Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending August 31, 2018:
  • Federal Court of Appeal squashes another export pipeline
  • Trudeau's climate action plan slowly unravels
  • CNRL buys Total's abandoned Josyln lease ...
    ... and hints at Horizon expansion to the south
  • WCS takes a 15% haircut for the month
  • Bay du Nord inches closer to reality in NL
  • Nova Scotia's Goldboro LNG secures natgas supply
  • US gasoline consumption hits record high
  • The former Statoil plans massive push into Brazil
  • Iranian exports take a big hit in August
  • OPEC production surges to new high for the year.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
BULLISH
  • Iran’s August loadings for crude oil and condensate are estimated at 2.06 million bbl/day, down from 3.09 million in April, and the lowest since April 2017.
USD INDEX
NEUTRAL
  • The US dollar ended the week roughly unchanged.
SUPPLY
BEARISH
  • According to Reuters, OPEC production increased by 220,000 bbl/day in August to 32.79 million bbl/day, mostly on gains out of Libya and Saudi Arabia.
  • Venezuela's PDVSA announced US$430 million in investments to increase oil production by 640,000 bbl/day at 14 of its oilfields.
DEMAND
NEUTRAL
  • No new news on the demand front this week
SENTIMENT
BULLISH
  • Net longs on both Brent and WTI managed money contracts jumped higher last week, signalliing bullish sentiment from traders.
  • WTI peaked above US$70 a barrel this week, before retreating slightly on Friday.
  • Brent continues to close in on its previous peak of US$80 barrel.
CURRENCIES & BONDS

This week's notable Canadian economic data:

  • Canada's GDP expanded 0.7% in Q2, bringing the annualized rate to 2.9%. Higher personal and government spending, as well as a big increase in exports, contributed to most of the gains. Exports of energy products increased 5.6% in the second quarter. Imports of refined products rose 45% due to the shutdown of four Canadian refineries this past spring.
  • Real GDP by industry was roughly unchanged in June, as gains in most sectors were offset by a 1% decline in oil and gas extraction. Unconventional extraction contracted 2.4% due to unplanned outages in the oil sands.
  • Industrial Product Prices declined 0.2% in July, led lower by precious metals and copper. In contrast, the Raw Materials Price Index rose 0.7%, mostly due to higher oil prices.
  • Canada's current account deficit narrowed to $15.9 billion in the second quarter, down from a $17.5 billion deficit in Q1. The goods and services deficit narrowed by $2.2 billion to $12.3 billion in Q2.
  • Average weekly earnings were unchanged in June, leaving the annualized increase at 2.8%.

After reaching a trade deal with Mexico, the US was unable to reach a deal with Canada. Major sticking points include auto parts and Canada's dairy sector. NAFTA talks resume on Wednesday. Concerns over US trade relations and weak GDP data sent Canadian bond yields tumbling, and the yield curve closer to zero. The Bank of Canada is expected to keep rates unchanged next week, but most analysts expect another increase in October.

Alberta is forecasting a budget deficit of $7.8 billion for this fiscal year, $1 billion less than its original forecast thanks to higher oil prices, higher royalties and increased revenues from personal income taxes. The province bumped up its 2019 GDP growth forecast from 2.5% to 2.7%. The NDP government does not have a plan to get back to balance until the 2023/24 fiscal year.

This week's notable US economic data:

  • Second quarter GDP growth south of the border was revised higher to 4.2%, the highest rate since Q3/2014 and slightly better than economists were expecting. The US economy is on track to hit President Trump's target of 3.0% growth this year. 
  • The Conference Board’s consumer confidence index rose to 133.4 in August, the highest since October 2000.

This week's US economic data raised expectations for a third rate hike by the US Federal Reserve in September. Longer duration US bond yields rose this week, but the US dollar ended the week unchanged.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
77.42
69.80
67.05
60.45
42.80
50.86
45.96
47.61
43.56
30.41
79.80
74.15
71.40
69.32
56.21

A Reuters survey of 45 economists and analysts expect Brent to average US$72.71 in 2018, slightly better than the US$72 average for the first 8 months of this year. The same group is forecasting an oil price of US$72.58 in 2019.

August was not a good month for oil prices, particularly Canadian crude. Average oil prices for the month are as follows (USD/bbl, change m/m):

  • Brent: $73.84 (-0.95)
  • WTI: $67.85 (-2.74)
  • Cdn Light: $59.78 (-4.83)
  • WCS: $39.32 (-7.28)

Brent and WTI posted a second consecutive week of gains, with the spread holding steady at about US$8/bbl. The Canadian heavy oil discount ended the week at US$27/bbl but averaged about US$28.50 for the month of August, representing a 42% discount to WTI.

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)

OPEC production rose to 32.79 million bbl/day in August, up 220,000 bbl/day from July, mostly on higher output from Libya and Saudi Arabia. Nigeria also gained 30,000 bbl/day, offsetting losses from Iran and Venezuela. August production is a new record high for OPEC so far this year.

Bank of America Merrill Lynch warned that global supply is likely to rise towards the end of the year. Supply outages from non-OPEC countries currently sit at a 15-month high of 730,000 bbl/day, but half of those barrels are in the process of being restored. Rising output from Canada, Brazil and the US will also boost global production, offsetting potential losses from Iran, Venezuela, Nigeria and Libya.

According to the US Energy Information Administration (EIA), gasoline consumption hit a record 9.9 million bbl/day last week, sending gasoline stockpiles lower. Gasoline prices gained over 1% for the week.

According to Baker Hughes, the US added 2 oil rigs this week, bringing the total count to 862. In contrast, Canada lost 2 rigs, falling to 151 on Friday.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

Aug 29, 2018

PRODUCT STOCKPILES BEGIN TO EASE AS GASOLINE CONSUMPTION HITS RECORD HIGH

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

US equity markets had a relatively good week, with the S&P 500, Nasdaq and Russell 2000 all breaking new record highs, thanks to a good showing from technology and discretionary stocks.

The TSX Composite declined 0.6%, dragged lower by energy and precious metals stocks.

Chinese markets managed to eke out small gains this week, while European markets all ended Friday lower on renewed trade concerns.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

Despite an increase in oil prices, the TSX energy sector posted a 1.7% decline for the week. Smaller cap producers got hit hard this week, along with most energy services names.

The US energy sector was roughly unchanged for the week. US midstream stocks were the worst performers due to higher interest rates.

CANADIAN ENERGY NEWS

This week's Canadian energy news:

  • In a stunning judgement, Canada's Federal Court of Appeal has overturned the government's approval of the Trans Mountain Expansion Pipeline (TMEP), due to the NEB's exclusion of marine transport risks and failure to consult with First Nations peoples. Although Kinder Morgan completed an exhaustive review of marine transport risks with Transport Canada, the issue falls outside of the NEB's direct scope since Kinder Morgan Canada (KML) does not have jurisdiction over marine shipping. A partial redo of the review process will likely delay the project by about 18 months. Alberta and Saskatchewan would like to see the case appealed to the Supreme Court. 
  • Canadian Natural Resources (CNRL) has agreed to purchase the Joslyn oil sands project from French energy major Total (NYSE:TOT) for $225 million, to be paid in cash over the next 5 years. The Joslyn lease is located directly south of Horizon. The company did not disclose development timelines for Joslyn but says the purchase "will allow for more effective lease-line development opportunities" between the two mines. Total shelved its $11 billion Joslyn project in 2014, after oil prices began free-falling. CNRL expects the deal to close at the end of September.
  • East River Oil and Gas has purchased bankrupt oil sands producer Connacher Oil and Gas for $113.5 million. East River is an affiliate of Shanghai-based Changchun Sinoenergy Corp. The deal is subject to approval by Canadian and Chinese authorities, as well as Connacher's first lien bond holders, who are owed more than $200 million. In their latest quarterly release, Connacher says it produced 12,060 bbl/day at its Great Divide in-situ operations near Fort McMurray.
  • Pieridae Energy (PEA.V) announced a merger with Ikkuma Resources (IKM.V), as it works towards a final investment decision on its $10 billion Goldboro LNG Project in Nova Scotia. The deal secures sufficient natural gas volumes to produce 10 million tonnes/year of LNG, destined mostly for export to European customers.
  • Equinor (NYSE:EQNR) says it has completed a 19-month exploration drilling program off the coast of St John's, in the Bay du Nord area. The company says it found two new discoveries in the region, confirming oil volumes to be on the low end of 300 to 600 million barrels. The government of Newfoundland and Labrador expects the project to be sanctioned in 2020 with first oil expected in 2025.

This week's Canadian political news:

  • Upon news of the cancellation of TMEP, Alberta Premier Rachel Notley announced her province's withdrawal from the federal climate plan, calling the plan not "worth the paper it's written on." The carbon tax will remain at $30/t, as will the phase-out of coal and other green initiatives, but carbon pricing will not increase to $50 by 2022 as mandated by the federal government. Notley would like see the Trudeau Liberals to act "boldly", file an appeal to the Supreme Court, and recall an emergency session of Parliament to get TMEP construction restarted.
  • New Brunswick's Progressive Conservatives have joined counterparts in Ontario, Saskatchewan and Alberta in their fight to scrap the federal carbon tax. If elected, leader Blain Higgs promises to reduce emissions in the province, without levying another tax on residents. Premier Gallant's ruling Liberal Party has yet to introduce a carbon tax in the province. New Brunswick's provincial election is scheduled for September 24, 2018.
  • Ontario's recent withdrawal from its carbon cap-and-trade program will translate into lower natural gas prices for residents and businesses. Doug Ford's Tories have launched a court case against Ottawa over its mandated minimum price on carbon. Each province has been asked to submit their plans for combatting climate change. Federal Environment Minister Catherine McKenna has vowed to withhold funding from any province whose plan doesn't include a price on carbon.
  • An Ontario court has ruled in favour of Tesla (NYSE:TSLA) in its case against the newly elected provincial government. The province has phased out subsidies for electric vehicles, but allowed a grace period for EVs recently purchased from dealers. Tesla complained it was unfairly singled out since the company sells directly to customers, bypassing the traditional dealership model. The Ontario government maintains the grace period was intended to protect the dealerships from lost sales, not the auto manufacturers. Tesla says it had 600 orders on the books when the government ended its EV incentive program in July, of which 175 have since been cancelled.

This week's Canadian investing news:

  • Kinder Morgan Canada's (KML) shareholders voted overwhelmingly in favour (99%) of selling its Trans Mountain assets to the federal government for $4.5 billion. The assets include the Trans Mountain pipeline, the Westridge Marine Terminal and storage facilities along the route. The transaction officially closed on Friday.
  • Ensign Energy Services (ESI) says it will commence the purchase of all outstanding common shares of Trinidad Drilling (TDG) at a price of $1.68 per share, unchanged from its previous offer. Trinidad has advised its shareholders "not to take any action" until its board has time to evaluate Ensign's offer, promising to make a formal recommendation within the next 15 days. Ensign already owns about 10% of TDG's outstanding shares. 
  • Parkland Fuel (PKI.TO) announced an agreement to acquire Missouri Valley Petroleum, a distributor of petroleum products throughout North Dakota. Financial terms of the deal were not disclosed.
  • Barnwell Industries (AMEX:BRN) closed on the purchase of several oil and gas properties in Alberta's Twining region. The US$10.5 million acquisition is now the company's "largest oil property."
  • The Ontario Energy Board (OEB) has approved the amalgamation of Enbridge's (ENB) Union Gas Limited and Enbridge Gas Distribution. The company says it is reviewing the OEB's decision before it makes a final determination on the amalgamation of its utilities.
US ENERGY NEWS

This week's US energy news:

  • In their latest sale, the Department of Energy has sold 11 million barrels of crude from its Strategic Petroleum Reserves at prices ranging from US$67.66 to $69.05 per barrel. Buyers include Exxon Mobil (XOM), Marathon Petroleum (MPC), Phillips 66 (PSX), Royal Dutch Shell (RDS.A) and Valero Energy (VLO).
  • BP (BP) is looking at selling its older oil and gas fields in Colorado, New Mexico, Oklahoma, Texas and Wyoming, as it shifts focus on "higher return" shale assets recently purchased from Australian mining giant BHP for US$10.5 billion. BP is looking to divest up to US$6 billion of upstream assets globally to fund a share buyback program.
  • Houston-based Genesis Energy (GEL) has agreed to sell its midstream assets in Wyoming's Powder River Basin to Silver Creek Midstream for about US$300 million in cash. Net proceeds from the sale will be used for debt reduction.
GLOBAL ENERGY NEWS

Around the world this week:

  • ExxonMobil (XOM) announced its ninth oil discovery offshore Guyana, bringing the total estimated resources in the region to more than 4 billion barrels.
  • Equinor (EQNR) raised its reserves estimates for the Johan Sverdrup oilfield in the North Sea by as much as 5%, now estimated to hold between 2.2 to 3.2 billion barrels of oil equivalent. Projected development costs have also been cut to about US$15 billion, down about 4.5% from its previous forecast. 
  • Equinor also says it expects Brazil to become a "a core area" for the company, on plans to invest more than US$15 billion in offshore exploration and production through 2030.
  • Total (TOT) announced the sale of its 26% equity stake in the Hazira LNG re-gasification terminal in India to Royal Dutch Shell (RDS.A). The company has also agreed to supply Shell with 500,000 tons of LNG annually over a five year term, destined for markets in India and neighbouring countries. Financial terms of the deals were not disclosed.
  • Unionized workers at Total's North Sea oil platforms have agreed to arbitration, narrowly averting a shutdown of three production facilities in the region. The union has called off planned strike action "as a gesture of goodwill."
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
  • Gran Tierra (GTE +4.4%)
  • Parkland Fuel (PKI +4%)
  • Encana (ECA +2.2%)
  • Peyto Exploration (PEY +0.7%)
  • Husky Energy (HSE +0.3%)
  • National-Oilwell Varco (NOV +5.1%)
  • Marathon Oil (MRO +4.4%)
  • Hess Corp (HES +3.4%)
  • Transocean (RIG +2.8%)
  • HollyFrontier (HFC +1.3%)
  • 12-MO
    HIGHS
  • Precision Drilling (PD -1.7%)
  • ConocoPhillips (COP +1.1%)
  • Marathon Petroleum (MPC -1.8%)
  • Andeavor (ANDV -1.6%)
  • 10-YR
    HIGHS
  • None
  • Andeavor (ANDV -1.6%)
  • GOLDEN
    CROSSES
  • None
  • None
  • BEARISH INDICATORS
    TSX
    S&P 500
    BOTTOM
    5
  • Baytex Energy (BTE -9.5%)
  • Crew Energy (CR -8%)
  • Whitecap Resources (WCP -7.1%)
  • Birchcliff Energy (BIR -6.5%)
  • Trican Well (TCW -6.5%)
  • Schlumberger (SLB -3.2%)
  • Chesapeake (CHK -3.1%)
  • ONEOK (OKE -2.3%)
  • Halliburton (HAL -2.3%)
  • Valero Energy (VLO -2.2%)
  • 12-MO
    LOWS
  • None
  • None
  • 10-YR
    LOWS
  • None
  • None
  • DEATH
    CROSSES
  • None
  • TechnipFMC (FTI +1.2%)
  • Newfield Exploration (NFX -2.1%)
  • ANALYST RATINGS

    UPGRADES

    • Antero Midstream Partners (NYSE:AM): Upgraded from Hold to Buy at Stifel Nicolaus.
    • BP (NYSE:BP): Upgraded from Underperform to Hold at Santander.
    • Cactus (NYSE:WHD): Upgraded from Accumulate to Buy at Johnson Rice.
    • Eclipse Resources (NYSE:ECR): Upgraded from Equal Weight to Overweight at Capital One Financial.
    • Journey Energy (TSX:JOY): Upgraded from Neutral to Buy at Eight Capital and from Hold to Speculative Buy at Canaccord Genuity.
    • Royal Dutch Shell (NYSE:RDS.A): Upgraded from Underperform to Hold at Santander.

     

     

     

     

     

    DOWNGRADES

    • Franks International (NYSE:FI): Downgraded from Buy to Hold at Tudor Pickering.
    • RPC (NYSE:RES): Downgraded from Buy to Hold at SunTrust Banks.

     

     

     

     

     

    NEXT WEEK'S EVENTS

    Monday:

    • Cdn/US markets closed for Labour Day

    Tuesday

    Wednesday:

    • NAFTA talks resume in Washington, DC
    • July international merchandise trade data and Q2 labour productivity released by StatsCan @ 8:30am ET
    • Interest Rate Decision from the Bank of Canada @ 10:00am ET
    • API Weekly Statistical Bulletin released @ 4:30pm ET (holiday schedule)

    Thursday:

    Friday:

    • August Labour Force Survey released by StatsCan @ 8:30am ET
    • 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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