Energy Market Review

Energy Market Review

This week's Energy Market Summary for the week ending June 8, 2018:
  • Suncor's Q2 output hampered by maintenance outages
  • Fort Hills "exceeding expectations"
  • Teck's Frontier Oil Sands Mine ready for public consultations
  • Enbridge cancels plan to verify shipper nominations
  • ConocoPhillips poised to sell 208 million Cenovus shares
  • CAPP goes sour on Canadian climate policy
  • WCS jumps 20%, erasing losses from last week
  • TransCanada's Leach Xpress declares force majeure
  • ExxonMobil expands footprint in Brazil
  • US asks Saudis to boost production ...
    ... as Iranian sanctions loom in the fall
  • WTI discount to Brent continues to widen.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
NEUTRAL
  • Iran, North Korea and Venezuela remain in the spotlight this week, with no resolution seen in the short term.
USD INDEX
BULLISH
  • A strengthening Euro pulled the greenback lower again this week.
SUPPLY
BEARISH
  • According to Bloomberg, the Trump Administration has asked Saudi Arabia to boost output by 1 million bbl/day in preparation for reinstatement of Iranian sanctions.
  • US production out of the Lower 48 increased by another 35,000 bbl/day last week, bringing total US output to a new record high of 10.8 million bbl/day.
DEMAND
NEUTRAL
  • In a note to clients, Goldman Sachs says oil demand has been stronger than expected, both in the US and internationally. Oil demand increased 2.6% in March while demand for gasoline rose 1%, both much higher than expected.
  • Goldman has kept its forecast for crude demand growth at 1.8 million bbl/day in 2018, versus the IEA's forecast of 1.4 million bbl/day growth.
  • Crude demand from Chinese refiners declined to 9.2 million bbl/day in May, down from a record high of 9.6 million bbl/day the previous month.
SENTIMENT
BEARISH
  • After hitting new highs in mid-May, oil prices continue to slowly drift lower.
  • The number of long positions continue to decline on both Brent and WTI, indicating less bullishness in oil markets.
CURRENCIES & BONDS

This week's Canadian economic data:

  • Canada's exports rose 1.6% to a record $48.6 billion in April, while imports declined 2.5% to $50.5 billion. The trade deficit narrowed from $3.9 billion in March to $1.9 billion in April. Exports of energy products rose 2.3%, the eighth increase in nine months. Exports of crude oil and crude bitumen gained almost 5% on higher export volumes.
  • Canada unexpectedly lost 7,500 jobs in May, split 31,000 full-time losses and 23,600 part-time gains. Declines were mostly seen in manufacturing and construction. The unemployment rate was unchanged at 5.8%. Average hourly wages rose 3.9% y/y, the strongest increase in almost 6 years.
  • Industrial capacity utilization rose to 86.1% in the first quarter, up from 85.6% in the last quarter of 2017, the seventh consecutive quarterly gain.

The Bank of Canada is seen as likely to raise rates in July due to recent strength in wage growth. The loonie eked out a 0.2% gain this week despite lingering concerns over US protectionism.

The Federal Open Market Committee (FOMC) meets on interest rates next week. The committee is seen as likely to raise rates by 25 basis points on Wednesday. US bond yields posted small gains for the week, sending treasury prices lower on both sides of the border.

Several officials for the European Central Bank (ECB) confirm the bank will be ready to start phasing out its bond buying program later this year, despite recent weakness in economic data, particularly out of Germany. The Euro rose almost 1% for the week, taking the US dollar lower.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
76.46
65.74
63.57
58.03
48.33
44.82
42.53
40.88
39.64
30.41
79.80
72.24
70.73
65.44
56.21

JP Morgan cut its 2018 crude forecast for WTI by US$3 to US$62.20 a barrel. The bank says geopolitical tensions and risks of supply disruptions may push prices higher in the second half of the year, falling towards the end of 2018 and remain subdued in 2019.

The WTI discount to Brent widened to over US$11 on Thursday, the largest gap since 2011. Brent and WTI were roughly unchanged this week, while a sharp narrowing of the Canadian heavy oil discount sent Western Canadian Select (WCS) prices soaring by over 20%, reversing the losses of last week.

Wholesale gasoline prices continue to retreat from the highs of May as inventories build south of the border. Retail prices in the Vancouver area have also pulled back from record highs of more than $1.60/L after BP's Cherry Point refinery in Washington State returned to normal operation after an extended maintenance shutdown.

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)

Despite a likely production increase by OPEC and further output gains in the US, Goldman Sachs says crude stockpiles will continue falling during the second half of this year. The investment bank points to strong demand for crude, particularly from China, and a shift away from long-term investment towards more short-cycle spending in the oil industry, as reasons to be bullish on oil prices.

Goldman Sachs also warns that transportation bottlenecks from the Permian basin in West Texas and New Mexico are likely to continue into the end of 2019, with as much as 400,000 bbl/day of stranded production forced onto trucks and railcars. Despite the logistical constraints, Goldman expects Permian production to grow by 800,000 bbl/day this year and another 700,000 bbl/day in 2019.

According to the US Energy Information Administration (EIA), the US has stopped building more crude storage capacity, for the first time since data collection began in 2011. Total crude inventory volumes have declined 115 million barrels from the highs of 2017, bringing tankage utilization rates from a peak of 70% to less than 50% in the first quarter of this year. The EIA publishes crude storage capacity estimates twice annually. Volumes and utilization rates are published under the "US Energy Statistics" webpage.

According to Baker Hughes, one new oil rig was added in the US, bringing the total to 862. Canada added another 13 rigs, to a total of 69.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

Jun 6, 2018

US CRUDE INVENTORIES UNEXPECTEDLY RISE OVER 2M BBLS DESPITE HIGHER REFINERY RUNS

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

US markets powered higher this week, led by large cap stocks. The tech-heavy NASDAQ and small-cap Russell broke to new highs during the week. European markets were roughly unchanged due to a strengthening Euro.

Most sectors on the S&P 500 ended the week in the positive, except for interest rate sensitive utilities stocks. US energy stocks gained almost 0.7% on Friday. The discretionary and technology sectors hit new all-time highs during the week.

Results were more mixed on the TSX, with utilities, staples and energy dragging the index lower. Discretionary, technology and industrial sectors hit new all-time highs this week.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

CIBC advises investors to dump their financial stocks and load up on energy, boosting the sector to Overweight. The bank is forecasting an average WTI price of US$68.50 in 2019. In addition to Suncor (SU) and Canadian Natural Resources (CNQ), CIBC has added Encana (ECA) to their list of top picks, in part due to the company's shift away from natural gas production.

According to Credit Suisse, Canada's TSX Composite Index has been held back by a poor performance in its heavily-weighted energy sector, which makes up 19.2% of the index. The banks says Canadian energy stocks have underperformed the broader index due to volatility in the heavy oil discount, despite rising oil prices. In contrast, energy accounts for just 6.1% of the S&P 500.

After breaking to new highs earlier in the week, refining stocks took a tumble this week after the EIA reported another increase in gasoline and distillate stockpiles.

CANADIAN ENERGY NEWS

This week's Canadian energy news:

  • Suncor Energy (SU) provided an operational update on second quarter production this week, telling investors it averaged 636,000 bbl/day in April and May, but exited May closer to 800,000 bbl/day. The company says it experienced some delays and additional work during planned maintenance turnarounds at its Base Plant operations, Syncrude and four refineries, but all work has now been completed. Suncor says all facilities will return to full production rates in June.
  • Suncor also reitereated that its newly commissioned $16.3 billion Fort Hills oil sands mine is "exceeding expectations" and should average 90% of nameplate capacity in the fourth quarter.
  • Suncor's CEO Steve Williams says the federal government's purchase of Trans Mountain assets from Kinder Morgan Canada (KML) does nothing to improve competitiveness in the country's energy sector. Williams says competitiveness is a function of royalties, taxation and "regulatory certainty," all of which require "some progress." The CEO says the government's rescue of an export pipeline from a private company proves the country's "normal processes didn't work very well."
  • The Canadian Association of Petroleum Producers (CAPP) says "inefficient and duplicative climate policies" is discouraging investment in Canada’s oil and gas sector, without any benefits to the environment. CAPP says Canadian government policies encourages companies to shift investment to countries with little or no emissions-reduction programs, thereby increasing total global emissions. The lobby group would like all levels of government to be more mindful of "carbon leakage" and instead focus on reducing total global emissions, not just emissions from Canada.
  • Environment Canada's Joint Review Panel says it has sufficient information to begin public consultations on Teck Resources' (TECK.B) proposed Frontier Oil Sands Project. If constructed, Frontier would be the most northern oil sands mining operation in the region, located 110 km north of Fort McMurray, just south of Fort Chipewyan. At full production, the mine will produce 260,000 bbl/day of diluted bitumen with an anticipated 41-year mine life. Interested parties are asked to submit their applications by June 22. Hearings will likely begin in September. Teck has yet to announce a final investment decision on the project.

This week's Canadian midstream news:

  • Enbridge (ENB) has cancelled plans to prevent shippers from overbooking volumes on its Mainline network after some companies expressed dismay over the plan. Last month, Enbridge told customers it would introduce a "verified supply allowance" which would prevent shippers from booking more volumes than required. The company says it is concerned that shippers may be inflating their nominations to ensure sufficient space on the line. Enbridge says its Mainline pipeline network, which stretches from Alberta to the US Midwest, is fully subscribed.
  • Kinder Morgan Canada (KML) says the Trans Mountain pipeline is oversubscribed for the month of June, forcing  shipping volumes to be apportioned by 43%. Apportionments averaged 15% in 2016 and 22% in 2017, but have been significantly higher this year due to rising production out of the oil sands, peaking at 44% in April.

This week's Canadian investing news:

  • According to Reuters, ConocoPhillips (NYSE:COP) is preparing to sell 208 million Cenovus (CVE) shares, acquired during the sale of its various oil sands and natural gas assets in Western Canada. The shares will likely be offered to institutional investors sometime this month.
  • Obsidian Energy (OBE) announced another $50 million in capital spending to fast track drilling in its Cardium play. Most of that capital will be spent in the fourth quarter. The new wells will add 2,300 boe/day of production in 2019. The company says it has decided not to sell its Viking assets in Alberta but remains in talks with China Investment Corporation on the sale of its Peace River properties towards the end of this year. 
  • Bellatrix Exploration (BXE) warns it has cut natural gas production by about 2,000 to 4,000 boe/day in the second quarter due to weak AECO spot prices. However, the company says it will meet its production guidance of 34,000 to 35,000 boe/day for the full year. Bellatrix also announced an extension to its revolving credit facility.
  • North American Construction Group (NOA) was awarded a two year contract extension for a "major oil sands customer" and an additional three year commitment for overburden removal, to be started after previously announced 2018 work is completed. The deal is worth about $120 million.
  • Frontera Energy (FEC) says it plans to offer up to US$500 million in unsecured senior notes due in 2023. Proceeds will be used to buy back US$250 million in senior secured notes due in 2021 and general corporate purposes.
US ENERGY NEWS

This week's US energy news:

  • A section of TransCanada's (TRP) Leach Xpress Pipeline exploded early Thursday morning in Marshall County, West Virginia. No injuries or property damage was reported in the blast. The company has declared force majeure on the line and says the incident could impact about 1.3 Bcf/day of gas deliveries. West Virginia's Department of Environmental Protection is still investigating the explosion. Leach Xpress is part of the Columbia pipeline system, which was acquired by TransCanada in 2016.
  • Andeavor (ANDV) announced plans to build a US$100 million refined products terminal in Mexico's Baja California region. The new facility is expected to reduce Andeavor's import costs while growing its network of ARCO branded stations in northwest Mexico.
  • BHP Billiton (BHP) has received its first round of bids for the pending sale of its US shale portfolio, said to be worth between US$7 and $9 billion. According to Bloomberg, Royal Dutch Shell (RDS.A), BP (BP) and Chevron (CVX) have all submitted bids, as well as several investment firms and hedge funds. BHP says the sale is "progressing" and hopes to close on a deal by the end of the year.
  • Devon Energy (DVN) announced plans to sell its interests in EnLink Midstream to an affiliate of Global Infrastructure Partners for US$3.13 billion in cash. Proceeds from the same will be put towards debt reduction and its share repurchase program, which was increased from US$1 billion to US$3 billion.

This week's US investing news:

  • ConocoPhillips (COP) says it received the last of all regulatory approvals required to  complete its acquisition of a 22% stake in 1.2 million acres of lands on Alaska's Western North Slope from Anadarko Petroleum (APC). The lands were purchased for US$400 million and produce about 11,000 boe/day during the first quarter of this year. COP and its subsidiary also announced a US$1.8 billion tender offer for a series of notes dated 2022, 2024, 2025 and 2034.
  • Energy Transfer Partners (ETP) priced a variety of senior notes valued at US$3 billion, with net proceeds to be used to repay senior notes due in June and July, repay amounts owed under its revolving credit facility and for general partnership purposes.
  • Whiting Petroleum (WLL) also announced plans to exchange all of its outstanding, unregistered Senior Notes for new, registered Senior Notes, both yielding 6.625% due in 2026. The offer will expire on July 5, 2018.
GLOBAL ENERGY NEWS

Around the world this week:

  • President Trump has promised to reinstate the "highest level" of sanctions against Iran and has allegedly asked Saudi Arabia to boost output by as much as 1 million bbl/day. The EU says it has no plans to reinstate sanctions and has asked the US to issue waivers for European companies already doing business in the country, such as French energy major Total (TOT). According to Reuters, several European refineries have already begun winding down their purchases of Iranian crude. If reimposed, US sanctions could take effect as early as November 4th.
  • Montreal-based SNC-Lavalin (SNC) was awarded a design contract for a $1.9 billion greenfield 250,000 t/yr chlor-akali PVC plant in Oman. The contract includes concept development, engineering and technology evaluation to support a final investment decision. A subsequent EPCM contract is expected in the first quarter of next year. Terms of the deal were not disclosed.
  • Venezuelan officials have freed two Chevron (CVX) executives, held in jail for two months during a corruption probe. The employees were facing treason charges for refusing to sign procurement contracts for a joint-venture with state-owned PDVSA. The executives are Venezuelan citizens and still have to report into authorities every 15 days.
  • A consortium consisting of Equinor (EQNR), ExxonMobil (XOM), Petroleos de Portugal won the highest bid for the Uirapuru block in Brazil's Santos Basin. The consortium offered US$800 million, which was three times the minimum floor price. The group will be partnered with state-owned PetroBras in the development of the field.
  • ExxonMobil (XOM) closed on the purchase of half of Equinor's (EQNR) interest in an pre-salt Carcara oil field located offshore Brazil. Carcara is said to contain 2 billion barrels of reserves. Exxon says development planning, appraisal and further exploration is currently underway. The company now has interests in 25 blocks offshore Brazil spread across 2.1 million net acres.  
  • According to Reuters, ExxonMobil is seeking buyers for its stake in a large undeveloped gas field off the coast of Tanzania. The company says it wants to focus on the development of a bigger project in neighbouring Mozambique, Guyana and US shale.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
GAINERS
• Advantage Oil & Gas (AAV)
• Birchcliff Energy (BIR)
• Husky Energy (HSE)
• MEG Energy (MEG)
• Paramount Resources (POU)
• Apache (APA)
• Chesapeake Energy (CHK)
• EQT Corp (EQT)
• Murphy Oil (MUR)
• TechnipFMC (FTI)
12-MO
HIGHS
• Parex Resources (PXT)
• Parkland Fuel (PKI)
• Andeavor (ANDV)
• Marathon Petroleum (MPC)
• Occidental Petroleum (OXY)
• ONEOK (OKE)
• Valero Energy (VLO)
10-YR
HIGHS
• None • Andeavor (ANDV)
• ONEOK (OKE)
• Valero Energy (VLO)
GOLDEN
CROSSES
• None • None
BEARISH INDICATORS
TSX
S&P 500
TOP 5
LOSERS
• CES Energy Solutions (CEU)
• Raging River (RRX)
• Secure Energy Services (SES)
• Seven Generations (VII)
• Whitecap Resources (WCP)
• Andeavor (ANDV)
• Cimarex Energy (XEC)
• Marathon Petroleum (MPC)
• Noble Energy (NBL)
• Valero Energy (VLO)
12-MO
LOWS
• CES Energy Solutions (CEU) • Cimarex Energy (XEC)
10-YR
LOWS
• None • None
DEATH
CROSSES
• None • None
ANALYST RATINGS

UPGRADES

  • Carrizo Oil & Gas (NASDAQ:CRZO): Upgraded from Hold to Buy at Tudor Pickering.
  • ConocoPhillips (NYSE:COP): Upgraded from Market Perform to Outperform at Sanford C. Bernstein.
  • Marathon Oil (NYSE:MRO): Upgraded from Hold to Buy at Tudor Pickering.
  • Noble Energy (NYSE:NBL): Upgraded from Underperform to Market Perform at Bernstein.
  • Noble (NYSE:NE): Upgraded from Underperform to Market Perform at Bernstein.
  • Occidental Petroleum (NYSE:OXY): Upgraded from Neutral to Buy at Citigroup.
  • PBF Energy (NYSE:PBF): Upgraded from Market Perform to Outperform at Raymond James.

 

DOWNGRADES

  • China Petroleum & Chemical (NYSE:SNP): Downgraded from Buy to Neutral at Goldman Sachs.
  • DCP Midstream (NYSE:DCP): Downgraded from Buy to Hold at Stifel Nicolaus.
  • Enable Midstream Partners (NYSE:ENBL): Downgraded from Buy to Neutral at Citigroup.
  • Noble Energy (NYSE:NBL): Downgraded from Buy to Hold at Tudor Pickering.
  • Petrobras (NYSE:PBR): Downgraded from Buy to Hold at Societe Generale.
  • Royal Dutch Shell (NYSE:RDS/A): Downgraded from Buy to Hold at Needham & Co and the Societe Generale.
  • SM Energy (NYSE:SM): Downgraded from Outperform to Neutral at Credit Suisse.

 

NEXT WEEK'S EVENTS

Monday:

Tuesday:

Wednesday:

Thursday:

Friday:

  • April Monthly Manufacturing Survey released by StatsCan
  • 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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