Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending September 28, 2018:
  • Alberta takes a stand against federal regulatory overhaul
  • Bitumen production hits another record high in August
  • TMEP in-service date pushed back to 2022, at best
  • BC awaits positive FID on LNG Canada
  • Cenovus banks on rail to get crude to USGC
  • WCS discount hits US$40 in Hardisty ...
    ... but touches par with WTI in Houston
  • Midwest refineries head into maintenance season
  • US crude production hits record high
  • OPEC promises to keep a lid on output increases ...
    ... sending Brent to 4-year high.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
NEUTRAL
  • No new news on the geopolitical front this week.
USD INDEX
NEUTRAL
  • After waffling earlier in the week, the US dollar gained over 1% on Friday, reversing losses from the previous week.
SUPPLY
BULLISH
  • OPEC rejected calls to increase output over the weekend, calling oil markets "adequately supplied." The cartel says any lost barrels from pending sanctions on Iran will be made up by rising supply from non-OPEC countries, mainly the US.
  • According to Reuters, Saudi Arabia plans to boost production by as much as 300,000 bbl/day through October, due to high demand from Asia. Reuters is also reporting that Russia is mulling an increase of 200,000 bbl/day.
DEMAND
NEUTRAL
  • No new news on the demand front this week.
SENTIMENT
BULLISH
  • Brent traders show signs of irrational exuberance as prices touch a 4-year high and net longs on managed money contracts continue to rise.
  • WTI continues to underperform, failing to return to the highs of last summer. The spread between Brent and WTI now sits at about US$9.50 a barrel.
CURRENCIES & BONDS

This week's Canadian economic news:

  • After a flat June, Canada's GDP expanded 0.2%, slightly better than economists were expecting. Oil and gas extraction declined another 1.2% in July, blamed mostly on maintenance outages in the oil sands.

  • Canada's Industrial Product Price Index (IPPI) declined 0.5% in August, mainly due to lower prices for non-ferrous metals. The Raw Materials Price Index (RMPI) also declined 4.6%, mostly due to lower crude prices.

  • Canadian wholesale trade rose 1.5% to $63.9 billion in July, reversing declines from the previous month. This is the third increase in the past five months.

  • Canadian earned an average of $997 a week in July, down 0.4% from the previous month. On an annualized basis, earnings are up 3%.

NAFTA negotiations between the Trudeau Liberals and the Trump Administration fizzled this week, with negotiations ongoing over the weekend. JP Morgan warns that failure to reach a deal on NAFTA could sink the loonie as much as 10%. Despite the pessimism around trade talks, the Canadian dollar ended Friday unchanged from the previous week.

This week's notable US economic news:

  • US GDP expanded at an annualized rate of 4.2% in the second quarter, unchanged from previous estimates.

  • Consumer confidence surged to an 18-year high in September, registering its third straight monthly increase.

  • After falling 1.2% in July, new durable goods orders rose 4.5% in August.

  • Real consumption rose 0.2% in August, following four months of 0.3% gains.

The FOMC raised interest rates by 25 basis points to a range of between 2.0 and 2.25%, removing the word "accommodative" from its policy statement. Fed Chair Jerome Powell says he does not foresee a spike in inflation. Markets are expecting one more rate hike before the end of this year, and three more in 2019. Despite the increase, bond yields dipped slightly this week, flattening the yield curve.

Across the pond this week:

  • European Central Bank chief Mario Draghi says he expects a "vigorous pickup" in euro zone inflation, setting the stage for an eventual unwinding of the ECB's asset purchase program. 

  • Italy's coalition government loosened the purse strings this week, significantly increasing its deficit and sinking the Euro over 1%. 

  • The Swiss Franc was one of this week's biggest losers on currency markets, falling over 2% after the government announced plans to renegotiate its economic relationship with the EU.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
82.72
73.25
67.10
53.50
37.50
55.14
49.29
51.08
46.68
30.41
82.72
74.15
71.40
69.32
56.21

This week's OPEC/NOPEC news:

  • OPEC and friends decided against a production increase last weekend, despite falling output from Iran. 

  • Given OPEC's official reluctance to raise production, commodity traders Trafigura and Mercuria warned that Brent prices could potentially rise to US$90 a barrel by Christmas and top US$100 in the new year, as markets are expected to become undersupplied once US sanctions on Iranian oil exports officially take effect on November 4. 

  • Goldman Sachs is less optimistic, noting that Saudi Arabia and Russia still have plenty of room to turn on the taps if oil prices break to the upside. Goldman says it expects Brent to stabilize at US$70 to US$80 by the end of the year.

  • JPMorgan speculates as much as 1.5 million bbl/day of Iranian crude could be lost when sanctions fully take effect. Mercuria pegs that number closer to 2.0 million bbl/day.

  • Unofficially, Reuters says Saudi Arabia plans to boost production by as much as 300,000 bbl/day through October, on high demand from its Asian customers. Russia is reportedly mulling an increase of about 200,000 bbl/day.

Energy Secretary Rick Perry says the US has no plans to release barrels from its Strategic Petroleum Reserves (SPR) just yet, and will instead rely on global producers to keep markets adequately supplied. Perry says an SPR release would have a "fairly minor and short-term impact" on oil prices.

The discount on Western Canadian Select widened by another US$2 this week, ending Friday at US$35.75, the highest since December 2013. The discount on Canadian Light also widened almost US$2 to US$19.75 on Friday, also nearing a 5-year high. 

The spread between Brent and WCS in Hardisty is now a whopping US$45 a barrel. According to Argus, WCS prices in Houston are running at par with WTI this week. 

Wholesale gasoline prices shot up another 4% this week. Retail gasoline prices are now sitting at a four-year high south of the border.

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)

This week's latest production records:

  • According to latest estimates from the Energy Information Administration (EIA), total US crude production hit a record 11.1 million bbl/day last week, as output from the Lower 48 also hit a record 10.6 million bbl/day.

  • Official EIA figures from last July show record production out of the Permian (3.3 million bbl/day), Bakken (1.3 million bbl/day) and the Gulf of Mexico (1.85 million bbl/day).

  • According to the Alberta Energy Regular (AER), oil sands operators produced a record 1.99 million bbl/day of bitumen last August, up almost 100,000 bbl/day from July. Upgraded bitumen volumes totalled 1.135 million bbl/day. Total production out of the province averaged 3.73 million bbl/day, including conventional crude and condensate volumes.

Last week saw the start of a rather active maintenance turnaround season, with most PADDs reporting a drop in utilization rates. Refineries in the Midwest, the largest buyer of Canadian crude, are now running at 83% of capacity.

According to Baker Hughes, US oil rig counts declined by 3 on Friday, bringing the total to 863. Canada lost another 13 oil rigs this week due to early arrival of winter, bringing the total to 122.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

Sep 26, 2018

Crude stockpiles build as refineries begin maintenance turnarounds

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

Aside from the tech-heavy NASDAQ, most North American markets posted losses for the week, with the TSX Composite falling almost 1% and S&P 500 declining 0.5%.

The Nikkei continues to rise, breaking out to a 27-year high this week as the yen weakened further, falling below 88 for the first time since late last year.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

Despite weakness in the overall market, the TSX energy sector gained 2% this week, its second consecutive weekly increase. The S&P 500 energy basket rose for the third week in a row, gaining 1% for the week.

CANADIAN ENERGY NEWS

This week's notable Canadian political news:

  • Speaking at a Calgary conference this week, Alberta Premier Rachel Notley says her government plans to fight Ottawa's proposed overhaul of the federal regulatory review process. Bill C-69 once again changes the rules for project approvals, replacing the National Energy Board (NEB) with a new federal regulator. Although Notley says she supports the spirit of the changes, she remains concerned about timelines and double-dipping on climate change accounting. Bill C-69 passed in the House of Commons last June and is due for second reading before the Senate sometime in the fall.

  • The NEB announced the start of public hearings into its re-assessment of the Trans Mountain Expansion Project (TMEP), announcing the appointment of three board members to its hearing panel. The Liberals have given the NEB 22 weeks to update its assessment of the project, including impacts from additional tanker traffic. Assuming a final report is submitted by late February, construction could be restarted in the spring, pushing the in-service date to sometime in 2022, assuming a construction timeline of about 30 months. Opponents are already accusing the government of rushing this latest review and conflict of interest, since they own the project and have a vested interest in seeing it completed. 

  • The State of Washington has asked the Canadian federal government to improve its spill response plan for the Puget Sound pipeline, a takeoff from the Trans Mountain Pipeline that feeds refineries in the northern part of the state. Washington's Department of Ecology says the pipeline owner is required by law to have an approved response plan, which would include emergency response procedures, particularly in reference to heavy oil. The existing Trans Mountain pipeline has been in operation since 1953, sending mostly light oil to four refineries located in Ferndale and Anacortes, WA. Heavy oil shipments out of Vancouver are currently limited to about 1 per month.

This week's LNG Canada chatter:

  • According to the Globe and Mail, the Trudeau Liberals are poised to grant LNG Canada an exemption from tariffs on imported steel modules. The 45.8% tariff would have added at least $1 billion to the $40 billion project. LNG Canada is led by Royal Dutch Shell (NYSE:RDS.A), whose Canadian subsidiary says they remain committed to the project, despite ongoing judicial attempts to squash the terminal's natural gas supply pipeline, which would be built by TransCanada (TRP).

  • According to Bloomberg, a positive final investment decision (FID) is due to be announced in Kitimat at the end of next week. Two of Shell's partners, PetroChina (NYSE:PTR) and South Korea's Kogas, have approved their share of the capital expenditures. Two other stakeholders, Petronas and Mitsubishi Corp, have yet to formally announce a positive FID. Ownership of LNG Canada is split 40% Shell, 25% Petronas, 15% PetroChina, 15% Mitsubishi and 5% Kogas.

This week's other energy news:

  • Cenovus Energy (CVE) announced a three-year deal with CP Rail (CP) and CN Rail (CNR) to transport 100,000 bbl/day of crude from its SAGD operations in northern Alberta to the US Gulf Coast (USGC). CN plans to start shipping crude from Cenovus' Bruderheim terminal sometime in the fourth quarter, while CP will begin shipments from USD Partner's Hardisty terminal in the second quarter of 2019. Cenovus says shipping its product to the USGC will improve the selling price for its diluted bitumen. Crude-by-rail transport costs are expected at just under US$20 a barrel, although exact terms of the agreements were not disclosed. According to the NEB, Canada's crude-by-rail exports to the US hit a record 207,000 bbl/day last July.

  • Inter Pipeline (IPL) has sold its Heartland Petrochemical Complex's utility plant to privately-held Fengate Capital Management. The 102 MW cogeneration facility supplies the petrochemical plant with electricity, steam and other key utilities. Fengate will be responsible for capital funding, estimated at $600 million, and has entered into a long-term contract to sell power and utilities back to Inter Pipeline. The company says construction of its $3.5 billion Heartland Complex is ongoing with completion scheduled for the end of 2021.

  • Pembina Pipeline (PPL) increased its 2018 earnings (EBITDA) guidance range by 4% to approximately $2.8 billion and announced plans to expand its Wapiti pipeline and terminalling infrastructure near Grande Prairie, Alberta and northeastern BC. The new addition has an estimated price tag of $120 million.

  • AltaGas (ALA) has purchased a 50% stake in the Black Swan Aitken Creek Processing Facilities. The company says the purchase will strengthen its position in northeastern BC, including gas processing, liquids handling, fractionation, and propane export via its Ridley Island Propane Export Terminal. Total capital spend for the 50% ownership and new AltaGas infrastructure is approximately $230 million. Black Swan is a private-equity backed company headquartered in Calgary.

US ENERGY NEWS

This week's notable US energy news:

  • China’s CNOOC (CEO) is considering the divesture of some its assets in the US Gulf of Mexico, allegedly due to ongoing trade disputes between the two countries and "internal restructuring" of its E&P division. Subsidiary Nexen Petroleum is reportedly mulling an outright sale of the properties or an asset swap with another company. The company says it has no plans to fully exit its US operations.

  • Royal Dutch Shell (RDS.A) says it will spearhead contract negotiations with the United Steelworkers Union, representing 30,000 refinery and chemical plant workers. The union is looking for a three-year contract, with wage increases of about 6% annually. Shell will lead the talks on behalf of BP (BP), Chevron (CVX), Exxon Mobil (XOM) and several other operators. Negotiations are expected to begin in January. The current contract expires on February 1, 2019.

  • ExxonMobil (XOM) announced the start of a new unit at its Beaumont facility in Texas, increasing production of low-sulphur diesel by 45,000 bbl/day. New unit relies on proprietary technology to remove sulphur while minimizing octane loss. The company says it continues to progress engineering for more production increases, potentially adding more refining capacity by 2022.

This week's US midstream news:

  • Enable Midstream Partners (ENBL) announced plans to develop the Gulf Run Pipeline, which will be designed to transport 1.1 Bcf/day of natural gas about 165 miles from northern Louisiana to LNG export facilities in the Gulf Coast. The pipeline is subject to final approvals by FERC and a positive FID from its main LNG customer.

  • MPLX (MPLX) announced the purchase of an export terminal in the Gulf Coast from Pin Oak Holdings for US$450 million. The terminal is located between New Orleans and Baton Rouge and has a storage capacity of over 4 million barrels. The company says the facility is well connected to local refineries, pipelines and rail lines, with plenty of room for future expansion. MLPX was spun-off from Marathon Petroleum (MPC) in 2012.

  • American Midstream Partners (AMID) has received an unsolicited buyout offer from Boston-based ArcLight Energy Partners, to purchase all remaining shares it doesn't already own for US$6.10 a share. AMID says this latest offer is not guaranteed to materialize. The company had two major deals fall through this summer, one for an outright sale to Southcross Energy Partners (SXE) and one major asset sale to DKGP Energy Terminals.

This week's other other US investing news:

  • Moody's Investors Service upgraded ConocoPhillips' (COP) corporate debt rating from Baa1 to A3, with a stable outlook. Moody's says the company has done a good job of lowering its debt levels and keeping spending under control. COP is the largest independent E&P company in the world.

  • Andeavor (ANDV) shareholders have unanimously approved the company's merger with Marathon Petroleum (MPC), allowing the deal to close early next week. Andeavor stock will soon be delisted from the NYSE.

GLOBAL ENERGY NEWS

French energy major Total (TOT) announced a major discovery offshore UK West of Shetland, estimated to hold one trillion cubic feet of natural gas (Tcf). The company says the field can be "developed quickly" and integrated with existing infrastructure in the area. Total also announced the discovery of a "high quality reservoir" off the coast of Myanmar. The company estimates resources to be in the range of 2 to 3 Tcf, clearing the way for the development of a commercial project.

Royal Dutch Shell (RDS.A) and ExxonMobil (XOM) both came up winners in Brazil's pre-salt Santos Basin this week. Shell and partner Chevron (CVX) were awarded a 35-year production sharing agreement for the Saturno block, increasing its offshore footprint to 2.7 million acres. Exxon and partner Qatar Petroleum won exploration rights in Titã block, increasing its total acreage off the coast of Brazil to 2.3 million acres.

Chevron (CVX) says it may have found a buyer for its 40% stake on the Rosebank project, located in the UK North Sea. According to Reuters, that buyer is most likely Equinor (EQNR). Rosebank is one of the biggest oil and gas developments in the region, estimated to hold 300 million barrels of oil. The field is jointly-owned with Suncor Energy (SU), Ineos and Siccar Point, who are also looking to offload part of their stakes. The US$6 billion 100,000 bbl/day project is currently in FEED, with a final investment decision expected sometime next year.

TechnipFMC (FTI) and Oslo-based Aker Solutions have both signed collaboration agreements with Equinor (EQNR) in the development of its offshore projects. Scope includes safety, technology, project execution, engineering and cost control.

Qatar announced plans boost its LNG production capacity, in an effort to hold on to the top spot as the world's largest LNG supplier. Qatar Petroleum says it will add a fourth train at its North Field, increasing production by 43% to 110 million t/yr by about 2024. The company is in talks with ExxonMobil (XOM), Total (TOT) and Royal Dutch Shell (RDS.A) to help with its pending expansion plans.

According to Iran's foreign minister, India plans to continue doing business with the country, despite the threat of retaliation from the Trump Administration. India is the second largest buyer of Iranian crude (after China) and has yet to confirm if it will reduce imports to zero, as requested by the Americans. Sinopec (SNP), China's largest refiner, has reportedly already cut its Iranian imports in half, falling to about 120,000 bbl/day this month.

State-owned Saudi Aramco plans to add 550,000 bbl/day of new capacity, as it boosts production from its Khurais and Manifa oilfields in the fourth quarter of this year. Saudi Arabia is thought to be the only OPEC member with significant room to boost output.

ANALYSTS ACTION

EDITOR’S NOTE: Upgrades and downgrades for Canadian and US energy stocks will be updated daily and posted to the Daily Energy Market Summary

NEXT WEEK'S EVENTS

Monday:

  • Quebec provincial elections

Tuesday

  • API Weekly Statistical Bulletin released @ 4:30pm ET

Wednesday:

Thursday:

Friday:

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

  • The Future of Petrochemicals released by the IEA

  • Baker Hughes Rig Count released @ 1:00pm ET.

UPDATED: EVERY WEEKEND
NOTES:
  • CRB = THOMSON REUTERS/CORECOMMODITY CRB INDEX
  • US BNDS = BONDS = TLT = iSHARES 20+ YEAR TREASURY BOND ETF
  • CA BNDS = XBB = iSHARES CANADIAN UNIVERSE BOND INDEX ETF
  • SECTOR & SUBSECTOR PERFORMANCES WEIGHTED BY MARKET CAP
  • 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
  • Canadian oil prices sink as differentials keep widening

    Canadian oil prices sink as differentials keep widening

    Weekly Energy Market Review

    Weekly Energy Market Review

    0