Energy Market Review

Energy Market Review

This week's Energy Market Summary for the week ending June 29, 2018:
  • Syncrude outage takes WTI higher
  • Enbridge clears final hurdle in Minnesota
  • Suncor, Husky and MEG stocks hit 1-year highs
  • TransCanada warns of natgas pipeline wars in the US
  • Trump tries to choke-off Iranian exports ...
    ... while Saudis plan to boost output by 1 million bbl/day.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
BULLISH
  • The Trump Administration is putting pressure on foreign countries, particularly in Asia and the EU, to reduce their imports of Iranian crude to zero by November, when sanctions are expected to be reinstated.
USD INDEX
NEUTRAL
  • US dollar index had a strong start to the week, but gave back most of its gains on Friday. The greenback has been stuck in a very narrow trading range since mid-May.
SUPPLY
BULLISH
  • According to Reuters, Saudi Arabia plans to pump as much as 11.0 million bbl/day in July, breaking its previous record high of 10.8 million bbl/day. The country produced an estimated 10.06 million bbl/day in May.
  • Libya's production remains stuck at 700,000 bbl/day, about 300,000 bbl/day below normal, as rival factions within the country's National Oil Company battle for control of Libya's export terminals.
  • US output was roughly unchanged again this week, the second week in a row.
  • Outage of the Syncrude upgrader near Fort McMurray has taken 350,000 bbl/day of light oil off North American markets. The facility is expected to remain out of service through the month of July.
DEMAND
NEUTRAL
  • US stockpiles declined almost 10 million barrels last week as refinery runs and crude exports both hit record highs.
  • Big oil majors such as Chevron and Exxon warned hat protectionism and trade wars risk destabilizing global economies, denting world oil demand, particularly from critical markets such as China.
SENTIMENT
BULLISH
  • Technicals have turned very strong for WTI, now back to the highs of late 2014 and approaching the psychological US$75 mark.
  • The WTI futures curve moved into sharp backwardation due to the loss light oil production from Alberta. Net shorts have also been cut considerably this week.
  • Brent also eked out a new multi-year high this week, ending Friday just under the US$80 mark.
CURRENCIES & BONDS

This week's notable economic data from Statistics Canada:

  • Real gross domestic product (GDP) edged up 0.1% in April, bringing annualized growth to 2.5%. Retail trade and food services both declined due to bad weather conditions. Mining declined over 9% due to a labour dispute, while oil and gas extraction rose 0.6%, a third consecutive monthly increase. Manufacturing was also up 0.8% for the month.
  • Higher oil prices helped boost both the Industrial Product and Raw Materials Price Indexes by 1.0% and 3.8% in May, respectively. Gasoline and diesel rose 4.1% and 5.5%, respectively, while conventional crude rose 7.2%. Year-over-year, raw materials prices are up 15.1% while industrial products prices are 3.1% higher.
  • Average weekly earnings were once again unchanged at $995 in April, leaving the annualized increase at 2.5%. Canadians worked an average of 32.7 hours in April, roughly unchanged from the same time last year.

In a speech delivered in Victoria this week, Bank of Canada Governor (BoC) Poloz reminds Canadians that BoC policy remains data dependent, while looming tariffs and trade wars will weigh heavily in its decision to raise interest rates. The chances of a rate hike this month perked up slightly this week, boosting the loonie by 1% and bringing the Canadian 10-year to 2.16% on Friday. The next BoC interest rate announcement is on July 11. 

First quarter GDP in the US slowed to 2.0%, revised lower from previous estimates and much lower than the 3.1% growth rate for the same quarter last year. US bond yields retreated slightly this week, sending bond prices higher south of the border.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
79.44
74.15
71.30
68.50
53.25
46.71
44.23
43.45
41.48
30.41
79.80
74.15
71.40
68.50
56.21

RBC Capital Markets says it expects a supply shortfall of 460,000 bbl/day in 2019, even if Saudi Arabia returns to its peak production capacity. The bank says production risks out of Venezuela, Iran, Nigeria and Libya will keep a lid on OPEC's output, while pipeline bottlenecks will restrict growth out of North America. RBC has a WTI and Brent forecast of US$68 and US$76, respectively in 2018, rising to US$76 and US$85.50 next year.

The bank also says it expects the differential between WCS and WTI to remain wide until new export pipelines are built. RBC expects the Canadian heavy oil discount to average about US$20 a barrel this year.

Bank of America Merrill Lynch (BAML) predicts Brent will hit US$90 a barrel by the middle of next year due to tight supplies and falling output from Iran and Venezuela. BAML says the WTI discount to Brent will remain stuck at about US$10/bbl until new pipelines are built out of the Permian Basin, expected towards the latter half of 2019.

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)

The US State Department is pressuring its allies in the EU and Asia to cut-off imports of Iranian crude once sanctions are reinstated on November 4th. The US government says it is working with its allies in the Middle East to make sure global oil supply is sufficient to cover demand. China is the largest importer of Iranian crude, who so far has no plans to cut off Iranian imports.

The US Energy Information Administration reported record numbers for last week as refinery runs rose to a record 17.8 million bbl/day and crude exports hit a record 3 million bbl/day. According to RBC Capital Markets, crude export capacity in the US is about 3.2 million bbl/day. Production was roughly unchanged as a 100,000 bbl/day gain in the Lower 48 offset losses in output from Alaska.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

Jun 27, 2018

Big drawdowns in Gulf Coast and record exports lower crude stockpiles by 10M BBLS

 

According to Baker Hughes, the US lost another 4 oil rigs this week, dropping the national total to 858. Canada gained 14 new oil rigs, bringing the total to 117.

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

A sea of red in global oil markets this week, once again spooked by President Trump's escalation of US protectionism. Chinese markets officially entered bear market territory this week, after having declined more than 20% from the highs of January.

Small caps and technology stocks led the declines on US markets. Declines were seen across all sectors, except for energy stocks, buoyed by higher oil prices, and utility stocks, which rose on lower bond yields. The Canadian energy sector was the only gainer on the TSX.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

Gains were seen across most of the energy sub-sectors. Canadian service stocks retreated slightly this week, while US refiners continue to pull back fro the highs of last March, despite a 5% gain in wholesale gasoline prices.

CANADIAN ENERGY NEWS

This week's Canadian energy news:

  • Alberta Finance Minister Joe Ceci says the province has now recovered all the jobs lost during the last recession, bringing the total number of employed Albertans to 2.3 million. Ceci says Alberta's economy grew 4.9% in the last fiscal year, while the provincial deficit declined $2.5 billion from the previous year. Higher oil prices will help GDP expand another 2.7% this year. The NDP government promises to balance the books by 2023/24.
  • The University of Regina concluded this week that the federal carbon tax will cost the average Saskatchewan family $1,000 annually and reduce the province's GDP by $16 billion through the end of 2030. Provincial Environment Minister Dustin Duncan says this is proof that "the federal government has significantly underestimated the economic impact of its carbon tax and overestimated the expected greenhouse gas reductions." The Federal Liberals maintain that carbon pricing is a net positive for the economy, and remains suspicious of the university's findings. Saskatchewan Premier Scott Moe has asked the province's Court of Appeal to decide whether the federal government has the constitutional right to impose a carbon tax on his province.

This week's Canadian investing news:

  • Calgary-based Altagas (ALA) has cleared its last hurdle in the District of Columbia in its bid to takeover WGL Holdings (NYSE:WGL). The merger is expected to be finalized in the next few days.
  • TransCanada (TRP) says it has replenished its existing $1.0 billion at-the-market equity program, allowing it to issue an equivalent amount of common shares, bringing the total to $2.0 billion. The shares may be issued over the next 12 months, as per the company's funding requirements.
  • Ratings agency S&P Global has revised Canadian Natural Resources' (CNQ) credit rating from 'BBB+' Negative to 'BBB+' Stable.
US ENERGY NEWS

This week's notable US energy news:

  • Regulators in Minnesota unanimously approved Enbridge's (ENB) $9 billion Line 3 Replacement Project, granting a Certificate of Need and allowing the company to commence construction through the state. The commissioners approved Enbridge's preferred routing with minor modifications, dismissing recommendations from an Administrative Law Judge of a true replacement in kind that would have required an extended shutdown. The new line is expected to come into service by the end of next year, adding an additional 370,000 bbl/day of export capacity out of Alberta. Enbridge stock jumped 11% this week.
  • A train carrying Alberta crude derailed in northwestern Iowa this week, spilling about 5,500 barrels of oil into local floodwaters. Operator BNSF says much of the spill was contained within a small area between its tracks. The cause of the incident is still under investigation, although the region had suffered significant flooding in the days leading up to the derailment. The crude was sourced from ConocoPhillips (COP) and destined for a refinery in Oklahoma. BNSF is a subsidiary of Berkshire Hathaway (BRK.A).
  • A California federal court dismissed climate change lawsuits filed against Chevron (CVX), ExxonMobil (XOM), ConocoPhillips (COP), Royal Dutch Shell (RDS.A), and BP (BP) by the cities of San Francisco and Oakland. The judge ruled that climate change is a global issue that requires "foreign and domestic policy" decisions that are beyond the scope of regional courts. The cities had argued that the sale of fossil fuels are a "public nuisance" and demanded compensation for rising sea levels.
  • ExxonMobil (XOM) subsidiary XTO Energy says it has reduced methane emissions from its operations by 9% since 2016. Much of those reductions have come from the continued phased out of its high-bleed pneumatic valves, improving tank emission control design and exchanging natural gas for instrument air in the actuation of pneumatic controllers. The decline is equivalent to a 2% reduction across XOM's total operations. The company says it remains on track to reduce its global methane emissions by 15% by 2020.
  • Exxon has also partnered up with Chevron (CVX), Cheniere Energy (LNG), Equinor (EQNR) and Pioneer National Resources (PXD) to form a new consortium dubbed CAMS (Collaboratory for Advancing Methane Science), with the goal of sharing R&D into the lowering methane emissions from natural gas operations.

This week's US midstream news:

  • EnLink Midstream Partners (ENLK) and EnLink Midstream (ENLC) announced plans to construct the Avenger Crude Oil Gathering System located in the Northern Delaware Basin. The companies say they have already secured 10-year contracts with Devon Energy (DEV).
  • Kinder Morgan (KMI), Apache Corporation (APA) and a subsidiary of Blackstone Energy announced plans to develop the US$2 billion Permian Highway Pipeline Project. The system will be designed to transport up to 2.0 Bcf/day of natural gas from the Permian Basin to markets in the US Gulf Coast and Mexico. The line is expected to be in service by the end of 2020.
  • Williams Cos (WMB) has asked federal energy regulators (FERC) for an extension on its long-delayed Constitution Pipeline. The project ran into regulatory red-tape after the New York State denied a key water permit required to complete construction. Williams is asking FERC to approve a construction delay to the end of 2020 while it tries to overturn NY's permit denial and awaits federal intervention to complete the pipeline. Constitution would transport 650 MMcf/day of natural gas from Pennsylvania to New York State. The project is jointly owned by Cabot Oil & Gas (COG), Duke Energy (DUK) and WGL Holdings (WGL), now owned by Altagas (TSX:ALA).
  • FERC has asked Energy Transfer Partners (ETP) to finish restoring land around segments of its Rover natural gas pipeline before allowing it to place more segments of the line into service. Another segment between Ohio and Michigan was approved for start-up this week. ETP has once again pushed back its in complete service date for Rover to the end of July.
  • Infrastructure giant ONEOK (OKE) announced plans to expand its natural gas pipeline infrastructure in the Permian Basin and Oklahoma by as much as 1.7 Bcf/day, providing additional takeaway capacity to the Texas Panhandle. The pipelines slated for expansion include the WesTex Transmission system, the Roadrunner Gas Transmission network and two legs of the ONEOK Gas Transportation network.
  • The State of West Virginia has temporarily stopped construction on parts of the Mountain Valley Pipeline after several environmental groups challenged the project's water-crossing permit. The groups are seeking a full stop of construction in the state. The 303 mile project is operated by EQT Midstream (EQM), transporting natural gas from the Marcellus and Utica shale into Atlantic states. EQT insists the line will be operational by the end of the year. 
  • A subsidiary of Sempra Energy (SRE) announced a 20-year contract with Polish Oil & Gas Co to deliver 2 Mt/y of LNG from its Port Arthur LNG facility starting in 2023. The 11 Mt/y Port Arther LNG export terminal is currently under development in Jefferson County, Texas.
  • Speaking at the World Gas Conference in Washington this week, TransCanada (TRP) VP Stanley Chapman warned its "not getting easier to build a new pipeline" south of the border. Chapman says he's seen plenty of approved pipelines and lines already under construction get held-up in lawsuits and is asking FERC to introduce new legislation and/or re-examine their existing policies. West Virginia Senator Shelley Moore Capito warns that "every regulatory action yields a lawsuit, leaving "no project safe from the retroactive pulling of permits" and making it tough to invest in new pipelines.

This week's US investing news:

  • After absorbing Baker Hughes into its oilfield services division last year, GE (GE) now says it plans to spin-off its 62.5% stake in Baker Hughes sometime in the next 2 to 3 years. Options include reverting the company back to a publicly traded corporation or selling the firm to an interested buyer. Baker Hughes GE (BHGE) was formed last summer, surpassing Halliburton (HAL) to become the second largest oilfield services provider after Schlumberger (SLB). GE has been under pressure from investors due to its persistently saggy share price and recent delisting from the Dow Industrial Average, after 122 years. The company says it will focus on its core businesses of jet engines, power plants and renewable energy.
  • Oasis Petroleum (OAS) announced the sale of 65,000 acres of non-core assets in the Williston Basin for US$283 million. The assets produce 4,400 boe/day. The company says it continues to evaluate opportunities to divest more non-core properties in order to optimize its project portfolio.
  • Hess (HES) has agreed to sell its stake in various Utica shale assets to Ascent Resources for US$400 million in cash. The divested properties produce about 14,000 boe/day (net). The company also decided it will not sell its 61.5% stake in the Danish South Arne Field, since the offers were below "value expectations." However, Hess says it will continue to look at strategic alternatives for the property.
  • Privately-held S&B Engineers was awarded an EPC contract for two NGL fractionation plants to be constructed by Phillips 66 (PSX) at the Sweeny Hub in Old Ocean, Texas. The plants will have a combined capacity of 300,000 bbl/day.
  • Offshore drilling operator TransOcean (RIG) has closed on U$1 billion in 5-year senior secured revolving credit, replacing its existing revolving credit facility. The company says it also secured the option of increasing its limit to US$1.5 billion.
  • Billionaire activist investor Carl Icahn has cut his stake in Cheniere Energy (LNG) from 13.8% to 9.5% but says he remains confident in the company's management.
GLOBAL ENERGY NEWS

Around the world this week:

  • Gas production out of the Groningen natural gas field will be lower than originally planned this year as the Dutch government works towards ending production by 2030 due to risks of earthquakes in the region. Groningen is operated jointly by ExxonMobil (XOM) and Royal Dutch Shell (RDS.A). The companies say they will not submit a claim for missed revenues. 
  • ExxonMobil (XOM) says it is considering a "multi-billion dollar" expansion of its refinery-petrochemical complex in Singapore, aimed at improving competitiveness. The company says decision will likely be made sometime next year, with new capacity potentially coming online by 2023.
  • Royal Dutch Shell (RDS.A) announced a positive final investment decision for its Fram gas and condensate field in the UK North Sea. The field is expected to produce 12,400 boe/day, including 5,300 bbl/day of condensate. The project is a joint-venture with ExxonMobil (XOM).
  • Shell also confirmed is has exited the Majnoon oilfield in Iran and handed over all its operations to state-owned Basra Oil.
  • The government of Indonesia warned that Chevron (CVX) intends to cut its deepwater investments in the country from almost US$13 billion to about US$6 billion. The government says there will be not change to output volumes and cost reductions would come from improved efficiencies.
  • Baker Hughes (BHGE) was awarded a "substantial" 15-year contract from Chevron (CVX) for its massive Gorgon LNG project off the northwestern coast of Australia. The contract includes the supply of subsea production equipment and a second contract for well completion equipment. Financial terms of the deal were not disclosed.
  • BP (BP) announced the purchase of Chargemaster, operator of over 6,500 electric vehicle (EV) charging points in the UK. BP estimates that the number of EVs on UK roads will rise from the current 135,000 to 12 million by 2040, and expects to roll-out ultra-fast charging infrastructure at its gas stations over the next 12 months. Financial terms of the deal were not disclosed.
  • Brazil's Petrobras (PBR) has agreed to sell its 197 gas stations in Paraguay to Grupo Copetrol for US$383.5 million. Brazil's energy minister says the company could be poised to sell up to US$28 billion in offshore assets in the Santos basin, pending approval by Congress.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
GAINERS
• Canadian Natural Res (CNQ)
• Enbridge (ENB)
• Enbridge Income Fund (ENF)
• Gran Tierra (GTE)
• MEG Energy (MEG)
• Apache (APA)
• Concho Resources (CXO)
• EOG Resources (EOG)
• Transocean (RIG)
• Cimarex Energy (XEC)
12-MO
HIGHS
• Encana (ECA)
• Gran Tierra (GTE)
• Husky Energy (HSE)
• Kelt Exploration (KEL)
• MEG Energy (MEG)
• Parkland Fuel (PKI)
• Pason Systems (PSI)
• Suncor Energy (SU)
• Anadarko Petroleum (APC)
• Chesapeake Energy (CHK)
• Hess Corp (HES)
• ONEOK (OKE)
10-YR
HIGHS
• Parkland Fuel (PKI) • ONEOK (OKE)
GOLDEN
CROSSES
• None • Newfield Exploration (NFX)
BEARISH INDICATORS
TSX
S&P 500
TOP 5
LOSERS
• CES Energy Solutions (CEU)
• Enerflex (EFX)
• Inter Pipeline (IPL)
• Nuvista Energy (NVA)
• Paramount Resources (POU)
• Andeavor (ANDV)
• Halliburton (HAL)
• Marathon Petroleum (MPC)
• Marathon Oil (MRO)
• Noble Energy (NBL)
12-MO
LOWS
• CES Energy Solutions (CEU)
• PrairieSky Royalty (PSK)
• None
10-YR
LOWS
• None • None
DEATH
CROSSES
• None • None
ANALYST RATINGS

UPGRADES

  • Baytex Energy (TSX:BTE): Upgraded from neutral to outperform at Macquarie, from sector perform to outperform at RBC and from hold to buy at TD Securities.
  • DCP Midstream (NYSE:DCP): Upgraded from neutral to buy at Goldman Sachs.
  • EOG Resources (NYSE:EOG): Upgraded from hold to buy at Societe Generale.
  • Helmerich & Payne (NYSE:HP): Upgraded from hold to buy at Jefferies.
  • Kinder Morgan (NYSE:KMI): Upgraded from market perform to outperform at Sanford C. Bernstein.
  • Range Resources (NYSE:RRC): Upgraded from underperform to market perform at Wolfe Research.
  • Source Energy Services (TSX:SHLE): Upgraded from hold to buy at TD Securities.

 

DOWNGRADES

  • Andeaver (NYSE:ANDV): Downgraded from buy to hold at US Capital Advisors.

 

NEXT WEEK'S EVENTS

Monday:

  • Canadian markets closed for Canada Day

Tuesday:

Wednesday:

  • US markets closed for Independence Day

Thursday:

Friday:

  • June Labour Force Survey released by StatsCan @ 8:30am ET
  • Calgary Stampede kicks-off with parade @ 9:00am MT
  • 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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