Energy Market Review

Energy Market Review

This week's Energy Market Summary for the week ending June 22, 2018:
  • Power bump takes Syncrude offline through July
  • Nexen adds more well pads at Long Lake
  • Kinder Morgan cleared to start construction at Burnaby Terminal
  • TransCanada expands Nova Gas network, again
  • Ontario's cap-and-trade credits stuck in limbo
  • Enbridge enters home stretch in Minnesota
  • Permian pipelines bursting at the seams
  • OPEC and Russia agree to boost production ...
    ... narrowing WTI discount to Brent.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
NEUTRAL
  • No new news on the geopolitical front.
USD INDEX
NEUTRAL
  • After touching a 1-year high earlier in the week, the US fizzled out by Friday, ending the week roughly unchanged.
SUPPLY
BULLISH
  • OPEC and Russia agreed to boost production quotas by almost 1 million barrels, beginning in July. The actual increase may be less than 700,000 bbl/day since some OPEC members, particularly Venezuela, Libya and Angola, may not be able to boost production. The increase was about half what traders were expecting.
  • Clashes continue in Libya, where the government has once again regained control of a major export terminal, seized by the rebel forces a few weeks ago. A third oil storage tank was set on fire this week. Production out of the North African OPEC member has declined by 450,000 bbl/day since the fighting began.
  • The EIA reported no change in US crude production last week, while Baker Hughes reported a very rare drop in oil rig counts on Friday.
DEMAND
NEUTRAL
  • No new news on the demand front this week.
SENTIMENT
BULLISH
  • Backwardation on the WTI futures curve jumped sharply higher this week, although backwardation on Brent futures narrowed slightly.
  • WTI prices staged a nice rally, narrowing its discount to Brent to just US$7/bbl.
  • Net longs on managed money contracts declined again last Tuesday, ahead of OPEC's Friday announcement.
CURRENCIES & BONDS

This week's Canadian economic data:

  • The Consumer Price Index (CPI) rose only 0.1% in May, bringing the annualized CPI to 2.2%, far short of expectations. Ex-energy, CPI is up 1.6% year-over-year.
  • Retail sales declined 1.2% in April to $49.5 billion. The decline was blamed on bad weather and a drop in auto sales. Sales of groceries and beverages gained 2.3% while retail sales at gasoline stations increased 1.4% due to higher gas prices.
  • Wholesale sales rose 0.1% to $63.1 billion in April. Increases were led by the sales in the machinery, equipment, food, beverage and tobacco sub-sectors, offsetting declines in motor vehicle parts.
  • The number of Canadians collecting Employment Insurance (EI) benefits declined 3.4% in April, falling to 453,100, the lowest level since comparable data became available in 1997. Declines were seen across all provinces.

Canadian bond yields were sharply lower this week on diminishing chances of a July rate hike by the Bank of Canada, also sending the loonie to a 1-year low.

A mixed bag of economic data was released in the US this week, as very strong new housing starts data offset a decline in existing home sales, a sharp drop in the Philadelphia Fed's manufacturing index and feeble gains in the ISM index. The US dollar rose to a 1-year high early in the week but fizzled by Friday. Yields on the US 10-year declined again this week, sending the yield curve (10 vs 2-yr) to a new 10-year low of just 0.34 basis points.

A pick-up in economic activity out of Germany and France helped boost the Euro late in the week, rising 0.4%. The Bank of England held rates unchanged at 0.5% this week, although three policymakers surprised markets by voting in favour of a rate hike, increasing the odds of an increase before year-end.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
75.55
68.58
66.53
61.53
44.58
45.54
43.01
42.21
39.91
30.41
79.80
72.24
70.73
65.44
56.21

Wells Fargo warns WTI will eventually drop back into its target range of US$50 to US$60 per barrel, on rising US production and the end of OPEC's production pact with Russia. The bank says supply is now outstripping demand, which should see oil prices return to the US$50 range by the end of the year.

News of OPEC's production increase has narrowed the WTI discount to Brent, falling to just US$7/bbl on Friday. Despite an unexpected outage of the 350,000 bbl/day Syncrude upgrader, the Canadian heavy and light oil discounts were roughly unchanged this week at about US$24 and US$7 a barrel, respectively.

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)
 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

Jun 20, 2018

Crude inventories decline 6m BBLS as exports rise to near-record highs

 

The number of oil rigs in service in the US saw its first decline in three months, falling by one to a total of 862 on Friday. Canada added 16 new oil rigs this week, bringing the total to 103.

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

Markets were rattled by Donald Trump once again this week, after the US President threatened to add tariffs to another US$200 billion worth of Chinese imports and also threatened more tariffs on EU imports, specifically targeting German autos. India joined the trade spat this week, adding a 20% tariff on California almonds.

European markets ended the week sharply lower, led by a 3.3% decline in the German DAX. Heavy losses in trade-sensitive stocks such at Caterpillar (CAT) and Boeing (BA) led the Dow Industrial 2% lower again this week. Canada's TSX bucked the trend this week, gaining 0.8% to a new record high on Friday.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

Energy stocks staged a good rally on both sides of the border, rising 3.8% in Canada and 1.5% in US markets. Gains were broadly based, except for US refiners, whose shares continue to pull back from the record highs of last March, despite a 1.5% gain in gasoline prices this week.

CANADIAN ENERGY NEWS

This week's Canadian energy news:

  • Nexen Energy announced a positive final investment decision for a $400 million expansion of its Long Lake SAGD facility in northern Alberta. The Long Lake Southwest expansion will add 26,000 bbl/day of additional capacity by the end of 2020 through the addition of three new well pads. Nexen is a wholly-owned subsidiary of CNOOC (NYSE:CEO).
  • Production at Syncrude was disrupted on Wednesday evening due a power outage at its Mildred Lake operations, likely caused by a tripped power transformer. The company says its 350,000 bbl/day upgrader will remain offline at least through July. The outage resulted in additional flaring, but no injuries or safety concerns were reported. The company says it is still investigating the incident. Majority owner Suncor Energy (SU) has yet to revise its 2018 production guidance. Suncor has a 59% stake in the Syncrude Project.
  • After wrapping up another successful open season, TransCanada (TRP) says it will move forward on its $140 million expansion of its NOVA Gas Transmission (NGTL) System, adding another 280 MMcf/day of incremental volumes starting in late 2021. This latest expansion is part of the company's $7.3 billion expansion of NGTL, which brings natural gas from BC and Alberta into the rest of Canada and parts of the US.
  • The National Energy Board (NEB) has approved changes requested by Kinder Morgan Canada (KML) for the construction of 14 new oil storage tanks at its Burnaby Terminal, required as part of its Trans Mountain Expansion Project (TMEP). Spacing will be increased between the tanks to reduce fire risks and five of the tanks will be reduced in size. The NEB also says it has approved the company's Quality Management Plan, fulfilling all conditions require to begin construction at the Burnaby Terminal. KML has committed to restarting construction on TMEP sometime this summer.
  • Suncor Energy (SU) and Enbridge (ENB) are among several Canadian companies seeking clarity from the government of Ontario after newly elected premier Doug Ford announced plans to pull the province out of its cap-and-trade program. The provincial government has issued $2.8 billion worth of pollution credits to dozens of companies, who are required by law to hold enough allowances by the end of 2020 to cover their greenhouse gas emissions. The companies say they bought credits thinking they would be required before the 2020 deadline, but those credits remain in political limbo.
  • An Alberta court has awarded Dow Chemicals Canada US$1.06 billion in damages against Nova Chemicals over alleged breach of contract over its jointly-owned ethylene plant in Joffre, Alberta. Dow claims Nova took some of the products that belonged to Dow and failed to run the facility at full production. Nova claimed it faced an ethane shortage due to mechanical issues that constrained production. In her decision, the judge concluded that Nova showed "wilful misconduct and gross negligence." Nova Chemicals says they will appeal the decision. Dow Chemicals Canada is a wholly-owned subsidiary of DowDuPont (NYSE:DWDP). Nova Chemicals was purchased by Abu Dhabi's International Petroleum Investment Company in 2009.

This week's Canadian investing news:

  • Mullen Group (MLT) reached a deal to acquire privately-held Canadian Hydrovac (CHL), based out of Sherwood Park, AB. Mullen says it will operate CHL as a standalone business unit within its oilfield services segment, adding 80 employees and over 50 specialized pieces of equipment to Mullen's fleet. Financial terms of the deal were not disclosed but the company says the acquisition will add about $25 million in additional revenues annually.
  • Baytex Energy (BTE) and Raging River Exploration (RRX) have agreed to merge their respective companies in an all-stock transaction worth $2.8 billion. Raging River shareholders will received 1.36 BTE shares for each RRX share. The combined company will retain the "Baytex" name and have an enterprise value of about $5 billion. The new Baytex will produce about 100,000 boe/day (weighted 85% oil) with a capital spending program of about $750 to $850 million. Raging River had put itself up for sale last spring, looking to boost shareholder value. The transaction is still subject to approval from 66⅔% of RRX and 50% of BTE shareholders. Baytex also filed for a mixed shelf offering of up to $500 million this week.
  • Crescent Point Energy (CPG) has appointed former VP Ryan Gritzfeldt as its new CEO, replacing interim President and CEO Craig Bryksa. The company also announced the disposition of various non-core assets in the Williston Basin for about $280 million, which currently produce about 4,800 boe/day. Proceeds from the sales will be put toward debt reduction. Full year 2018 production guidance has been adjusted to 181,000 boe/day.
  • Keyera Corp (KEY) announced the issuance of $400 million of senior unsecured medium term notes priced at 3.934% maturing in 2028. Net proceeds will be used to repay the company's short term credit facility and general corporate purposes, including capital and operating expenditures, acquisitions and future growth opportunities. Keyera also closed on its recent acquisition of a liquids blending terminal near Tulsa, Oklahoma this week.
  • North American Construction Group (NOA) says it has successfully negotiated a second-term extension to a key services agreement with a major oil sands customer. The 3-year contract involves mine reclamation services, valued at about $160 million.
  • The TSX has approved Imperial Oil's (IMO) bid to buy back up to 5% of its outstanding common shares, roughly 40.4 million, over the next 12 months. The total repurchase program will be reduced by the number of IMO shares repurchased by parent company ExxonMobil (NYSE:XOM).
US ENERGY NEWS

This week's US energy news:

  • Minnesota's Public Utilities Commission (PUC) has begun final hearings into Enbridge's (ENB) proposal to replace its 50 year old Line 3, which transports crude from Western Canada into the Midwest region. Enbridge has made three new commitments to the State of Minnesota, including the purchase of renewable energy credits, the establishment of a trust fund for the decommissioning of old pipelines and a contingency fund to be used in the event of an oil spill. Replacement of Line 3 would restore capacity to 760,000 bbl/day, adding another 370,000 bbl/day of take-away capacity out of Western Canada. A final decision is expected next week.
  • The US Commerce Department has received almost 21,000 requests from companies wishing to be exempted from the new 25% steel-import tariff recently imposed by the Trump Administration. The tariffs hit midstream players especially hard, with some companies claiming no domestic steel mill can supply pipe with the required specifications, in the time required. Kinder Morgan (KMI), Hess (HES) and Plains All American (PAA) are seeking exemptions for major projects that are already in the works, with internationally-sourced pipe already on order. The Commerce Department has committed to making a decision on each request within 90 days.
  • Speaking at an OPEC conference in Vienna this week, Pioneer Natural Resources (PXD) CEO Scott Sheffield warns that some companies in the Permian will have to shut-in production due to pipeline bottlenecks. A lack of pipeline take-away capacity in the area has forced some producers to truck crude to Gulf Coast refineries and export terminals. Permian production, primarily in West Texas, currently stands at 3.3 million bbl/day and is projected to grow at a rate of about 800,000 bbl/day annually. The Permian discount to WTI widened to over US$11 a barrel a few weeks ago but could reach US$25 if production continues to outpace new pipeline construction.
  • The US House Judiciary Committee has reintroduced its "No Oil Producing and Exporting Cartels Act," accusing OPEC of exerting too much control over energy markets for the purpose of inflating oil prices. If passed, the law would make OPEC subject to anti-trust legislation and allow the US government to sue for billions in damages. Politicians have failed to pass the legislation several times in the past two decades, with both Presidents Bush and Obama threatening to veto the act. However, President Trump seems far more open to the legislation, having criticized the cartel openly in his books and numerous tweets.
  • American Midstream Partners (AMID) has agreed to sell its Marine Products Terminals to institutional investors for US$210 million in cash. The assets include two terminals in New Orleans and one terminal in Georgia. The company says it will use the funds to focus on its core business.
GLOBAL ENERGY NEWS

Around the world this week:

  • After a backlash from Australia's competition bureau, BP (BP) has abandoned a US$1.3 billion deal to buy 543 retail gas stations from Australian grocer Woolworths. The country's competition bureau opposed the deal after concluding it might result in higher gas prices. BP already has 1,400 BP-branded retail gas station in the country, of which about 350 are company owned. Woolworths says it will look for a new buyer.
  • Anadarko Petroleum (APC) has put its staff in northern Mozambique under "lock-down" due to the threat of terrorist activity in the area. The company is in the process of trying to raise US$14 to US$15 billion to complete its Mozambique LNG facility. The company declined to comment on the matter and has not provided an update on cost or schedule impacts.
  • ExxonMobil (XOM) announced the start of resin and rubber production at its integrated manufacturing complex in Singapore. The new facility has the capacity to produce 90,000 t/yr of hydrogenated hydrocarbon resins and 140,000 t/yr of butyl. The company also announced its eighth oil discovery off the coast of Guyana in the Stabroek Block.
  • A Brazilian court has ruled in favour of the country's oil workers in a dispute over Petrobras' (PBR) compensation program, which excludes special work arrangements, such as night shifts and danger pay. The ruling could result in a 35% pay raise for some employees, costing the the company as much as US$4.5 billion. Petrobras says it will appeal the decision.
  • Royal Dutch Shell (RDS.A) has reached a deal to sell its interests in several Norwegian oil fields to Norwegian firm OKEA for US$556 million in cash. The company has also agreed to pay some of the decommissioning costs, pegged at US$120 million. This latest sale is part of Shell's US$30 billion divestiture program.
  • Baker Hughes (BHGE) was awarded a 4-year integrated well services contract to support Equinor's (EQNR) rigs in the Norwegian North Sea, including drilling and construction work for eight rigs in the Troll, Oseberg and Grane fields. Financial terms of the deal were not disclosed.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
GAINERS
• Cenovus Energy (CVE)
• Enerplus (ERF)
• Kelt Exploration (KEL)
• Nuvista Energy (NVA)
• Pason Systems (PSI)
• Apache (APA)
• Anadarko Petroleum (APC)
• Chesapeake Energy (CHK)
• Newfield Exploration (NFX)
• Cimarex Energy (XEC)
12-MO
HIGHS
• Husky Energy (HSE)
• Imperial Oil (IMO)
• MEG Energy (MEG)
• Parkland Fuel (PKI)
• Pembina Pipeline (PPL)
• Pason Systems (PSI)
• Parex Resources (PXT)
• Anadarko Petroleum (APC)
• Murphy Oil (MUR)
• ONEOK (OKE)
10-YR
HIGHS
• Parkland Fuel (PKI) • ONEOK (OKE)
GOLDEN
CROSSES
• None • None
BEARISH INDICATORS
TSX
S&P 500
TOP 5
LOSERS
• Baytex Energy (BTE)
• Crew Energy (CR)
• Peyto Exploration (PEY)
• Raging River (RRX)
• Seven Generations (VII)
• Cabot Oil & Gas (COG)
• EQT Corp (EQT)
• Marathon Petroleum (MPC)
• Phillips 66 (PSX)
• Valero Energy (VLO)
12-MO
LOWS
• CES Energy Solutions (CEU)
• Enerflex (EFX)
• PrairieSky Royalty (PSK)
• Raging River (RRX)
• None
10-YR
LOWS
• None • None
DEATH
CROSSES
• None • Concho Resources (CXO)
ANALYST RATINGS

UPGRADES

  • Baytex Energy (TSX:BTE): Upgraded from sector perform to outperform at RBC, from hold to buy at TD Securities, from neutral to outperform at Macquarie and from hold to buy at Desjardins.
  • Calfrac Well Services (TSX:CFW): Upgraded from neutral to outperform at CIBC.
  • Cimarex Energy (NYSE:XEC): Upgraded from neutral to buy at BofA.
  • Chevron (NYSE:CVX): Upgraded from market perform to outperform at Raymond James.
  • Kinder Morgan (NYSE:KMI): Upgraded from market perform to outperform at Wells Fargo.
  • Parsley Energy (NYSE:PE): Upgraded from hold to buy at National Alliance Securities.

DOWNGRADES

  • Noble (NYSE:NE): Downgraded from buy to hold at Jefferies Financial.
  • Plains All American Pipeline (NYSE:PAA): Downgraded from outperform to market perform at Sanford C. Bernstein.
  • Raging River Exploration (TSX:RRX): Downgraded from Buy to Reduce at Laurentian.
  • TechnipFMC (NYSE:FTI): Downgraded from neutral to underperform at BNP Paribas.

 

NEXT WEEK'S EVENTS

Monday:

Tuesday:

  • Minnesota's Public Utilities Commission meets on Enbridge's Line 3 Replacement
  • Provincial finance ministers meet in Ottawa, ON
  • API Weekly Statistical Bulletin released @ 4:30pm ET

Wednesday:

Thursday:

Friday:

  • Bank of Canada Business Outlook Survey
  • April GDP by industry released by StatsCan @ 8:30am ET
  • May Industrial Product and Raw Materials Indexes released by StatsCan @ 8:30am ET
  • Baker Hughes Rig Count released @ 1:00pm ET
  • Contract expiry for Brent (Aug contract) and gasoline (July contract)
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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