U.S. Commercial Stocks Flat Year-On-Year

U.S. commercial stocks drew 4.7 million barrels this past week, roughly split equally between crude and products. Crude stocks had their first significant weekly stock decline this year and this begins an expected trend for the weeks ahead with next week’s EIA data forecast to show a 4.9 million barrel stock decline. Cushing crude stocks built 0.3 million barrels last week and they too should begin to decline showing a 0.5 million barrel decline in next week’s EIA report. Both gasoline and distillate have had inventory declines for the last 8 weeks and for next week PIRA sees another distillate inventory decline while gasoline stocks are flat. Crude runs were up 760 MB/D year-on-year this past week and with next week’s forecast 240 MB/D run increase, they will be up 840 year-on-year, a reflection of much stronger refining margins and lower outages.

Delays Limit Cross-Border Flows

For much of 2017, net shipments to Mexico have been in a holding pattern, with volumes vacillating tightly between 3.9 and 4.2 BCF/D. Looking ahead, maintenance on Net Mexico this month will likely push volumes below this cemented trend. Thereafter, seasonally growing cooling loads will help drive pipeline utilization higher, with summer heat triggering record export volumes. Nevertheless, recently announced downstream infrastructure delays pose some downside risks to our outlook. That said, with most of the major pipeline delays likely resolved by 2018, a resolution is in sight. Accordingly, while near-term risks to 2017 pipeline deliveries exist, we remain steadfast with our conviction that export growth should approach ~1 BCF/D year-on-year in 2018.

Late Winter March Springs Up

March spot power prices increased from February levels in most Eastern markets as cold weather and the start of an active nuclear maintenance schedule boosted the call on gas-fired generation in the East by 18%. Henry Hub prices recovered above the $3 mark by the end of March as cold weather boosted heating loads while production continued to tread water. Northeast prices topped February averages by ~15%. For the balance of 2017, gas price gains ranging from ~25% in the Midwest and Southeast to over 50% in the Mid-Atlantic region will pressure gas-fired generation, reducing implied heat rates. Margin weakness will be especially pronounced in PJM as the gas buildout continues.

Coal Prices Ease As Market Adjusts to Cyclone Debbie

Seaborne coal pricing cooled considerably this week, as the market seems to be deciding that the impact of Cyclone Debbie on thermal coal balances and prices will not be as severe as previously thought. This was particularly the case for FOB Newcastle prices, which dropped by over $4.50/mt at the front of the curve. In terms of key developments this week, import demand in both South Korea and China for March came in strong, and this resurgence should underpin strength in the Asian coal market. With this backdrop of demand strength, and the actual impact of Cyclone Debbie on thermal output not yet known, PIRA believes that the downward adjustment in pricing this week was an overcorrection.

Court Freezes Diezel Portion of California LCFS

The California Fifth District Court of Appeal issued an opinion in the years-long legal battle between ethanol producer POET and the California Air Resources Board (CARB). The Court found that the Low Carbon Fuel Standard (LCFS) violated California’s Environmental Quality Act (CEQA), focusing specifically on CARB’s flawed analysis of NOx emissions from biodiesel. The Court froze the regulations addressing diesel fuel and its substitutes (i.e., biodiesel and renewable diesel) at 2017 levels while CARB reattempts to fix the violations.

U.S. Ethanol Prices Increase Again

RIN prices climbed the week ending April 7 as the likelihood of a quick change in the RFS waned. The 2017/2018 harvest in the South-Central region of Brazil began. The Latin American country is considering a tariff on U.S. imports of about 20%. European prices continued to slide.

Benign U.S. Inflation; Strengthening Activity in China and India

In the U.S., the Consumer Price Index revealed a surprising drop in inflation during March. A combination of different factors was responsible for this outcome – for example, March declines in apparel and new car prices were a pullback from high inflation readings in early 2017. The bottom line: U.S. core inflation is still remarkably steady on a year-on-year basis, and the underlying price pressure remains under control. In China, latest data on trade, vehicle sales, and oil demand indicated that the economy is in solid shape. In India, weakness in vehicle sales and oil demand during early 2017 will likely turn out to be just a blip.

Wet Forecast Ignored

The corn market’s reaction to a continuing wet forecast after a three-day weekend is certainly disappointing in the early going. Where it was dry enough to plant in states like Nebraska and some parts of Illinois, conditions were described as ideal over the weekend. However, there remains a wide swath of the Belt that’s “unplantable” at the moment with very little relief for the next week.

U.S. Propane Inventories Continue to Draw

Propane inventories continue to be pushed down by exports and products supplied. U.S. stocks totaled 40.4 MMB at the end of last week, down by 1.2 MMB from the week prior. The year-over-year deficit widened by 4 MMB and was 27.3 MMB last Friday. Exports remained in the 900-MB/D range and have been in this range for the past three weeks. There have been about 20 days of supply (adjusted for exports) since the beginning of February.

Seasonal Japanese Demand Declines Tempered, but Margins Soft

Crude runs eased on the week, while crude imports remained low enough to induce another small crude stock draw. Finished product stocks rose modestly off record lows. The seasonal decline in aggregate demand is less than has been seen in past years. Gasoil and kerosene demands are holding up exceedingly well against typical seasonal demand declines. Refining margins eased modestly on the week and remain very mediocre, in spite of the low finished stock position. Our marketing margin indicators eased again for the second straight week, but they remain above average.

Pipeline Delays Signal More Rationalized Supply Growth

If all of the currently Appalachian midstream pipelines commence timely service, the North American market could be awash in low cost gas — quickly tilting the fundamental balance from tightness back into surplus by 2018. This sentiment appears to underpin the sub-$3 prices reflected in the deferred futures contracts. Yet, despite a flurry of recent federal approvals, every road out of the Appalachian basin appears to be plagued with a unique set of challenges, suggesting a more rationalized approach for delivering low-cost supply to the market.

In Spite of Low Water Levels, Growing Swiss Exports to Italy in the Evening Hours

While Swiss nuclear output has recovered to prior year levels, hydro is still a major bullish driver for the Swiss power market. Switzerland has been experiencing very low water levels in its reservoirs over the past few months, while recent flow data also shows Italy still pulling more power from Switzerland this month to meet its evening peaks.

European Carbon Prices Stay Low, Bearish 2016 Emissions Data Released

A lack of recent policy developments and the release of 2016 EU ETS verified emissions data, down about 2.5% year-over-year, has diverted attention away from post-2020 market reform efforts and towards near-term trends. Market fundamentals, driven by declining power sector EU Carbon Allowance (EUA) demand and higher auction volumes, are poor and may be overshadowing a rise in compliance-related EUA purchasing (which occurred in previous years even with year-over-year emissions declines). EUAs are also currently in line with implied carbon prices from coal-to-gas switching. PIRA maintains a generally flat view for EUA prices in 2017. However, positive Trialogue talks on post-2020 reforms in May-June could offer a degree of price support, should policymakers use the bearish 2016 emissions data to focus attention on the need for stronger supply-side reforms.

U.S. Output Plummets

U.S. ethanol production fell 33 MB/D to a 26-week low of 986 MB/D the week ending April 7 as more plants shut down for spring maintenance. The 68 MB/D decline over the past fortnight was the largest ever reported. Domestic inventories drew by 802 thousand barrels to 22.9 million barrels, the largest drop in 48 weeks. Ethanol-blended gasoline manufacture decreased to 9,005 MB/D, down 100 MB/D from a 14-week high of 9,105 MB/D in the preceding week.

Financial Stresses Remain Low and Credit Conditions Constructive

Energy and precious metals performed well on the week, along with many of the debt tracking metrics, both energy and non-energy. Industrial metals, equities and the dollar moved lower. There continues to be unwinding of the “reflation” trade, which was confirmed by the release of inflation expectations by the Cleveland Fed. Disinflation tendencies have reappeared in the U.S. and Europe, though in the UK, implied inflation is continuing its uptrend. Banking stocks have continued to retrench as the yield curve has tended to flatten. Volatility has increased of late, both VIX (equities) and government bond market volatility. The market skew/vix indicator has fallen, which is interpreted as the market pricing in increased tail uncertainty. Even so, financial stresses remain low.

Resource Control Policies Still Loosening, Despite Rising Prices

PIRA’s analysis of resource nationalism around the world indicates that the low oil price environment is causing oil producers to implement more investor-friendly policies. Most notably, a Saudi Aramco IPO appears likely in 2018, while new leaders in Brazil and Argentina are adopting market-oriented reforms. On a broader scale, it will take a few more years of relatively depressed oil prices to overcome long-held tendencies to maintain government control and trigger a more widespread policy shift. Ingrained resource nationalism in Russia and elsewhere has offset attempts to attract foreign investment, while presidential elections in Iran and Mexico could set back efforts to open their oil sectors. But with many exporters forecast to continue running budget deficits, PIRA expects the balance to continue shifting toward policies designed to attract greater foreign and private investment.

April Weather: U.S. and Europe Warm; Japan Cold

At mid-month, April looks to be warmer than normal (-9% versus 10-year normal) in the three major OECD markets with a net effect on oil-heat demand to be -105 MB/D. On a 30-year-normal basis, the markets are almost 19% warmer.

Rough Storage Extended Closure Will Have Ripple Effect on Global Gas this Winter

The U.K. became a little more like Japan this week, as we now have another large gas market with virtually no seasonal gas storage. The U.K. Rough storage facility is not closed for good, but betting on its return anytime soon would not be wise and so we add the U.K. as a potentially larger LNG buyer this winter and beyond. The long LNG market is not exactly dodging a bullet here by adding more U.K. demand into the mix, but every little bit helps.

Global Equities Retrench a Bit

The overall U.S. market fell back on the week. With disinflation influences picking up a bit, the tracking indices of banking, materials and industrials lagged in performance. The defensive indicator held up better than the growth indicator. Internationally, all the tracking indices moved lower, though the World Index, excluding the U.S., was down only marginally.

China’s Crude Output to Stay in Decline Despite Increased Spending

The low price environment of last year hit China’s crude production especially hard. Output fell from 4.13 MMB/D in January 2016 to 3.89 MMB/D in December 2016. With prices near $50 currently, PIRA forecasts less production will be shut in. But a lack of new projects, relatively high cost of production, and a base decline close to 4% per year leads PIRA to forecast that China’s crude production will continue to decline this year and next year. We expect crude output at 3.80 MMB/D in 2017 and 3.77 MMB/D in 2018. Beyond 2018, production is expected to stay relatively flat until 2025.

Rough Outage Was Clearly Expected – What Are Markets Expecting Next?

The Rough outage caused little-to-no-uproar in European natural gas prices – it was already priced-in and then some. Rough has been an active and key part of winter infrastructure since 1975, but it’s tired and needs to either be fixed or retire. This winter the U.K. will have to make do without it. Over the past 10 years, the facility has supplied winter months with 25-mmcm/d of gas on average, up to a maximum of just about 46-mmcm/d on peak demand days. These volumes won’t be cheaply or easily replaced - after all, the Rough gas was bought at summer prices and now it will have to be bought at spot winter prices from the Continent or abroad. Problems with the storage facility have been going on for long before last summer and the ailing facility has made it more than clear that problems keep on popping up. Worst of all, the problems may persist forcing the market to look towards a United Kingdom without a seasonal storage facility, but with significantly higher risk premiums come winter time.

Belarus Gas Price Fixed Until Year End

The price of Russian gas for Belarus will remain at the same level until the end of the year, Belarusian President Alexander Lukashenko said commenting on the results of his recent talks with Russian President Vladimir Putin in St. Petersburg. "The Russian side suggested completing this year the execution of the current contract with Gazprom" Lukashenko said. "I would not say that we managed to achieve the intended result and reach the goal that we had initially set," the president said, commenting on the Moscow talks. "It was a kind of compromise, but a compromise that resulted in the terms that are very favorable for us."

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