Energy Market Review

Energy Market Review

This week's Energy Market Summary for the week ending July 6, 2018:
  • Syncrude's return to normal likely delayed to the fall
  • Kinder Morgan to restart TMEP construction in August
  • BC/Alberta gas prices inch closer to record highs
  • AER reports record volumes of bitumen production
  • NEB reports record crude exports to US by rail
  • EIA reports record imports of Canadian crude
  • Ontario officially scraps carbon cap-and-trade
  • Bernstein warns of "super-spike" in oil prices
  • Iran threatens to choke off 20% of world oil supply ...
    ... and asks President Trump to ease up on Twitter
  • Russia and Saudi Arabia ramp-up output in June.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
BULLISH
USD INDEX
BULLISH
  • After rising early in the week, the US dollar declined again by Friday, falling 0.6% for the week.
SUPPLY
BEARISH
  • President Trump announced over twitter that Saudi Arabia's King Salman has agreed to boost output by as much as 2 million bbl/day "if and when necessary" to make up for losses out of Venezuela and Iran.
  • Libya’s National Oil Corp declared force majeure on loadings from several ports this week, disrupting 850,000 bbl/day of exports.
  • According to Reuters, Saudi production rose by 500,000 bbl/day in June, bringing output close to 10.5 million bbl/day. Most analysts doubt the kingdom's capacity to pump more than 11 million bbl/day for a sustained period of time.
  • OPEC produced 32.32 million bbl/day in June, up 320,000 bbl/day from May, and now the highest since January 2018.
  • Russia's oil output climbed above 11 million bbl/day in June for the first time since April 2017. June figures are up about 100,000 bbl/day from the previous month.
DEMAND
NEUTRAL
  • No change on the demand front this week.
SENTIMENT
NEUTRAL
  • Backwardation continues to steepen on the WTI futures curve, indicating short-term constraints in oil markets.
  • WTI and Brent pulled back from multi-year highs, as both benchmarks failed to top key resistance levels of US$75 and US$80, respectively.
CURRENCIES & BONDS

This week's notable Canadian economic data:

  • Canada's unemployment rate rose from 5.8% to 6.0% in June, despite the addition of 32,000 jobs. Most of the gains were part-time, focused in Ontario, Saskatchewan and Manitoba. Over 75,000 Canadians joined the labour market last month, raising the participation rate to 65.5%.
  • Canada's international trade deficit widened to $2.8 billion in May, up from a $1.9 billion deficit in April. Imports rose 1.7% while exports declined 0.1%. Imports of refined petroleum products, mostly gasoline, rose 13.9% for the month to $1.6 billion.
  • Canada's IHS Markit Manufacturing PMI (Purchasing Managers' Index) rose to 57.1 in June, a new record high. Looming aluminum and steel tariffs likely drove companies to move up their orders and build up inventories ahead of the July 1st deadline.

This week's notable US economic data:

  • The US added 213,000 jobs last month, better than analysts were expecting, while May's numbers were also revised higher by 37,000. The national unemployment rate rose from 3.8% to 4.0%, as more American's entered the workforce.
  • The ISM manufacturing index rose 1.5 points in June to 60.2, indicating very strong economic activity south of the border. The ISM non-manufacturing index gained 0.5 point to 59.1, the highest since February. 
  • The US trade deficit narrowed to US$43.1 billion in May, down from US$46.1 billion the previous month. The May numbers are the smallest since October 2016. Exports grew 1.9%, while imports gained of 0.4%.

Longer duration US bond yields retreated again this week, bringing the yield curve (10 - 2 yrs) to 0.29, the lowest since August 2007.

In currency markets, the US dollar once again rose early in the week, giving back all gains by Friday. The Chinese government intervened to support its currency, which has declined over 6% in the past two months on trade jitters.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
77.11
73.80
70.02
68.11
53.30
46.71
44.23
43.45
41.48
30.41
79.80
74.15
71.40
68.76
56.21

This week's notable oil price forecasts:

  • Scotiabank raised its forecast for West Texas Intermediate (WTI) to an average of US$68 this year, rising to US$71 in 2019. Brent is expected to average about US$6 higher over the next two years. The revision reflects expectations for strong demand and tight supplies. The bank also widened its forecast for the Western Canadian Select (WCS) discount to US$23/bbl in both 2018/2019 and warns that US protectionism could potentially be a threat to commodity prices. 
  • Desjardins Securities sees a "perfect storm gathering" for oil prices on supply shortfalls and increasing geopolitical uncertainty. The bank sees WTI prices exceeding US$80 per barrel this year, which should be "extremely supportive" for Canadian producers, especially if the loonie remains weak. The brokerage firm increased their WTI forecast to US$62.50/bbl in the second half of 2018, up from US$60, while their 2019 forecast was bumped up from US$57.50 to US$60/bbl.
  • Morgan Stanley raised its forecast for Brent by US$7.50 to US$85 a barrel for the second half of 2018. The bank says oil markets are likely to be undersupplied since production increases from Saudi Arabia, Russia, the UAE and Kuwait will not be enough to offset losses from Iranian sanctions and lower output out of Libya and Angola.
  • Raymond James expects WTI to pull back to about US$68 a barrel due to potential disruptions from Iran and the Middle East. For 2019, the brokerage firm is forecasting an average of about US$65, with prices starting the year at US$67 and falling to US$63 by year-end. Raymond James expects WCS to trade at about US$40/bbl.
  • Analysts at Bernstein Research warn oil prices could spike to US$150 a barrel since most oil majors have failed to invest enough capital into new production. According to the brokerage firm, 15 companies account for 80% of the world's oil reserves, with only two majors, ExxonMobil (XOM) and BP (BP), reporting increases in capital spending.
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

Jul 5, 2018

US crude inventories rise as imports of Cdn crude hit a record high

 

After being stagnant for the past few weeks, the US added 5 new oil rigs this week, bringing the total to 863. Canada added another 9 oil rigs, bringing the total to 126.

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

North American markets posted good gains this week, despite low trading volumes. Gains in the US were led by small caps and technology, reversing declines from the previous week. Easing of trade tensions with the EU helped European markets close higher this week. 

Once again, Chinese markets continue to sink on escalating trade tensions with the US, with the Hang Seng Index leading the declines, falling over 4% for the week.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

Desjardins Securities says investors are "at one of the most attractive entry points" in years, as many producers are still trading near five-year lows, which should also lead to more consolidation among E&Ps. Low-risk top picks include Canadian Natural Resources (CNQ), Suncor Energy (SU) and Encana (ECA). Recommended mid-caps include light oil producers such as TORC Oil & Gas (TOG), Tamarack Valley Energy (TVE) and Whitecap Resources (WCP).

CANADIAN ENERGY NEWS

This week's Canadian energy news:

  • Recovery efforts continue at Syncrude's 350,000 bbl/day Mildred Lake upgrader after a power outage took the facility offline a few weeks ago. According to unconfirmed media reports, the outage caused several vessels to suddenly shutdown with product still inside, requiring each unit to be emptied, cleaned and inspected before being returned to service. The company says the upgrader will remain offline through July but has yet to provide a timeline for return to normal operation. Analysts at Haywood Securities estimate the plant won't be back to full rates until late September or early October. Imperial Oil (IMO) says it is assisting with the investigation, while majority owner Suncor Energy (SU) says it is still reviewing the problem. 
  • Kinder Morgan Canada (KML) has filed a six month construction schedule for its Trans Mountain Expansion Project (TMEP). The company says it plans to resume work in Alberta in August, progressing to the North Thompson region of BC in late September. Work already underway in BC's Lower Mainland, including the Westridge Marine Terminal, will also continue as planned. The timeline assumes all permits and approvals are received on time. For now, TMEP's in-service date of late-2020 remains unchanged. The federal government is expected to take over construction responsibilities for the pipeline in 2019.
  • For the month of July, the existing Trans Mountain pipeline is apportioned by 46%, surpassing the highs of last April. Apportionments indicate that shipper nominations are greater than pipeline capacity.

In Canadian political news this week:

  • Newly minted Ontario Premier Doug Ford officially announced an "orderly wind-down" of the province's cap-and-trade program, drawing criticism from the federal government, who has mandated a minimum carbon tax for all provinces and territories. Ford claims cancelling the plan will reduce household costs and cut gas prices by 10¢/L. It is unclear if the province will buy back the $3 billion in carbon emission credits already sold to companies operating in the province. Ford has vowed to sue the federal Liberals if they try to impose a carbon tax on Ontario.
  • BC's NDP-Green coalition government approved another 1.5% increase to Metro Vancouver's gasoline taxes, this time to cover a $30 million shortfall in the municipal transit budget. At almost $1.60/L, the Lower Mainland has the highest gas prices in North America, thanks in part to a public transit tax of 17.7¢/L and a recent increase in the province's carbon tax, which rose to $35/t after the last provincial election. Premier Horgan maintains greedy oil companies are to blame for high gas prices, vowing to raise the issue with the federal government.
  • Gasoline prices in Calgary and Edmonton also spiked to over $1.36/L this week, closing in on the all-time high of $1.39 in June 2013. Price tracker GasBuddy blames the increase on higher oil prices and a weak Canadian dollar.

This week's Canadian investing news:

  • Enbridge (ENB) announced the sale of its Canadian natural gas gathering and processing business in the Montney, Peace River Arch, Horn River and Liard basins in BC and Alberta to Brookfield Infrastructure (BIP.UN) for $4.31 billion. The assets include 19 gas and liquids processing facilities with a total capacity of 3.3 Bcf/day, as well as 3,550 km of natural gas gathering pipelines.
  • Camp-provider Civeo (CVEO) was awarded a $100 million contract to house more than 2,000 construction workers on TransCanada's (TRP) Coastal GasLink Pipeline Project. The 670 km pipeline will bring natural gas from northeastern BC to the proposed LNG Canada export terminal near Kitimat, BC. Civeo's contracts and the Coastal GasLink project are both subject to a positive final investment decision on LNG Canada by operator Royal Dutch Shell (RDS.A) and its partners, which is anticipated sometime this year.
  • Kelt Exploration (KEL) announced a 10-year take-or-pay agreement with Altagas (ALA) for processing 75 MMcf/day at its Townsend Deep Cut Gas Plant. Three of Kelt's operations underwent maintenance turnarounds during the second quarter, reducing Q2 guidance closer to 26,000 boe/day.
  • Paramount Resources (POU) closed on a previously announced sale of its Resthaven/Jayar oil and gas assets to Strath Resources for $340 million in cash and stock. The company has revised its 2018 production guidance to about 90,000 boe/day, weighted 37% liquids. Paramount's capital budget remains unchanged at $600 million.
US ENERGY NEWS

This week's US energy news:

  • The National Transportation and Safety Board (NTSB) concluded that TransCanada's (TRP) Keystone pipeline leak in South Dakota last fall was likely caused by a fatigue crack that propagated from damage inflicted to the exterior of the pipe during its installation in 2008. The rupture occurred in Marshall Country, spilling about 5,000 barrels of crude oil.
  • Husky Energy (TSX:HSE) has yet to provide a timeline for restarting its refinery in Superior, Wisconsin, after a fire and explosion damaged the facility in late April. The company says it will not be able to fully assess damage until the US Chemical Safety Board completes its investigation. Husky bought the 50,000 bbl/day refinery from Calumet Specialty Products Partners for US$435 million last fall.
  • TransCanada's (TSX:TRP) Columbia Gas Transmission subsidiary says its Leach Xpress natural gas pipeline in West Virginia will resume normal service in mid-July. A segment of the line was damaged in early June, forcing producers in the Marcellus and Utica shale to find alternative pipelines.
  • Laredo Petroleum (LPI) reported a fire at its tank battery facility in Laredo, Texas. No injuries were reported and no wells sustained any damage. The company expects to restore about 90% of production by the beginning of next week, returning to full production by the end of the month.
  • Taiwan's state-owned CPC Corp signed a 25-year agreement with Cheniere Energy (LNG) to supply 2 million t/y of LNG from its export terminal in Corpus Christi, Texas. Taiwan is the fifth largest LNG importer in the world, after Japan, China, South Korea and India. 

This week's US investing news:

  • ConocoPhillips (COP) has agreed to purchase BP’s (BP) minority-stake in the Greater Kuparuk Area in Alaska and the Kuparuk Transportation Company in exchange for a 16.5% interest in the BP-operated Clair Field in the UK North Sea. Financial terms of the asset swap were not disclosed.
  • Andeavor (ANDV) has been cleared of any anti-trust concerns by the US Department of Justice and the Canadian competition bureau for its planned takeover of Marathon Petroleum (MPC). The deal is expected to close in the second half of this year subject to approval by MPC shareholders.
  • Seadrill (SDRL) says it has emerged from bankruptcy protection this week after having successfully restructured its debt. SDRL shares have also resumed trading on the NYSE.
GLOBAL ENERGY NEWS

Around the world this week:

  • Following in the footsteps of BP (BP), Royal Dutch Shell (RDS.A) and ConocoPhillips (COP), Chevron Corp's (CVX) European subsidiary has begun a process to sell its assets in the UK North Sea. The company says it wants to focus on growing its shale production out of the Permian basin and the massive Tengiz field in Kazakhstan. Chevron's production out of the North Sea averaged 50,000 bbl/day last year.
  • A London judge has ordered Tullow Oil (LSE:TLW) to pay rig owner Seadrill (SDRL) US$254 million over a terminated contract in Ghana. Tullow cancelled the contract in December 2016 after the country declared force majeure over a maritime dispute with the Ivory Coast.
  • State-owned Petrobras (PBR) has suspended major asset sales after Brazil's Supreme Court ruled that Congress must approve any privatizations. The company had hoped to sell several refineries, its gas pipeline company and a fertilizer factory. Petrobras is working towards the divestiture of US$21 billion in assets over two years, having sold US$4.5 billion so far with another US$3 billion on the books this year.
  • BP (BP) and its partners announced the start-up of its US$28 billion Shah Deniz 2 development offshore Azerbaijan in the Caspian Sea. Shah Deniz 2 is designed to produce 1.5 Bcf/day of natural gas, bringing total production to 2.5 Bcf/day and up to 120,000 bbl/day of condensate. The company also announced its first commercial gas delivery to Turkey via the Southern Gas Corridor pipelines, which will deliver natural gas from the Caspian Sea to European markets.
  • Equinor (EQNR) and its partners have submitted its plan to the country's energy regulators to further develop the Troll field on the Norwegian continental shelf. If approved, production at Troll will be extended beyond 2050. The project has an estimated capital cost of about US$1 billion with breakeven costs pegged at less than US$10 per barrel. The government also approved the company's Snorre Expansion Project, extending its production life beyond 2040. Equinor also agreed to purchase Barra Energia's 10% interest in the BM-S-8 licence in Brazil’s Santos basin and acquired Danish energy trading firm Danske Commodities for €400 million.
  • Chevron (CVX) won yet another legal battle, this time in Argentina, against a New York based litigation representing 30,000 Ecuadorians who are trying to enforce a US$9.5 billion judgement over alleged environmental violations in the country. The team of lawyers, who have since been charged with corruption, bribery and racketeering, are seeking to seize Chevron's global assets since the company no longer has any operations in Ecuador. 
  • A US district court judge has ruled that ConocoPhillips (COP) can depose Venezuela's Citgo Petroleum in its attempt to enforce a US$2 billion arbitration award over the nationalization of its assets in 2007. COP has been trying to seize oil cargoes and other assets, which have since been transferred to Citgo to avoid seizure. As part of the arbitration award, Conoco was able to place liens on PDVSA's assets in the Caribbean, including inventories held at refineries and terminals, and cargo vessels.
  • ExxonMobil (XOM) has suspended construction on its Angore gas pipeline in Papua New Guinea after some of its construction sites were vandalized. The company says all affected staff are being demobilized or reassigned. The 11 km pipeline will connect the Angore gas field with the Hides gas plant. Production will not be impacted but Exxon did not provide a  timeframe for when work will resume.

This week's notable global EPC news:

  • Dutch firm SBM Offshore was awarded a Front End Engineering and Design (FEED) contract for a second FPSO for the Liza field in Guyana's Stabroek block. The field is operated by a subsidiary of ExxonMobil (XOM). Subject to project sanction, the engineering firm will construct, install and then lease and operate the FPSO for a period of up to 2 years, after which ownership and operation will be transferred to XOM.
  • TechnipFMC (FTI) was awarded a contract by Total's (TOT) Angolan subsidiary for the Zinia Phase 2 offshore field development. The contract covers EPC work for various subsea equipment, as well as support services.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
GAINERS
• Crew Energy (CR)
• Cenovus Energy (CVE)
• Mullen Group (MTL)
• TORC Oil & Gas (TOG)
• Whitecap Resources (WCP)
• Concho Resources (CXO)
• Helmerich & Payne (HP)
• National-Oilwell Varco (NOV)
• ONEOK (OKE)
• Range Resources (RRC)
12-MO
HIGHS
• MEG Energy (MEG)
• Parkland Fuel (PKI)
• Suncor Energy (SU)
• Devon Energy (DVN)
• ONEOK (OKE)
10-YR
HIGHS
• Parkland Fuel (PKI) • ONEOK (OKE)
GOLDEN
CROSSES
• None • None
BEARISH INDICATORS
TSX
S&P 500
TOP 5
LOSERS
• Birchcliff Energy (BIR)
• Encana (ECA)
• Paramount Resources (POU)
• Pason Systems (PSI)
• Seven Generations (VII)
• TechnipFMC (FTI)
• Murphy Oil (MUR)
• Pioneer Natural Res (PXD)
• Transocean (RIG)
• Valero Energy (VLO)
12-MO
LOWS
• CES Energy Solutions (CEU)
• PrairieSky Royalty (PSK)
• None
10-YR
LOWS
• None • None
DEATH
CROSSES
• None • None
ANALYST RATINGS

UPGRADES

  • Equinor (NYSE:EQNR): Upgraded from neutral to outperform at Macquarie.
  • Husky Energy (TSX:HSE): Upgraded from market perform to outperform at Raymond James.
  • Kosmos Energy (NYSE:KOS): Upgraded from sector perform to outperform at RBC.
  • Mullen Group (TSX:MTL): Upgraded from sector perform to outperform at National Bank.
  • Royal Dutch Shell (NYSE:RDS/A): Upgraded from hold to buy at DZ Bank.

 

 

DOWNGRADES

  • Chevron (NYSE:CVX): Downgraded from outperform to neutral at Macquarie.
  • C&J Energy Services (NYSE:CJ): Downgraded from buy to neutral at Guggenheim.
  • MEG Energy (TSX:MEG): Downgraded from outperform to market perform at Raymond James.
  • Pason Systems (TSX:PSI): Downgraded from outperform to sector perform at National Bank.
  • Patterson-UTI Energy (NASDAQ:PTEN): Downgraded from buy to neutral at Guggenheim.
  • TechnipFMC (NYSE:FTI): Downgraded from buy to neutral at Citigroup.

 

 

NEXT WEEK'S EVENTS

Tuesday:

Wednesday:

Thursday:

Friday:

  • 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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