late 2017. April’s figures were also revised higher to 0.4%.
This week's news out of central banks:
- The Federal Open Market Committee (FOMC) unanimously voted to raise interest rates by 250 basis points this week, citing strong economic activity and a tight labour market. The Feds signalled two more rate hikes in the second half of this year.
- The European Central Bank (ECB) says they will reduce their bond buying program from the current €30 billion per month to €15 billion in October, eventually phasing out the program by the end of this year. The bank does not expect to raise rates before the summer of 2019 and reiterated it will keep rates at zero "for as long as necessary" in order to get inflation back to their 2% target.
- The Bank of Japan also met this week, signalling no change in its monetary policy while downgrading expectations for inflation.
The Euro tanked on Thursday, ending the week 1.4% lower and sending the US dollar higher. The Australian dollar was one of this week's worst performing currencies on falling commodity prices, down 2.1% to 74.46.
JP Morgan says the energy transition leading into peak oil consumption will return oil prices to the low US$50s, as OPEC, global oil majors and smaller US shale producers "start to fight for a greater share of the world’s oil demand."
In this month's Short Term Energy Outlook from the Energy Information Administration (EIA):
- Brent spot prices are expected to average US$71/bbl this year, falling to US$68 in 2019, US$2 higher than the EIA's May estimate.
- The WTI discount to Brent is forecasted at US$7/bbl this year, falling to US$6 in 2019.
- Retail gasoline prices in the US are expected to average US$2.87/gallon this summer, up from an average of US$2.41 last year.
- Henry Hub natural gas spot prices are expected to average US$2.99/MMBtu this year, rising to US$3.08 in 2019.
Canada's heavy oil discount to WTI continued its wild ride this week, this time widening to US$23.15 due to the July WCS contract expiry. The WTI July contract will expire on Wednesday. The WTI discount to Brent eased from over US$11 last week to about US$8 on Friday. Gasoline prices also tanked 4% late in the week, despite a drawdown in US inventories.
According to the Canadian Association of Petroleum Producers (CAPP), Canada's oil production is expected to rise by 1.4 million bbl/day to 5.6 million bbl/day by 2035. Output from the oil sands will rise from the current 2.65 million bbl/day to 4.2 million bbl/day, despite another drop in capital spending, falling to $45 billion in 2017. The lobby group estimates that Keystone XL, the Trans Mountain Expansion and Line 3 Replacement are all required, as a minimum, to keep up with rising supply. CAPP adds that global competition for capital investment "is fierce and Canada is losing" due to a "lack of regulatory clarity, and the inability to see federally-approved pipelines get built," sending the signal that Canada is "closed for business." In contrast, capital spending in the US rose 38% last year to $120 billion.
The EIA says total US crude oil production will average 10.8 million bbl/day this year, rising to 11.8 million bbl/day in 2019, revised from its previous forecast of 10.7 and 11.9 million bbl/day, respectively. Net imports of crude oil and petroleum products will continue to decline, falling from an annual average of 3.7 million bbl/day in 2017, to 2.5 million this year and just 1.6 million bbl/day in 2019, the lowest since 1959.
Interfax reported that Russia’s production has now risen to 11.09 million bbl/day, up from its agreed limit of 10.95 million bbl/day and the highest in 14 months. According to the Wall Street Journal, Saudi Arabia has already increased output, boosting production by more than 100,000 bbl/day in recent weeks to about 10 million bbl/day. Markets are expecting OPEC and Russia to increase production by about 1 million bbl/day to offset declines from Venezuela and mitigate the impact of renewed sanctions on Iran.
According to OPEC's latest Monthly Oil Market Report, output out of its cartel members rose 35,000 bbl/day in May to 31.9 million bbl/day. Saudi Arabia increased output by 85,500 bbl/day, offsetting some of the declines out of Nigeria and Venezuela. Global crude supply will increase 2 million bbl/day this year, more than half coming out of the US. OPEC says global oil markets face "pronounced uncertainty" in the second half of this year, as rising supplies may or may not keep up with demand from around the world.
In its latest Oil Market Report, the International Energy Agency (IEA) has left its forecast for 2018 world oil demand growth unchanged at 1.4 million bbl/day, but says higher oil prices and trade wars remain as possible headwinds. Global oil supply rose 276,000 bbl/day in May, to 98.7 million bbl/day. Non-OPEC supply will grow by 2 million bbl/day this year, with more than half of those gains from the US. OPEC output edged up 50,000 bbl/day in May to 31.7 million bbl/day. OECD commercial stockpiles declined 3.1 million barrels in April to 2.8 billion barrels, a new 3-year low.
Speaking in London this week, BP's (BP) CFO Brian Gilvary says his company does not foresee a crude supply deficit in the next few years despite a decline in capital investment. The CFO points to growing production out of US shale and non-OECD countries such as the Middle East. BP expects Brent to hover between US$50 and US$65 over the next few years.
According to Baker Hughes, the US put one extra oil rig into service this week, bringing the total to 863. Canada added 18 oil rigs, bringing the total to 87.
After a fairly good performance earlier in the week, US markets retreated on Friday after the Trump Administration announced a 25% tariff on US$50 billion worth of Chinese imports, accusing the country of unfair trade practices. China has threatened to retaliate in kind. The US trade deficit with China is about US$375 billion.
The TSX Composite rose 0.7% for the week, coming close to the highs of January. Foreign markets, particularly in Japan and Europe, also had a good weak due to weaker local currencies. Trade war jitters took Chinese markets lower on Friday.
Discretionary and technology sectors once again rose to record highs on both the TSX and S&P 500. Energy was once again the worst performing sector on both sides of the border, falling 3.1% in the US and 2.7% in Canada.
This week's Canadian energy news:
- Husky Energy (HSE) has begun consultations on the construction of two new pipelines across the Saskatchewan River, replacing the line that ruptured and leaked in 2016. The new lines would transport crude oil and condensate to/from its Lloydminster operations. Husky says the new pipelines would be constructed on higher ground to minimize the risk of ground shifting, which was found to be the cause of 2016 incident that spilled 1,400 barrels of diluted heavy crude into the river. The company also says it has improved its operating procedures to ensure incidents are reported more promptly.
- A spokesperson for Suncor Energy (SU) says its Edmonton refinery is now back up and running after being shutdown for maintenance a few weeks ago. The outage caused gas shortages in several Petro-Canada stations in Alberta, BC, Saskatchewan and Manitoba. Suncor says the gas shortage was made worse by simultaneous outages at several other refineries.
- The Supreme Court of Canada says it will not hear Unifor's appeal of Suncor Energy's (SU) random drug testing program. The labour union, which represents 3,000 workers, filed a grievance against the company after it began randomly testing employees in "safety-sensitive" jobs at the site. Unifor calls the program an "unreasonable exercise of management rights" which does not improve safety. Suncor now heads to an arbitration panel to reinstate the testing policy. The company's drug and alcohol testing prior to hiring and post-incident is not affected by the court case.
- Ontario's incoming Premier Doug Ford has pledged to keep his campaign promise to eliminate the province's cap-and-trade program, pulling his province out of the Western Climate Initiative. Ford says removing the "job-killing tax" is part of his plan to reduce gas prices by 10¢/litre. Ontario now joins Saskatchewan in their fight against the Trudeau Liberals, who have mandated each province to put a minimum $10/t price on carbon, rising to $50/t by 2022. Ford's Progressive Conservatives won a majority government in Thursday's Ontario election. Alberta's United Conservative Party says they also plan to join Ontario's fight against the federal carbon tax if elected next year.
- A US judge has ordered two former Penn West executives to face charges of accounting fraud. US regulators accused the duo of booking hundreds of millions of dollars in operating costs as capital expenses, in an attempt to make their operations appear more profitable and efficient. The company has since changed its name to Obsidian Energy (OBE) and has already agreed to pay about US$50 million to settle several lawsuits, without admitting any wrongdoing.
This week's Canadian sales and acquisitions:
- Paramount Resources (POU) has agreed to sell its Resthaven/Jayar oil and gas assets in the Montney region to privately-held Strath Resources for $340 million. The assets currently produce 5,300 boe/day, weighted 36% liquids. The deal is structured $170 million in cash, 85 million Strath common shares at $2/share and 10-year warrants to acquire another 8.5 million shares, also priced at $2/share. Upon closing, Paramount will own 15.6% of Strath. Paramounts CEO Jim Riddell will also join Strath's Board of Directors. Strath Resources is majority owned by private equity firm Waterous Energy Fund.
- Mullen Group (MTL) announced an agreement with AECOM (NYSE:ACM) to acquire its Canadian Industrial Services Division, focused mostly within Alberta's heavy oil and oil sands regions. The division employs about 350 people and operates about 250 pieces of specialized equipment. Terms of the deal were not disclosed, but Mullen says the acquisition will be funded in cash and will boost annual revenues by about $70 million.
- AltaGas (ALA) announced the sale of a 35% stake in three hydroelectric projects in northwestern BC for $922 million. The buyer is a joint venture company indirectly owned by Axium Infrastructure and Manulife Financial (MFC). Altagas will remain majority owner and operator of the power facilities. The company says net proceeds will be used to help fund its $8.4 billion acquisition of WGL Holdings (NYSE:WGL). Altagas also filed for a mixed shelf offering of up to US$2 billion this week.
This week's Canadian investing news:
- An Alberta court has extended creditor protection for Connacher Oil and Gas until the end of September, 2018. Connacher defaulted on US$154 million in debt in March 2016 but its Great Divide in-situ facility continues to operate normally despite being under creditor protection. The company is in the process of trying to sell its oil sands assets.
- Precision Drilling (PDS) says it expects to complete a partial redemption of $50 million in senior notes, helping it reduce its debt by $75 million and lower interest costs by $5 million annually. PDS says it is on track to eliminate between $300 million to $500 million in debt by the end of 2021.
- CES Energy Solutions (CES) has doubled its monthly dividend to $0.005 per share and also announced the buy-back of up to 10% of its outstanding common shares.
- Credit ratings agency S&P Global has upgraded Vermilion Energy's (VET) long-term corporate credit rating from 'BB-' to 'BB' with a stable outlook. S&P also removed the company from its CreditWatch list.
This week's US energy news:
- Phillips 66 (PSX) has given the green light to a US$1.5 billion expansion of its Sweeny Hub in Old Ocean, Texas, boosting capacity to 400,000 bbl/day. The project includes two new 150,000 bbl/day NGL fractionators, as well as additional storage and pipeline infrastructure. The expanded facility should come into service by the end of 2020. The company has already signed a supply agreement with DCP Midstream (DCP), who has secured an option to purchase a 30% stake in the project.
- According to Reuters, ExxonMobil (XOM) is expanding its global energy trading platform and improving its risk-management systems, in an effort to optimize pricing for products and boost earnings. The company has recently hired a team of experienced traders, including former traders from Glencore (GLNCY), BP (BP) and BHP (BHP).
- SandRidge Energy (SD) says it has been approached by 17 potential bidders for an all-out buyout of its company. Billionaire activist investor Carl Icahn, who has also offered to buy the company, ousted SandRidge's CEO and has been putting pressure on management to boost share prices. SandRidge accuses Icahn of misleading investors and putting his interests above those of SD shareholders.
This week's TransCanada (TRP) news:
- South Dakota's Supreme Court dismissed an appeal from opponents of Keystone XL, noting a lower court lacked jurisdiction to hear their cases. The anti-pipeline crusaders are appealing a judge's decision last year which upheld the regulator's approval of the project through the state. TransCanada says they are pleased with the decision. The company has yet to confirm a positive investment decision but has already begun consultations with landowners and says they hope to begin construction early in 2019.
- TransCanada has begun repairs on a section of its Leach Xpress natural gas pipeline in West Virginia after last week's explosion. Parts of the line have already been put back into service this week. The 1.5 Bcf/day Leach Xpress pipeline delivers gas from the Marcellus and Utica shale regions of Pennsylvania, West Virginia and Ohio into the Midwest and Gulf Coast.
- The company also launched a binding Open Season for its Marketlink Pipeline that runs from the Cushing, Oklahoma storage hub to refineries in the US Gulf Coast via the Keystone Gulf Coast extension. Delivery points include Sour Lake, Houston, and Port Arthur, Texas. Open season concludes in July 13, 2018.
This week's Enbridge (ENB) news:
- Enbridge says it would like to see either an underwater tunnel or trench to replace a 7.2 km section of its Line 5 in the Straits of Mackinac, which connects Lake Michigan and Lake Huron. The state of Michigan has stated a preference for building a new line within a tunnel under the lake bed. Enbridge estimates the tunnel would cost between US$350 and US$500 million, taking 5 to 6 years to construct. An open-cut trench is slightly cheaper, costing between US$250 and $300 million, taking 4 to 5 years to construct. Last April, the 65-year old pipeline was damaged after being struck by a boat anchor. Enbridge is due to submit three other reports on how to prevent underwater damage. A decision on the replacement of Line 5 is due in the fall.
- BMO Capital Markets warns that costs for the Line 3 Replacement project could rise by as much as US$1.2 billion due to route changes in the state of Minnesota. Line 3 is part of Enbridge’s Mainline network that transports crude oil from Alberta into Wisconsin and other parts of the Midwest. The replacement project still awaits a final ruling from Minnesota's Public Utilities Commission. Last summer, Enbridge pegged project costs at US$2.9 billion for the US section of the line.
- According to FERC, Enbridge has started construction of the last remaining border crossing section of its US$1.6 billion Valley Crossing natural gas pipeline between Texas and Mexico. The 305 meter segment of line will be located offshore, extending into the US-Mexico border. Enbridge says the remaining 265 km of line has already been completed and will be commissioned shortly. Valley Crossing is designed to carry up to 2.6 Bcf/day of natural gas from Texas to Mexico, connecting to the Sur de Texas-Tuxpan pipeline, currently under construction by TransCanada (TRP) and Sempra Energy (SRE). Once completed, it will be the largest natural gas connection between the two countries.
Around the world this week:
- ExxonMobil (XOM) says it making progress at its Liza project, located in the the Stabroek Block offshore Guyana. Drilling has now commenced for the first of 17 wells planned for Phase 1 in preparation for the start of production in 2020. Phase 1 of the Liza Destiny FSPO will have a capacity of 120,000 bbl/day, increasing to 220,000 bbl/day in Phase 2 and 500,000 bbl/day by the time all three phases are completed. The field is jointly held with Hess (HES) and CNOOC (CEO). Stabroek holds an estimated 3.2 billion barrels of recoverable resources.
- Terrorist activity in Mozambique is threatening over US$30 billion in investment in the country's LNG sector. About 20 million t/y of LNG capacity is currently under construction, with the first cargos expected to be exported in 2021. The largest facility is being led by Anadarko Petroleum (APC), who says they are monitoring the situation very closely and are rumoured to have suspended construction over safety concerns. APC also announced a 20+ year agreement with Tokyo Gas to supply 2.6 million t/y of LNG annually from its Mozambique LNG1 project.
- The West African nation of Sierra Leone has extended the deadline for a fourth round of licensing bids for five deepwater offshore blocks. Despite plenty of exploration activity in the past 5 years, the county has yet to see a commercial development. Hopes run high for "striking it big" since several large oil discoveries were made in neighbouring Senegal and Mauritania. The list of companies interested in the region include ExxonMobil (XOM), BP (BP) and Kosmos Energy (KOS). Chevron (CVX), Noble Energy (NBL) and Lukoil won rounds in 2012 but chose not to renew their licenses.
- Equinor (EQNR) closed on its purchase of a 25% stake in the Roncador oil field from Petrobras (PBR). The company says all transaction conditions have been met, including government and regulator approvals. The purchase price was US$2 billion plus contingency payments of up to US$550 million depending on recovery rates from the field.
- Chevron (CVX) announced the start of Train 2 at its massive Wheatstone LNG project in Western Australia. Train 2 is the last of five production trains built by Chevron in the region, which include both Wheatstone and Gorgon. The two projects, which are now fully operational, have a combined capital cost of US$88 billion.
- Total (TOT) says it has secured a 25-year concession for the Tin Fouye Tabankort gas and condensate field in Algeria, owned jointly with state-owned Sonatrach and Spanish energy major Repsol (REPYY). The companies have also signed a gas marketing agreement.
ARC Resources (ARX)
MEG Energy (MEG)
Peyto Exploration (PEY)
EQT Corp (EQT)|
Williams Co (WMB)
Husky Energy (HSE)|
Imperial Oil (IMO)
MEG Energy (MEG)
Parex Resources (PXT)
Suncor Energy (SU)
| ONEOK (OKE)|
| None|| ONEOK (OKE)|
| Birchcliff Energy (BIR)|| None|
Cenovus Energy (CVE)|
Crew Energy (CR)
Raging River (RRX)
Trican Well (TCW)
Baker Hughes (BHGE)
Marathon Petroleum (MPC)
CES Energy Solutions (CEU)|
| None|| None|
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- Apache (NYSE:APA): Upgraded from Hold to Buy at Argus.
- Cimarex Energy (NYSE:XEC): Upgraded from Hold to Buy at Jefferies.
- Enable Midstream Partners (NYSE:ENBL): Upgraded from Underweight to Equal Weight at Barclays.
- EnLink Midstream (NYSE:ENLC): Upgraded from Equal Weight to Hold at Barclays.
- Kosmos Energy (NYSE:KOS): Upgraded from Hold to Buy at Jefferies.
- Oasis Petroleum (NYSE:OAS): Upgraded from Buy to Hold at Jefferies.
- Occidental Petroleum (NYSE:OXY): Upgraded from Hold to Buy at Jefferies.
- Petrobras (NYSE:PBR): Upgraded from Underperform to Market Perform at Raymond James.
- Total (NYSE:TOT): Upgraded from Hold to Buy at Jefferies.
- Buckeye Partners (NYSE:BPL): Downgraded from Buy to Neutral at UBS.
- DCP Midstream (NYSE:DCP): Downgraded from Equal Weight to Underweight at Barclays.
- International Petroleum (TSX:IPCO): Downgraded from Hold to Reduce at GMP Securities.
- Sempra Energy (NYSE:SRE): Downgraded from Outperform to Market Perform at Wells Fargo.
- JP Morgan Energy Conference kicks-off in New York City, NY
- The National Energy Roundtable: The Future of Utilities begins in Toronto
- API Weekly Statistical Bulletin released @ 4:30pm ET
- OPEC International Seminar in Vienna, Austria
- EIA Weekly Petroleum Status Report released @ 10:30am ET
- July contract expiry for WTI
- April Employment Insurance data released by StatsCan @ 8:30am
- April wholesale trade data released by StatsCan @ 8:30am
- EIA Weekly Natural Gas Storage Report released @ 10:30pm ET