U.S. Crude Stocks Decline on Favorable Import/Export ArbUS crude stocks fell in September, as prices between domestic and foreign grades incentivized crude exports while discouraging imports. Cushing stocks fell only about 1 million barrels, as a continuing narrow LLS-WTI differential limited flows from Cushing to the Gulf Coast.
The fundamental basis for the recently sustained run up in NBP prices to the high side is tied to U.K. gas consumption in power, weak French nuclear output, and Norwegian gas exports that remained well below last year until this week. Throw in an early colder than normal forecast for the upcoming week and what you are left with is limited downside risk for the moment, but considerably more later on this winter if weather normalizes. High storage levels on the Continent will not yet deter the prices from remaining strong. The stocks are there, but not the will to use them. It is well known that storage holders are exceedingly reluctant to use storage early in withdrawal season and prefer to hoard storage until the first quarter.
With colder weather approaching and so much uncertainty surrounding nuclear availability, French power prices keep climbing. A signpost of improving availability for the upcoming winter months would be the restarts in the upcoming week. Among those, Chinon 1, affected by the channel head anomaly, should be reconnected on October 10. Such restart might impact market psychology, bringing an end to the upward trend for French prices.
The rally in seaborne coal prices that has been going on essentially since the beginning of 2016 has been accelerating over the past two weeks, with additional bullish developments exacerbating an already tight prompt market. For near term pricing, API#2 prices moved up by the greatest extent this week, rising by over $4.00/mt, and pushing over $75/mt for the first time since 3Q14. The force majeure declaration in Colombia and a further reduction in the European nuclear outlook was likely behind this rise in pricing. FOB Newcastle prices rose sharply as well, increasing by $3.35/mt, despite China's buying activity being subdued due to Golden Week. The most important factor for short-term pricing is how much supply can come into the market to tamp down this pricing run. After several years of extreme amounts of excess tonnage in the market, the move to rationalize supply (or at least minimize new supply), and an uptick in demand from China and elsewhere have strained the market.
The pace of U.S. job growth in September was about as expected. A continuing rising trend in the labor force participation rate, however, was something of a surprise. This is an important development, since it has the potential to reshape the Fed’s view of the labor market. In developed markets, fiscal policy options to stimulate economic activity are in the spotlight. In fact, Canada and Japan recently adopted the policy of larger government spending. Political winds in other areas suggest that more countries may join this trend.
U.S. total propane stocks increased by 736 thousand barrels to 104 MMB. The annual stock surplus narrowed by 865 MB to 3.7 MMB. This surplus has been declining since the week ending September 18th. On the other hand, other NGLs have been registering small builds or draws as of late. The latest 2.6 MMB draw is the largest draw of the past five years for this particular week.
U.S. ethanol prices peaked the week ending September 30, but ended the week to the downside. Manufacturing margins improved supported by higher corn and oil prices. RIN values increased.
Total commercial stocks experienced a huge stock draw of over 11.2 million barrels for the latest week, one of the largest of the year. Stocks were pulled lower by both products, down over 8.2 million barrels, and crude, which was almost 3 million barrels lower. Stronger product demand at about 20.6 MMB/D, up 1.3 MMB/D from the prior week, contributed to the draw. Crude runs fell by around 300 MB/D for the week to 16.03 MMB/D, the lowest weekly level in months. It is anticipated that runs will fall further to about 15.6 MMB/D as turnarounds increase sharply for the next week. For the next week crude stocks are expected to build by almost 2.7 million barrels as key light product inventory declines by over 3 million barrels.
Slowly rising tanker rates over the past 6 months are offering an early warning mechanism for the bearish turn in the market's future. A steady increase in LNG tonnage on the water is underway – most of it is running ahead of the new trains to which it is dedicated. The tonnage represents the natural manifestation of two essential problems facing the LNG industry over the next five years; finding enough demand growth for new LNG supply and selling the LNG at a price that offers a reasonable netback. PIRA sees two distinct methods emerging to alleviate these problems, although by no means will they solve them completely. How well they will work will be a matter of waiting and seeing, but the process is already underway and offers some support to prices in the near term.
Global equities were modestly mixed on the week. In the U.S., the broad index fell back 0.6%, but banking and retail indices posted solid gains. Energy was neutral, while utilities was the weakest performer. Internationally, Latin America was the strongest performer, while Asia also had a good week, with China and emerging Asia posting gains.
The week ending September 30, production dropped to a three-month low as plants outside the Midwest went through scheduled maintenance. There was a large drop in inventories to the second lowest level of the year. Ethanol blended gasoline rose after falling in seven of the prior eight weeks.
On the week, total commercial stocks drew 6 MMBbls and have become increasingly tight, relative to seasonal trends. This has supported the recovery in Japanese refining margins over the last month. Runs dropped 186 MB/D as maintenance continues. Crude imports stayed sufficiently low to induce another crude stock draw. Finished product stocks also drew, with gasoline hitting its low for 2016. Aggregate demand improved by 161 MB/D and the current pattern looks improved. Margins were little changed on the week and remain acceptable.
The S&P 500 moved lower on the week, with volatility slightly higher, and high yield debt and emerging market debt moving a bit lower in price. The dollar was generally stronger, particularly against the Japanese yen and British pound. There was noted strengthening in the currencies of Russia, Mexico, and Indonesia, against the U.S. dollar. For commodities, a strong performance in energy and oil helped carry the overall index higher, but ex-energy moved definitively lower. Precious metals, including gold, silver, platinum, and palladium weighed on the ex-energy complex. Among industrial metals, aluminum moved higher.
Following the implementation of the modified Rangarajan committee formula, the price of Indian domestic gas has been reduced around 18% for the six month period from Oct 1, 2016 to Mar 31, 2017. For the Fertilizer sector, the lowering of the domestic gas prices is expected to reduce the pooled prices during H2 FY2017 which should lead to subsidy savings of ~Rs.7-8 billion ($100-120-million) for the Government for H2 FY2017 (assuming the currency to remain stable).
Saudi Arabia's formula prices for November were just released. While cuts were made to most crudes in the key markets, they were less than the market expected. Saudi had additional barrels to sell in November due to lower crude burn and the Yasref refinery being down for maintenance. The price cuts were not aggressive enough to push those extra avails into the market. In Asia, the cuts were consistent with a modestly wider contango in Dubai structure, and in Europe they were consistent with a wider discount on Urals-Brent.
EIA recently released their July oil balances. Domestic crude supply, which is domestic crude production plus the balancing item, again declined to a new cyclical low of 8.77 MMB/D. This is the lowest figure seen since March 2014. From the April 2015 peak, domestic crude supply has declined 1.19 MMB/D, or an annualized decline rate of -9.7%.
The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.
Last week we covered the OPEC announcement on production cuts, a strategy to reduce over-supply in the market and give a much needed boost to oil prices. Without higher oil prices, many new projects are thought to be uneconomic. Or are they? Douglas-Westwood has recently reviewed over 250 upstream capital projects sanctioned in the last four years to assess how industry costs are moving. The results are remarkable.
Oil & Gas Exploration & Production (E&P) companies have been under pressure in the downturn. Faced with much lower free cash flow from producing fields, the focus for many has been on managing costs so that dividends can be maintained through the downturn.
The sanctioning of many new projects has been deferred during this period as E&P firms instead focus on becoming leaner. However, three specific trends are driving a remarkable reduction in upstream capital costs, and bringing some uneconomic fields over the threshold of viability.
• The immediate impact of the downturn was a squeeze on the supply chain by the E&P companies. Demands of 10-15% price reductions to service and equipment companies were common. This trend was more or less immediate at the start of the downturn, and will most likely be eroded as soon as the market recovers.
• With reduced activity levels came massive over-supply of some asset classes. Rig utilization, vessel utilization, (amongst many other asset classes) has plummeted and day-rates have fallen in some cases over 60%. Over-supply will take some time to work its way out of the system as older units are scrapped.
• Re-engineering of existing projects, returning to conceptual or FEED studies to re-work the development scheme has also yielded substantial cost savings. Further gains are yet to be had from standardization of engineering approaches, equipment, and even people. These savings should be far more permanent in nature.
Our analysis of global upstream projects (onshore and offshore, including unconventional) shows that on average the spend per barrel recovered for newly-sanctioned projects has fallen an incredible 40% over the 2012 to 2016 period. In some locations, the cost reductions have been much greater than this average. The DW upstream capital projects study covering the 250 project previously mentioned will detail key drivers and initiatives that have led to this outcome. You can register your interest for updates on this study here.
Steve Robertson, Douglas-Westwood London
Oil Prices Are Supported by Surplus Stocks DecliningThe economic backdrop will continue to be constructive, with growth improving in 2017. OPEC is unlikely to agree to any market action in Algiers, and this will put short-term downward pressure on prices. Winter supply/demand fundamentals are tight enough to generally keep crude oil prices in a $40-$50/Bbl range. Surplus stocks will continue to decline, which should be supportive to prices. Supply creation will become the market’s focus in 2017, and this will require higher oil prices. Product markets have been rebalancing, and upcoming turnarounds will help the process. Refining margin outlook is generally healthy for the upcoming season. U.S. crude price differentials and export incentives are encouraging U.S. exports for now. While supply disruptions have eased, political risks to supply will remain high.
Outages continue to pile up in the Atlantic Basin, while Asian supply continues to climb at a faster rate than demand growth. Less and less Mideast LNG will be required to balance the Asian market, but if this gas continues to move to the East, the bearish impact on prices will begin to build.
With French nuclear output set to remain below historical minima, the French dark and spark spreads have gained considerably in the last few days, moving even closer or even above Italian counterparts. A stronger spark spread for 1Q17 in France could be easier to justify in light of the likely introduction of the carbon tax on coal units (30 euro/MT), but less so in October and 4Q16, even assuming nuclear will remain at historically low levels.
Seaborne coal prices continued to rally, with the market still adapting to the emergence of tightness in the prompt market, which has been absent from coal supply/demand balances for several years. It appears as though the Chinese government has activated the "Tier-1" plan, allowing 74 coal mines to increase output by 0.5 MMmt/day because prices hit 500 yuan/mt for two consecutive weeks. This development took an edge off of the rally in pricing this week. Interestingly, API#2 prices gained the most ground, with 4Q16 prices rising by nearly $2.50/mt while API#4 and FOB Newcastle prices rose by less, respectively. PIRA believes this upward adjustment in API#2 was due to a stronger outlook for coal burn from the French nuclear situation. In general, there is not much incremental supply that could be called upon quickly to deflate this pricing rally, particularly as crossover tons are being pulled out of the thermal market into the coking market.
Environmental justice concerns were front and center at the hearing on the proposed Cap and Trade Amendments to promote a “cap and no trade” agenda focused on achieving localized reductions of criteria and air toxins (non-GHG) pollutants. A new report has linked the location of GHG emitters to disadvantaged communities and to particulate emissions, with little improvement in GHG emissions from CA entities since the start of Cap and Trade. The upcoming Scoping Plan will need to rigorously investigate alternative options to the Cap and Trade and must make the case for Cap and Trade in the context of environmental justice. PIRA expects related ongoing legal challenges and further market uncertainty.
The outcome of the Fed policy meeting was as expected. The central bank’s decision to stay put owed substantially to Fed policymakers’ shifting perspective on the economy’s long-run capacity. Specifically, in the last few years, meeting participants substantially reduced estimates for the potential GDP growth rate and the neutral policy interest rate. This shift means that (even though a rate hike in December appears to be a given at this point) the pace of tightening during 2017 will likely be slow. The Bank of Japan decided to target the yield of 10-year government bonds as a policy objective. The purpose of this move is to make the central bank’s quantitative easing program sustainable.
U.S. LPG price outperformance continues unabated. Mt Belvieu propane futures (Oct.) strengthened by 5.8% to 52.8¢/gal — a point at which it’s just about 50% of WTI value. Butane at the market center punched up by 4.1% to 68.5¢. Conway prices outperformed those in the gulf with C3 and C4 jumping 7.1% and 5.6% respectively. Conway butane ended the week at a narrow 2.75¢ discount to Belvieu, the tightest since May of this year.
U.S. ethanol prices were higher the week ending September 16. August RIN generation reached a record high. Manufacturing margins jumped.
Filling sandbags replaced running a combine for some in Northeast Iowa over the weekend as the Cedar River crested Saturday night in Waterloo and is expected to peak at 23 feet Tuesday in Cedar Rapids. Levels on the river so far have been slightly lower than those seen in the historic floods of 2008 as the crest moves south towards Iowa’s second largest city and home to major area grain buyers, including Quaker Oats.
Latin America 3Q16 gasoline demand is estimated at 2670 MB/D, down 15 MB/D year-on-year. Distillate demand is bearish at about 75 MB/D less year-on-year. Mexican gasoline demand at 805 MB/D in 3Q16 is marginally better than 3Q15. Brazilian 3Q16 gasoline demand is forecast to be 5 MB/D higher year-on-year, while diesel demand is projected to be 40 MB/D lower. PIRA expects the region to import ~900 MB/D of gasoline and components in 3Q16. Diesel imports in 3Q16 are estimated to be 950 MB/D. Brazilian exports of heavy crudes are trending down: expected to be 140 MB/D in 2017. Medium crude exports spike and will reach 740 MB/D in 2017. Latin American refinery crude runs in 3Q16 are forecast to be 5,190 MB/D, 470 MB/D lower year-on-year. The likely end of Brazilian incentives to import fuels and the completion of domestic refinery maintenance cycle will help increase refinery runs. Distillate cracks are expected to move upwards, pulled by higher demand for heating but capped by the very high stocks on both sides of the Atlantic.
The Henry Hub (HH) cash price rally has carried the benchmark to $3.14/MMBtu — a high not seen since 1Q15 — as unseasonably warm weather and maintenance delays at Sabine Pass buoyed the call on supply. Accordingly, HH cash prices for the month may top $2.95, and post a M/M gain of more than 15¢. Cooling-degree days (CDDs) are on track to average a whopping ~30% above normal this month, a tally that would mark the second hottest September on record, rivaling last year’s atypical heat in the process. Consequently, gas-fired electric generation (EG) has outperformed prior estimates, with total EG loads outpacing the “norm” by ~4 BCFe/D. Given this backdrop, weekly storage refills have seen a noteworthy “pruning” month to date, and as a result, odds of a sub-3.9 TCF end-October U.S. storage carry have risen.
National Joint-Stock Company Naftogaz Ukrainy from October 1 will raise the price of gas sold to industrial customers on a prepayment basis by 5.1%. According to a company release, the price is relevant for consumers buying gas in the amount of more than 50,000 cubic meters per month and who have no debts to Naftogaz. The price for other customers will rise by 5%. After the increase of gas prices for industrial consumers in August by 9.3%, Naftogaz decreased the price by 7.9% in September. Compared with July, gas prices in October will be higher by 5.6-5.8%.
Cape freight rates have hit their highest level of the year as capesize fixing volumes have surged while bunker prices have remained largely flat. The 180,000 dwt Cape average has moved to over $15,000/day, well above the $5,000 - $10,000 range the market has been trading at for most of the year. On the supply side, Cape fleet growth remains positive as scrapping has decidedly slowed of late, although there is 5 MMdwt of Cape tonnage that was built in 2003 that is susceptible to scrapping as ships approach their third special survey in 2018 because of a need to retrofit to a BWM system under the IMO convention. We believe that Cape rates will show a second bounce in Q4 and will push above $20,000/day in late 2017.
As the clock continues to wind down on the Obama presidency, attention is shifting to finalizing what has been begun rather than new proposals. While the Clean Power Plan is on hold, EPA continues work on the rules for implementation, projected for December — despite opposition from Congress. An endangerment finding for aviation GHG emissions was finalized in July, with GHG standards for heavy duty vehicles following in August. The final Cross State Air Pollution Update Rule for seasonal NOx imposes tighter caps and higher allowance prices in 2017, while a proposal for implementation of the 2015 Ozone NAAQS is forthcoming. The new regional Haze strategy, proposed in May, is expected to be finalized by year end.
The S&P 500, High Yield Corporate Bond Index, Russell 2000 and EMB Index all gained on the week, despite falling slightly on Friday, and VIX receded significantly. Total commodities and commodities excluding energy were both higher on the week. Precious and industrial metals gained. Agricultural commodities fell slightly at the end of the week, though it was higher on a weekly average basis. Long-term interest rates were generally lower (especially the U.S. Baa corporate bond yield).
Output fell 23 MB/D to 981 MB/D the week ending September 16. Inventories drew to a 10-month low of 20 million barrels. Manufacturing of ethanol-blended gasoline dropped to a 15-week low 8,118 MB/D.
Overall commercial oil inventories fell 6.0 million barrels this past week, entirely in crude oil. East Coast (PADD I) gasoline stocks had an historic stock decline (-8.5 million barrels) because of the Colonial Pipeline outage and likely panic buying, while PADD III gasoline stocks not surprisingly built (+4.8 million barrels). Reported oil demand fell 800 MB/D, largely because the EIA revised up product exports by 1.4 MMB/D, 1.2 MMB/D of which was in products other than the four major products. Cushing stocks built 0.5 million barrels this past week but should revert back to drawing next week. Overall crude stocks also decline but at a much more modest pace of 1.2 million barrels versus this past week. Strong distillate demand pulls stocks down next week by 350 MB/D, while gasoline inventories build modestly (80 MB/D) because of much weaker demand.
4Q is traditionally the most volatile gas demand period of the year, and PIRA expects this year not to deviate from this pattern. If anything, the introduction of more wind capacity is creating even more volatility in the gas demand outlook. As October and 4Q arrives, we experience steady and ever-increasing gas demand build. For Europe as a whole, average demand growth between now and the end of the year is 1,000-mmcm/d.
Data were delayed two days because of a national holiday. Crude runs declined on the week. Runs will continue declining through much of the month. Crude imports rose and a crude stock build of 2.37 MMBbl ensued. Finished product stocks rose 0.6 MMBbls, with most of it being in the jet-kero complex. Gasoline demand was lower as were yields. Exports, on the other hand, rose and stocks built slightly. Gasoil demand, yields, and exports were higher and stocks drew slightly. Kerosene stocks continued to build. On the week, all the cracks gained, with gasoline and naphtha doing the best.
Unlike previous years, when farmers pre-stocked their diesel requirements well before the start of planting and harvesting, this year farmers are buying fuel on as-needed basis. During the planting season earlier this year, this hand-to-mouth buying created a bulge in diesel demand during May and June. With this fall's harvest just underway, farm demand for diesel should pick up substantially once again.
Baghdad and the KRG agreed to resume 150 MB/D of shipments from NOC fields to the Kurdish export pipeline. Flows are currently capped at 100 MB/D due to technical limitations, and greater uncertainty will surface upon the deal’s expiration in 2017. In the south, fiscal problems and delayed FIDs will likely prevent a notable near-term increase in production capacity. A military offensive to retake Mosul appears increasingly likely this fall. The involvement of Shiite militias will stoke sectarian tensions and create large security challenges down the road.
Global equities moved broadly higher on the week. All the U.S. tracking indices gained, with utilities, industrials, and housing being the best performers. Retail posted the weakest gain, while energy underperformed. All the international tracking indices also gained and outperformed the S&P 500. Latin America and Japan posting the largest gains, while the ex-U.S., and emerging markets tracking indices also did well.
The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.
Large U.S. Product Build The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.
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