Energy Market Review

Energy Market Review

This week's Energy Market Summary for the week ending July 13, 2018:
  • Alberta's energy patch downplays pipeline constraints
  • Cdn crude exports hit a new high in April ...
    ... while refinery runs hit a multi-decade low
  • Trump scolds Germany for building natgas pipelines
  • Global oil markets return to surplus next year
  • Lost Libyan barrels poised to come back online ...
    ... sending oil prices tumbling.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
BULLISH
  • US Secretary of State Mike Pompeo hinted Washington may consider granting waivers to some of Iran's crude buyers, after some countries asked to be exempted from pending sanctions. However, Secretary Steven Mnuchin later backtracked, noting there will be no exception for any country.
USD INDEX
NEUTRAL
  • The US dollar index rose 0.8% this week, but remains stuck in a trading range.
SUPPLY
NEUTRAL
  • Syncrude's Mildred Lake upgrader remains offline this week, taking 350,000 bbl/day of light oil off North American markets. The company expects 1/3 of production to resume by the end of the month, rising to 2/3 in August and full output by mid-September.
  • Libya's National Oil Company lifted force majeure after it regained control of the country's export terminals. Libyan production hit a high of almost 1.3 million bbl/day last February before the ports were closed in late June, bringing production to just 527,000 bbl/day.
  • Norwegian oil and gas workers began strike action this week, shutting in 23,000 bbl/day of output. Another strike in Gabon has reduced production by about 54,000 bbl/day.
DEMAND
BEARISH
  • OPEC says global demand growth will slow from 1.65 million bbl/day this year to 1.45 million bbl/day in 2019. The IEA sees global demand closer to 1.4 million bbl/day next year.
SENTIMENT
NEUTRAL
  • Oil prices continue to retreat from recent highs, taking a much needed pause from the uptrend.
CURRENCIES & BONDS

As expected, the Bank of Canada raised interest rates by 0.25 basis points this week, bringing the overnight lending rate to 1.5%. The Bank expects the global economy to expand 3.75% this year, slowing to 3.5% in 2019, but trade protectionism remains as a major global headwind. Canada's economy is expected to accelerate 2.8% in the second quarter, slowing to 1.5% in Q3. Weak housing data is being offset by stronger exports and improving business investment.

The US Administration is working on adding tariffs to another US$200 billion worth of Chinese imports, representing almost half of all imports from China. China's trade surplus with the US hit yet another record high in June.

US bond yields rose again on the short end of the curve, bringing the yield curve (10 vs 2-yrs) to yet another low, now just 0.24%. The US dollar perked up almost 1%, ending Friday a 94.5.

The Japanese yen was the worst performing major currency this week, breaking through key support levels this week for the first time since January. A falling yen is generally considered a good sign for US equity markets. The Chinese yuan also declined to an 11-month low this week.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
75.33
71.01
67.60
66.02
51.65
48.06
45.77
45.25
43.29
30.41
79.80
74.15
71.40
69.32
56.21

This week's revised oil price forecasts:

  • Canaccord Genuity raised its WTI forecast to US$65 per barrel in 2018, up from a previous estimate of US$60. Expectations for Brent were also revised from US$65 to US$70. Canaccord expects the WTI-WCS differential to hover around US$21/bbl through 2019 until Enbridge (ENB) completes its replacement of Line 3 late next year. 
  • Credit Suisse also raised it forecast for oil prices through 2020, now expecting Brent to average US$75 a barrel in 2019 and 2020, both revised higher by US$5/bbl. WTI is expected to average US$67 next year, rising to US$68 in 2020. The firm expects oil markets to be balanced next year despite uncertainty over output from Venezuela and Iran. However, markets are expected to be undersupplied by 2020 due to a lack of investment in new mega-projects.
  • JP Morgan raised its outlook for oil prices and lowered its forecast for demand growth this year due to uncertainty over global trade. The bank expects Brent to average US$70/bbl in both 2018 and 2019, while 2018 demand growth was cut from 1.4 to 1.2 million bbl/day.
  • In this month's Short-Term Energy Outlook, the US Energy Information Administration (EIA) has bumped up its forecast for WTI prices, now expected to average almost US$66/bbl this year, falling to US$62 in 2019. The EIA's Brent forecast also edged up slightly to US$71.80 and US$68.70/bbl for this year and next. Henry Hub gas prices are expected to remain relatively stagnant at an average of US$2.99/MMBtu in 2018, rising to US$3.04 next year.

Brent prices tumbled almost 6% on Wednesday, the biggest drop in almost two years. The declined was blamed mostly on Libya, after the government regained control of its export terminals, potentially bringing over 700,000 bbl/day of crude back online.

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)

After producing a record 4.2 million bbl/day in March, Canada's total crude oil output dipped 304,000 bbl/day in April, falling to 3.9 million bbl/day. Most of the declines were seen in upgraded bitumen volumes, which fell 265,000 bbl/day for the month. Crude feed to Canadian refineries declined over 500,000 bbl/day to just 1.215 million bbl/day, a multi-decade low as several refineries underwent major maintenance turnarounds. Crude exports hit a new record high of 3.745 million bbl/day in the month of April.

This week's notable changes in supply/demand forecasts:

  • The EIA has left its US crude production forecast unchanged this week, at a average of 10.8 million bbl/day in 2018, rising to 11.8 million bbl/day next year. Expectations for global output were also revised higher to 102.5 million bbl/day in 2019, while global consumption is pegged close to 101.9 million bbl/day. The EIA expects total global petroleum inventories to be unchanged this year versus 2017, followed by an increase of 220 million barrels in 2019.
  • In this month's Oil Market Report, the International Energy Agency (IEA) says an unusually cold start to the year boosted demand in the first half, but higher oil prices likely slowed consumption in the second quarter. Global oil supply rose 370,000 bbl/day in June on higher output from Saudi Arabia, Russia and the US. OECD stockpiles also creeped higher in May, the third increase since last summer.
  • In this month's Oil Market Report, OPEC says world oil consumption will average 98.85 million bbl/day this year, rising to 100.3 million in 2019. Aside from China and India, the cartel says it is also seeing strong demand out of Latin America and the Middle East. OPEC is also projecting a small increase in OECD stockpiles for the month of May.
 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

Jul 11, 2018

Cushing stockpiles continue to fall, now down over 10M bbls in 5 weeks

 

According to Baker Hughes, US oil rig counts were unchanged this week at 863. Canada added 13 oil rigs, to a total of 139. For the fourth week in a row, the EIA reported no change in US crude output. However, US stockpiles declined 12.6 million barrels, with over 7 million barrels coming out of the Gulf Coast.

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

Global equity markets generally ended the week higher, with the TSX and NASDAQ breaking to new record highs. Japan's Nikkei Index was the best performing market due to a weakening currency.

All sectors on the S&P 500 posted gains for the week, except for interest-rate sensitive utility stocks. Discretionary and technology sectors broke to new highs during the week. Energy sector stocks also posted gains, rising 2.2% on the TSX and almost 1% on the S&P 500.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

Barclays says share prices for global oil majors are largely undervalued due to lofty oil prices, much improved cost structures and "high-graded" asset bases. The UK bank has an overweight rating on BP (BP), Chevron (CVX), ConocoPhillips (COP), Royal Dutch Shell (RDS.A) and Total (TOT), noting that ConocoPhillips and Petrobras (PBR) offer the best value over the next 12 months, while Hess (HES) and ExxonMobil (XOM) are the least attractively-priced.

Barclays also estimates that Canadian oil companies are more attractively priced than US counterparts. The company's top pick on the TSX is Cenovus Energy (CVE), while Husky Energy (HSE) and Imperial Oil (IMO) are said to be trading at the steepest discounts.

CANADIAN ENERGY NEWS

This week's Canadian energy news:

  • At this week's TD Securities Energy Conference in Calgary, several Alberta oil executives downplayed their exposure to the Canadian heavy oil discount and constraints in the country's export pipelines. Husky Energy (HSE) CEO Rob Peabody says his company has plenty of pipeline export capacity to cover output, at least until 2021. Suncor Energy (SU) COO Mark Little echoed a similar sentiment, noting that 100% of production from the new Fort Hills mine already has space booked on existing pipelines. Imperial Oil (IMO) CEO Rich Kruger confirmed his company is looking at boosting heavy oil processing capacity at its refineries, while Cenovus Energy (CVE) EVP Al Reid was more cautious, noting his company will await more clarity with respect to new pipeline construction before it revives two deferred in-situ projects. Imperial and Cenovus are significant suppliers of heavy oil, each producing about 380,000 bbl/day out of the oil sands.
  • Nexen Energy has been ordered to pay $460,000 in penalties and fines for a pipeline rupture in the summer of 2015 at its Long Lake in-situ facility located 45 km southeast of Fort McMurray. The incident resulted in the spill of 30,000 barrels of emulsion, composed of 80% water and 20% bitumen, over an area that covered 22 km². The Alberta Energy Regulator (AER) laid charges against the company in July 2017 and says the ruptured pipeline will remain suspended until Nexen receives written approval from the provincial regulator. The federal government also levied a $290,000 fine under the Migratory Birds Convention Act. Nexen Energy is a wholly-owned subsidiary of CNOOC (NYSE:CEO).
  • Hurricane Chris forced the evacuation of several oil platforms off the coast of Nova Scotia this week. ExxonMobil (NYSE:XOM) removed non-essential personnel from its Sable facility off the coast of Halifax, while BP (NYSE:BP) suspended activities on one of its drilling rigs in the area. The hurricane was downgraded to a tropical storm, bringing strong winds and storm surges to Newfoundland's Avalon Peninsula, including the St. John's area.
  • Calgary-based Cor4 Oil (formerly Imaginea Energy) confirmed the release of about 950 barrels of crude oil and water from one of its pipelines, located about 7 km northeast of Jenner, Alberta. The spill was confined to agricultural lands and no impacts to wildlife were reported. Both the AER and Cor4 continue to investigate the cause of the incident.

This week's Canadian investing news:

  • Precision Drilling (PD) has signed a five year, take-or-pay contract for a new drill rig project in Kuwait. The company also says it has largely met its target of debt reduction for this year, said to be at least $75 million.
  • Painted Pony Energy (PONY) announced better than expected results from two wells drilled in the Lower Montney region. The company says production levels were higher than planned, including higher liquid yields. Painted Pony will redirect some of its drilling activity this year "to better capitalize" on the results.
  • Range Resources (RRC) has reached agreement with SailingStone Capital Partners to separate the company's board chairman and CEO roles. SailingStone owns about 17% of the company.
  • The TSX has approved CES Energy Solutions' (CEU) plan to buy back up to 24.6 million shares over the next 12 months, representing 10% of its public float.
US ENERGY NEWS

This week's US energy news:

  • TransCanada (TRP) says the Leach Xpress segment of its Columbia Gas Transmission network will be put back into service over the weekend, after a blast damaged the natural gas pipeline in early June. The cause of the explosion is still under investigation but preliminary findings suggest ground movement tore open a weld, emitting 165 million cubic feet of natural gas into a rural area of West Virginia. The company has identified six other locations susceptible to the same ground movement. Full return to service will require approval from federal regulators. 
  • The State of Pennsylvania has unanimously rejected a plan by Buckeye Partners (BPL) to reverse the western portion of its Laurel products pipeline that runs between refineries in the Philadelphia area to Pittsburgh. The reversal would have given refineries in the Midwest better access to the Pittsburgh market, reducing the need for imports from the East Coast. State regulators say the company failed to make a business case for the reversal. Buckeye says they disagree with the decision and have now applied to federal regulators to make segments of the line bi-directional.
  • The US Commerce Department has approved tariff exclusions for almost 300 metric tonnes of steel for Royal Dutch Shell (RDS/A) and Chevron (CVX) this week. The waivers are valid for one year. The Commerce Department has received 20,000 requests for waivers but has processed only 241 so far.
  • According to Bloomberg, the Trump Administration is looking at releasing some of its Strategic Petroleum Reserves (SPR) in order to lower gas prices ahead of the Labor Day weekend. The US holds about 660 million barrels in SPR. The government has sold 35 million barrels of SPR stockpiles since the beginning of 2017 to finance various government spending programs. Sources speculate the government could release up to 30 million barrels in an attempt to appease voters ahead of the November mid-term elections. However, the impact on gas prices is likely to be minimal.
  • President Trump was in Germany this week, scolding the Europeans for their Nord Stream pipeline, which brings natural gas from Russia to Germany via the Baltic Sea, bypassing the Ukraine. The US calls the pipeline "another tool for the political coercion of European countries" which undermine's "Europe’s overall energy security and stability." The US State Department has warned Western firms invested in the pipeline may face sanctions. The twinned 1,224 km pipelines has the capacity to ship 5 Bcf/day of natural gas to Western Europe, and will be doubled by the end of next year when another phase of expansion comes online.

This week's US investing news:

  • Oilfield services firm Weatherford (WFT) has agreed to sell its land drilling rig operations in Algeria, Kuwait and Saudi Arabia, as well as two idle land rigs in Iraq, for US$287.5 million in cash. The deal includes 31 drilling rigs and the transfer of 2,300 employees and contract personnel.
  • ConocoPhillips (COP) boosted its 2018 share repurchase program from US$2 billion to US$3 billion. The company already bought US$3 billion in shares in 2016/2017 and has reduced its debt to US$15 billion, more than one year ahead of schedule. COP says its share buybacks, capital expenses and dividend payouts will be funded from its operating cash flow.
  • Anadarko Petroleum (APC) says it plans to buy back US$1 billion worth of shares, in addition to its previously announced US$3 billion share buyback program. Anadarko also boosted its debt-reduction program by another US$500 million to a new total of US$1.5 billion.
GLOBAL ENERGY NEWS

Around the world this week:

  • According to industry sources, Total (TOT) has sold its stake in several oil and gas assets in the UK North Sea for US$1.5 billion. The divestment will include stakes in a number of smaller fields the company acquired as part of its purchase of AP Moller-Maersk's oil and gas division.
  • In a bid to reduce costs, ExxonMobil (XOM) has increased the capacity of its planned Rovuma LNG project in Mozambique by 50%. The move should cut costs in half as the company prepares to raise debt to finance the massive project. The new plan is for two trains, each with a capacity of 7.6 million tonnes/year, which would make it the world's largest LNG facility outside of Qatar. If all goes according to plan, the facility is projected to start-up in 2024.
  • Strike action in Norway has forced Royal Dutch Shell (RDS.A) to shutdown production at its Knarr field in the the Norwegian North Sea. About 670 drilling workers walked off the job earlier this week after the two sides failed to reach agreement over wages and pensions. This is the first strike in Norway’s oil and gas sector since 2012. The union has threatened to escalate strike action, potentially extending walk-outs to other platforms, including production facilities in the UK North Sea.
  • Shell has also reportedly signed an agreement with Nigeria to develop seven natural gas projects worth about US$3.7 billion. The projects will produce 3.4 Bcf/day of natural gas by 2020, enough to avoid a shortfall in the country's power grid.
  • Chevron (CVX) has confirmed it will exit the Makassar Strait deepwater natural gas block off the coast of Indonesia and will instead focus its efforts on "more promising areas" in the country. Indonesia's oil and gas regulator says although the field was found to contain significant volumes of hydrocarbons, profit margins were estimated to be slim.
  • Italian energy major Eni (E) announced a second light-oil discovery in the Faghur basin, located in the Egyptian western desert. The company currently produces about 55,000 boe/day out of the region.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
GAINERS
• Birchcliff Energy (BIR)
• CES Energy Solutions (CEU)
• Crew Energy (CR)
• Precision Drilling (PD)
• Seven Generations (VII)
• ConocoPhillips (COP)
• Concho Resources (CXO)
• Marathon Petroleum (MPC)
• Noble Energy (NBL)
• Transocean (RIG)
12-MO
HIGHS
• Canadian Natural Res (CNQ)
• Cenovus Energy (CVE)
• Enbridge Income Fund (ENF)
• Enerplus (ERF)
• Husky Energy (HSE)
• Imperial Oil (IMO)
• MEG Energy (MEG)
• Parkland Fuel (PKI)
• Pembina Pipeline (PPL)
• Suncor Energy (SU)
• TORC Oil & Gas (TOG)
• Anadarko Petroleum (APC)
• ConocoPhillips (COP)
• Devon Energy (DVN)
• Hess Corp (HES)
• Marathon Oil (MRO)
• Noble Energy (NBL)
• National-Oilwell Varco (NOV)
• ONEOK (OKE)
10-YR
HIGHS
• Parkland Fuel (PKI) • ONEOK (OKE)
GOLDEN
CROSSES
• None • None
BEARISH INDICATORS
TSX
S&P 500
TOP 5
LOSERS
• Cenovus Energy (CVE)
• Enerflex (EFX)
• Inter Pipeline (IPL)
• MEG Energy (MEG)
• PrairieSky Royalty (PSK)
• Baker Hughes (BHGE)
• Hess Corp (HES)
• Helmerich & Payne (HP)
• Range Resources (RRC)
• Williams Co (WMB)
12-MO
LOWS
• PrairieSky Royalty (PSK) • None
10-YR
LOWS
• None • None
DEATH
CROSSES
• None • None
ANALYST RATINGS

UPGRADES

  • BP (NYSE:BP): Upgraded from outperform to top pick at RBC.
  • Husky Energy (TSX:HSE): Upgraded from equal weight to outperform at Barclays.
  • Imperial Oil (TSX:IMO): Upgraded from equal weight to overweight at Barclays.
  • PBF Energy (NYSE:PBF): Upgraded from neutral to outperform at Macquarie.
  • Petrobras (NYSE:PBR): Upgraded from underweight to overweight at Barclays.
  • Precision Drilling (TSX:PD): Upgraded from equal weight to overweight at Morgan Stanley.
  • Rowan Companies (NYSE:RDC): Upgraded from hold to buy at Tudor Pickering.
  • Transocean (NYSE:RIG): Upgraded from neutral to positive at UBS and from hold to buy at Tudor Pickering.
  • Vermilion Energy (TSX:VET): Upgraded from neutral to outperform at Credit Suisse.

 

 

 

DOWNGRADES

  • C&J Energy Services (NYSE:CJ): Downgraded from buy to neutral at Citigroup and from overweight to equal weight at Morgan Stanley.
  • Energen (NYSE:EGN): Downgraded from overweight to equal weight at Morgan Stanley.
  • Equinor (NYSE:EQNR): Downgraded from outperform to market perform at Sanford C. Bernstein.
  • Golar LNG (NYSE:GLNG): Downgraded from buy to neutral at Bank of America.
  • Hess (NYSE:HES): Downgraded from equal weight to underweight at Barclays.
  • Oasis Petroleum (NYSE:OAS): Downgraded from positive to neutral at UBS.
  • Pioneer Energy Services (NYSE:PES): Downgraded from buy to hold at Jefferies Financial Group.
  • SM Energy (NYSE:SM): Downgraded from buy to neutral at B. Riley.
  • Superior Energy Services (NYSE:SPN): Downgraded from equal weight to underweight at Morgan Stanley.

 

 

 

NEXT WEEK'S EVENTS

Monday:

  • World Economic Outlook released by the IMF
  • Last trading day for Canadian Light, Edmonton Condensate and Western Canadian Select (August contracts)

Tuesday:

  • World Energy Investment 2018 released by the IEA

Wednesday:

Thursday:

Friday:

  • June Consumer Price Index (CPI) and May retail trade data released by StatsCan
  • Baker Hughes Rig Count released @ 1:00pm ET
  • Last trading day for West Texas Intermediate (August contract)
  • Q2/2018 earnings: Schlumberger
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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