Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending August 17, 2018:
  • NEB clears TMEP construction from Edmonton to Kamloops
  • PAA solicits bids for NGL pipeline expansion in Alberta
  • Line 3 Replacement breaks ground in Manitoba
  • Nova Scotia may win race for LNG mega-project sanction
  • Telsa gets snubbed in Ontario
  • Canada fights US tariffs with more tariffs
  • Keystone XL hits another speed bump in Montana
  • Cdn heavy discount narrows slightly ...
  • ... but remains under pressure due to BP refinery outage
  • Wholesale gasoline prices take a big tumble
  • WTI declines for sixth week in a row ...
  • ... as the US greenback breaks to the upside.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
BULLISH
  • A fresh wave of protests is once again threatening output from Libya's main export terminal. The country's output has recovered to over 1 million bbl/day, but some production will likely be shut-in as protestors prevent tankers from loading crude.
USD INDEX
NEUTRAL
  • The US Dollar Index topped 96 this week for the first time since last summer, but gave back all gains by Friday.
SUPPLY
BEARISH
  • According to secondary sources, OPEC says its members increased supply by 41,000 bbl/day in July, to 32.32 million bbl/day.
  • Expectations for non-OPEC supply for 2018 and 2019 was revised higher, now forecasted at 59.62 and 61.75 million bbl/day, respectively.
  • Saudi Arabia says it reduced output by 200,000 bbl/day in July, to 10.29 million bbl/day. OPEC estimates actual production was closer to 10.39 million bbl/day.
DEMAND
BEARISH
  • In its Monthly Oil Market Report, OPEC lowered 2018 oil demand growth to 1.64 million bbl/day, on weaker demand out of Latin America and the Middle East.
SENTIMENT
NEUTRAL
  • Net longs on managed money contracts continues to decline for both Brent and WTI, although net shorts remain subdued.
  • Brent and WTI dipped to their respective 200-day moving averages this week, but managed to maintain above the key support levels.
CURRENCIES & BONDS

This week's economic data from Statistics Canada:

  • Canada's annual Consumer Price Index (CPI) is now up 3%, the hottest since the summer of 2011. Prices rose in all eight sectors, led by energy (+14% y/y) and transportation (+8% y/y).
  • Excluding the increase in gasoline prices (+25% y/y), Canada's annual inflation rate is tracking closer to 2.2%.
  • A ramp up in refining activity helped boost manufacturing sales by 1.1% in June, rising to $58.1 billion on both higher volumes and higher prices. Sales of energy products jumped almost 16% while chemical products saw a 4.5% decline for the month.

Higher than expected inflation numbers renewed concerns of another interest rate hike by the Bank of Canada, possible before the end of the year, boosting the Canadian dollar 0.5%.

Dismal economic data out of China send global interest rates tumbling earlier in the week. Despite intervention by the Chinese Central Bank, the Renminbi dipped to a 19-month low, but recovered some its losses after the US agreed to resume trade talks.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
71.83
65.91
63.91
56.66
39.66
50.27
45.96
47.17
43.56
30.41
79.80
74.15
71.40
69.32
56.21

Oil prices declined again this week, with the spread between Brent and WTI once again widening to almost US$6 a barrel.

After hitting a 5-month low on Wednesday, Western Canadian Select (WCS) staged a nice recovery due to expiry of the September contract. The Canadian heavy discount is expected to remain elevated over the next two months as BP's Whiting Refinery, the largest consumer of Canadian heavy crude, goes down for maintenance.

Wholesale gasoline prices tumbled almost 8% for the week as refineries in the US Midwest and Gulf Coast reported running flat out last week.

Futures curves on both Brent and WTI flattened again this week, with contango narrowing on Brent and backwardation easing on WTI. 

Net longs on managed money contracts continues to decline for both Brent and WTI, although net shorts remain subdued.

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)

Key highlights from OPEC's Monthly Oil Market Report:

  • OPEC lowered expectations for 2018 oil demand growth, now forecasted to increase by 1.64 million bbl/day, on weaker demand out of Latin America and the Middle East.
  • Total oil demand is estimated at 98.83 million bbl/day this year, rising 1.43 million bbl/day in 2019. Supply is expected to reach 100.26 million bbl/day.
  • Non-OPEC supply was revised upwards to 59.62 million bbl/day in 2018, on better than expected production out of China. That number rises to 61.75 million bbl/day in 2019, as higher output from the US, Brazil, Canada and the UK offsets declines out of Mexico and Norway.
  • OPEC production increased by 41,000 bbl/day in July to 32.32 million bbl/day. In order to keep oil markets in perfect balance, OPEC says they will need its members to reduce output to about 32 million bbl/day.

OPEC also reported that OECD commercial oil stockpiles declined by 12.8 million barrels in June, falling to 2.82 billion. OECD inventories are now down 197 million barrels from the same time last year.

According to Baker Hughes, the number of US oil rigs in service this week was unchanged at 869, while Canada added one new rig, bringing the total to 141.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

Aug 15, 2018

CUSHING STOCKPILES RISE FOR THE FIRST TIME SINCE MAY DESPITE RECORD REFINERY RUNS

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

A rising US dollar and problems in Turkey have sparked concern over the health of emerging markets, whose debt is primarily denominated in US dollars.

Weak economic data out of China earlier in the week spooked global markets and also sent commodity prices lower. US markets largely recovered on Thursday, but European and Chinese markets ended the week with losses.

North American markets were decidedly more defensive this week, as the Staples, Heath Care and Utilities sectors led markets higher. Energy and Materials were the biggest losers on lower oil, gasoline, copper and gold prices.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

Energy stocks posted declines across all sub-sectors. Canadian midstream stocks were spared most the losses, with most components posting a small gain for the week. US refiners continue to correct from their recent highs due to narrowing crack spreads, falling over 6% this week.

CANADIAN ENERGY NEWS

This week's Canadian energy news:

  • Calgary-based Pieridae Energy (PEA.V) says it's close to finalizing agreements with lenders, buyers and the government of Nova Scotia, bringing it closer to a final investment decision on its 1.3 Bcf/day Goldboro LNG project. The $10 billion export terminal, located 150 km northeast of Halifax, would ship natural gas from Alberta and the US to power companies in Germany and potentially Switzerland. The small-cap company has managed to secure billions in loans from Germany and Italy, and says it is looking to buy or merge with an Alberta gas producer in order to secure supply for its first phase of development. If all goes according to plan, Goldboro could begin exports in 2023. 
  • Newfoundland and Labrador's offshore regulator (C-NLOPB) has released their final report into the 2017 ice incursion incident at Husky Energy's (HSE) SeaRose platform, when the company failed to disconnect the FSPO and move away from a nearby iceberg, which came within 0.25 nautical miles of the facilities. The regulator says the company's emergency response procedures were not properly followed, and employees were not clear on the threats posed by the iceberg. The C-NLOPB says it is satisfied all the findings from the report have been addressed by the company.
  • Federal Finance Minister Bill Morneau plans to impose "safeguards" against a recent flood of cheap foreign steel imports into Canada, as Asian producers seek to diversify their customer base away from the US. The plan could include quotas, import tariffs or a combination of both. Foreign steel accounts for about half of the steel used by building trades in Canada, and is especially critical to the energy sector. The construction industry warns this will just drive up costs and potentially put jobs at risk. The Americans have long complained that steel produced in Asia is imported into the US through Canada, flooding the US with cheap steel. In late June, the Trudeau Liberals announced $800 million in subsidies for Canadian steel companies adversely affected by US import tariffs. The government says they will consult with producers and the public over the next two weeks before making a final decision.
  • Luxury EV manufacturer Tesla (NASDAQ:TSLA) has launched a lawsuit against the Ontario government for ending incentives on electric vehicles, worth as much as $14,000 per EV. Buyers would still be eligible if the vehicle was purchased through a dealer before July 11 and delivered before September 10. Tesla does not use the traditional dealership model, and claims it was unfairly targeted in the government's decision to exclude it from the transition period.

This week's Canadian midstream news:

  • Delegates attending the Métis Nation of Alberta’s general assembly in Lac La Biche last week voted overwhelmingly in favour of supporting Kinder Morgan Canada's (KML) Trans Mountain pipeline. The group also says they will consider taking a stake in the project, adding that there have been ongoing discussions with both provincial and federal levels of government.
  • The National Energy Board (NEB) has cleared the Trans Mountain Expansion Project (TMEP) to commence construction between the Edmonton Terminal and Kamloops, in BC's interior. The NEB says the project has met all applicable pre-construction conditions for the approved segments, which now covers 72% of the entire route. Hearings for the final segment are scheduled to begin in Chilliwack in October.
  • Plains All American Pipeline (NYSE:PAA), and SemGroup Corp (NYSE:SEMG) say they have sufficient customer demand to launch open season for a new liquids pipeline from Wapiti and potentially the Pipestone area in West Central Alberta to PAA's terminal infrastructure in Edmonton and Fort Saskatchewan. The project includes both existing pipelines and new pipelines, with an initial capacity of 100,000 bbl/day of natural gas liquids, condensate and light crude oil, expandable to over 200,000 bbl/day. The companies say the pipeline network will offer a "competitive transportation alternative" for growing production out of the Montney and Duvernay basins. If all goes according to plan, the new infrastructure should come online by the end of 2020. 
  • Canada's newly minted Minister of Natural Resources, Amarjeet Sohi, attended a ground breaking ceremony in Manitoba for Enbridge's (ENB) Line 3 Replacement Project. Sohi says "Canada is a place where the environment and the economy go hand in hand," adding that the project strengthens "the energy network between Canada and the US." Replacement of the 50-year old Line 3 began in 2017 for sections in Alberta and Saskatchewan. Enbridge says the complete line should be in service by the end of next year, restoring the export pipeline to its original rated capacity of 760,000 bbl/day.

This week's notable Canadian investing news:

  • Ensign Energy Services (ESI) launched a $947 million bid for Trinidad Drilling (TDG), including $477 million of the company's outstanding debt. Ensign is offering $1.68 a share for each TDG share, representing an 11% premium to the previous day's close. Trinidad launched a strategic review earlier this year, putting itself up for sale without finding a suitable buyer. Ensign, which already owns 9.8% of TDG, says it approached the company's board with an offer, but couldn't reach a deal. Trinidad called the offer "unacceptable" but says it is willing to continue discussions.
  • Parkland Fuel (PKI) announced the purchase of Utah-based Rhinehart Oil Co, a fuel and lubricants distributor located primarily in the US Rocky Mountains region. Parkland says the deal will double its US operations and enable "further acquisitions across the region." Financial terms were not disclosed but the company says the acquisition will be funded with cash or its existing credit facility.
  • Birchcliff Energy (BIR) posted a second quarter net profit of $7.4 million this week, down almost 60% from the same time last year. Production averaged 76,296 boe/day in Q2, up 18% y/y while revenues rose almost 3% to $150.6 million.
US ENERGY NEWS

This week's notable US midstream news:

  • A Montana judge has thrown another wrench into TransCanada's (TRP) Keystone XL pipeline, ordering a new federal environmental review of the project, including the new route approved by Nebraska earlier this year. However, the judge stopped short of vacating the Presidential Permit, which was granted by the Trump Administration in the spring of 2017. TransCanada had hoped to begin construction next spring, but has yet to comment on this latest court decision. Although the decision is not a showstopper, it has the potential to further delay the pipeline's in-service date. Another court case is also pending in the state of Nebraska.
  • Federal regulators (FERC) have issued a certificate of public convenience and necessity for Williams Co's (WMB) Rivervale South to Market project, a northeastern expansion of the existing Transco natural gas network. Williams says it has 190 MMcf/day of capacity booked on the line, which will primarily deliver gas to New Jersey and New York State. If all regulatory approvals are received on time, construction should begin early next year.
  • Less than two weeks after ordering a full stop of construction on the 300-mile Mountain Valley Pipeline, FERC now says they will allow EQT Midstream (EQT) to restart construction for certain segments of the line in West Virginia. The regular admits stopping construction may result in "significant areas being subject to erosion and soil movement," which could adversely impact the environment. Regulatory setbacks have pushed the start-up date for the 2 Bcf/day pipeline from late this year to sometime in 2019.

Other US energy news:

  • The latest round of parcel sales in the US Gulf of Mexico attracted little interest for the second time this year. Companies submitted bids for 144 parcels, less than 1% of the 14,575 blocks up for sale. Last spring's auction attracted only 148 bids. Exxon Mobil (XOM) was awarded 25 blocks in this latest sale, BP (BP) won 19 bids, while Hess Corp (HES) and Equinor (EQNR) were each awarded 16 blocks. Waning interest in the region is being blamed on high royalty payments, long lead times to first-oil and competition from onshore shale.
  • Houston-based EPC firm TechnipFMC (FTI) is suing fellow Houston-based EPC firm McDermott International (MDR) and its new COO for the alleged theft of trade secrets. FTI claims its former Executive VP Samik Mukherjee downloaded thousands of confidential documents days before resigning his position at TechnipFMC to accept the COO role at McDermott. The lawsuit claims McDermott is already winning contracts based on some of the leaked information.

This week's US LNG news:

  • Cheniere Energy (LNG) signed a 25-year agreement with Taiwan's CPC Corporation to deliver 2 million t/yr of LNG beginning in 2021. The purchase price is indexed to the monthly Henry Hub price, plus a fee. Cheniere has also received federal approval to introduce feedgas into Train 1 of its LNG export facility in Corpus Christi, Texas, in preparation for the start of production before the end of this year. 
  • PetroChina (PTR) is considering cutting its imports of US LNG during the winter months in response to President Trump's proposed tariffs on Chinese imports. The Chinese are still mulling adding a 25% tariff on US LNG imports, which may force the Americans to find alternative buyers. US LNG exports are forecasted to surpass 4 Bcf/day this year, rising to 8 Bcf/day by the end of next year.

This week's US M&A activity:

  • Oil and gas producer Diamondback Energy (FANG) has agreed to buy Energen Corp (EGN) in an all-stock deal valued at US$9.2 billion, widening the company's exposure to the Permian Basin. Energen had been under pressure from an activist investor who had demanded an outright sale of the company in order to boost share prices. Earlier this month, Diamondback also struck a deal to buy Permian producer Ajax Resources for US$1.2 billion in cash and stock.
  • Devon Energy (DVN) has agreed to sell 9,600 acres in the Delaware Basin to Carrizo Oil and Gas (CRZO) for US$215 million. The non-core assets produce about 2,500 boe/day (net to Devon), weighted 60% liquids. Devon says total proceeds from its divestitures program has now reached US$4.4 billion, with more non-core assets expected to be sold later this year. Carrizo says it will fund the purchase through the issuance of 9.5 million shares.
  • According to Bloomberg, Midstates Petroleum (MPO) is reportedly in talks to buy Sandridge Energy's (SD) assets in Mississippi and Oklahoma. Sandridge has been under pressure by activist investor Carl Icahn to sell itself and recently rejected an all-stock offer from Midstates. Sandridge says it is working with 26 potential buyers who have expressed interest in some or all of its assets.

Other US investing news:

  • Warren Buffett's Birkshire Hathaway (BRK.A) cut its stake in Phillips 66 (PSX) by 24% to 34.7 million shares by the end of the second quarter. The move is likely in response to PSX's share buybacks, which push Birkshire's holdings above the critical 10% level.
  • Billionaire George Soros added Chevron Corp (CVX) to his Soros Fund holdings, raised his stake in Devon Energy (DVN), Kinder Morgan (KMI), and Andeavor (ANDV) while reducing holdings in Canadian Natural Resources (CNQ) and Williams Co (WMB).
  • Nordic American Offshore (NAO) stock plunged to an all-time low this week after the oilfield platform supplier said it was considering a reverse stock split to keep its share prices above the critical US$1 level, required to maintain its listing on the NYSE.
GLOBAL ENERGY NEWS

Around the world this week:

  • Exxon Mobil's (XOM) PNG LNG project in Papua New Guinea has struck a deal with BP's (BP) Singapore subsidiary to supply 450,000 t/y of LNG for the first three years, rising to 900,000 t/y in the final two years. This latest contract brings total committed volumes to 7.5 million t/yr. PNG LNG has a nameplate capacity of 6.9 million t/yr but consistently runs above that level. Exxon has a 33.2% stake in the project, along with Oil Search (29%), Santos (13.5%), Japan's Nippon Oil & Gas (4.7%) and the government of PNG.
  • The government of Indonesia is forcing domestic producers to sell their output to state-owned Pertamina in an effort to reduce crude oil imports. Indonesia produces around 775,000 bbl/day of crude, of which about 225,000 bbl/day is exported. Pertamina refineries normally import about 375,000 bbl/day of crude feedstock, but a recent decline in the country's currency has forced the government to curb imports and impose tariffs on various consumer goods. The government says the crude will be purchased at market prices. The country's largest producers include Exxon Mobil (XOM), Chevron (CVX), ConocoPhillips (COP) and Total (TOT).
  • Denmark's AP Moller-Maersk has decided to spin-off its offshore drilling operations, shifting its business focus to transportation and logistics. Maersk Drilling will be listed on Copenhagen's Nasdaq exchange sometime next year. The division was last estimated to be worth US$4.8 billion. Maersk's oil division was sold to Total (TOT) for US$7.5 billion last year.
  • Venezuela is considering putting an end to its gasoline subsidies, allowing prices to rise to international levels. The government says the move is intended to prevent illegal sales to Columbia and the Caribbean. Fuel prices in the country have remained unchanged despite an inflation rate of 1,000,000%. The cost to fill up a small SUV in Venezuela currently sits at 2.2 million bolivors, about as much as a cup of coffee.
  • After five years on the job, the head of Royal Dutch Shell’s (RDS.A) global refining division, Lori Ryerkerk, will step down at the end of the month, to be replaced with Robin Mooldijk, who currently serves as Vice President Manufacturing Americas.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
  • Ensign Energy Services (ESI +9.2%)
  • Paramount Resources (POU +3%)
  • Inter Pipeline (IPL +1.7%)
  • Freehold Royalties (FRU +1.4%)
  • Enbridge Income Fund (ENF +0.9%)
  • None
  • 12-MO
    HIGHS
  • Husky Energy (HSE +0.8%)
  • Parkland Fuel (PKI +0.8%)
  • Enbridge Income Fund (ENF +0.9%)
  • None
  • 10-YR
    HIGHS
  • Parkland Fuel (PKI +0.8%)
  • None
  • GOLDEN
    CROSSES
  • None
  • None
  • BEARISH INDICATORS
    TSX
    S&P 500
    BOTTOM
    5
  • Raging River (RRX -12.1%)
  • Baytex Energy (BTE -10.6%)
  • Trican Well (TCW -9.7%)
  • Kelt Exploration (KEL -8.3%)
  • Cenovus Energy (CVE -8.2%)
  • Transocean (RIG -14.3%)
  • Baker Hughes (BHGE -10.8%)
  • Cimarex Energy (XEC -8.6%)
  • Chesapeake (CHK -7.5%)
  • Anadarko Petroleum (APC -7.1%)
  • 12-MO
    LOWS
  • PrairieSky (PSK +0.2%)
  • CES Energy Solutions (CEU -6%)
  • Crescent Point (CPG -4.1%)
  • Freehold Royalties (FRU +1.4%)
  • Raging River (RRX -12.1%)
  • None
  • 10-YR
    LOWS
  • None
  • None
  • DEATH
    CROSSES
  • None
  • Newfield Exploration (NFX -5.5%)
  • ANALYST RATINGS

    UPGRADES

    • Denbury Resources (NYSE:DNR): Upgraded from Hold to Accumulate at Johnson Rice.
    • Devon Energy (NYSE:DVN): Upgraded from Accumulate to Buy at Johnson Rice.
    • Enbridge (ENB): Upgraded from Neutral to Buy at Bank of America.
    • Noble (NYSE:NE): Upgraded from Sell to Hold at Argus.
    • Occidental Petroleum (NYSE:OXY): Upgraded from Hold to Buy at National Alliance Scurities.
    • TechnipFMC (NYSE:FTI): Upgraded from Hold to Buy at Jefferies.

     

     

     

    DOWNGRADES

    • Alta Mesa Resources (NASDAQ:AMR): Downgraded from Outperform to Hold at Imperial Capital.
    • Anadarko Petroleum (NYSE:APC): Downgraded from Buy to Accumulate at Johnson Rice.
    • Cenovus Energy (CVE): Downgraded from Buy to Hold at Tudor Pickering and from Buy to Hold at Canaccord Genuity.
    • Chesapeake Energy (NYSE:CHK): Downgraded from Peer Perform to Underperform at Wolfe Research.
    • Energen (NYSE:EGN): Downgraded from Accumulate to Hold at Johnson Rice.
    • Diamondback Energy (NASDAQ:FANG): Downgraded from Outperform to Market Perform at BMO.
    • Granite Oil (TSX:GXO): Downgraded from Outperform to Sector Perform at RBC.
    • Matador Resources (NYSE:MTDR): Downgraded from Buy to Accumulate at Johnson Rice.
    • Southwestern Energy (NYSE:SWN): Downgraded from Buy to Accumulate at Johnson Rice.

     

     

     

     

    NEXT WEEK'S EVENTS

    Tuesday:

    • June wholesale trade data released by StatsCan @ 8:30am ET
    • Last trading day for WTI September contract

    Wednesday:

    • June retail trade data released by StatsCan @ 8:30am ET
    • EIA Weekly Petroleum Status Report released @ 10:30am ET
    • Release of minutes from latest US Federal Reserve meeting @ 2:00pm ET

    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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