Global Oil Market: OPEC+ cuts to peg Brent in $60-70/Bbl range, for now

With oil markets grappling with current oversupply, downward revisions to 2019 demand, and a prevailing bearish sentiment, which has sent Brent crude oil prices from over $85/Bbl two months ago to $60/Bbl now, the focus has shifted to OPEC+’s response to market circumstances at the upcoming December 6 meeting. We assume OPEC+ will come to an agreement to cut supply. However, the deal will likely be vague, nuanced, and appear as subtle as possible. This is because Saudi Arabia must balance between cutting the oversupply in the market while being sensitive to U.S. President Trump, who is concerned with high oil prices and inflation, and has the potential to take action against Saudi Arabia on several fronts (Khashoggi, NOPEC, military support in Yemen). In an effort to not appear too aggressive yet still signal that cuts will be real and meaningful, we assume a headline OPEC+ cut figure of 1.2-1.4 MMB/D, from October 2018 levels, through the first half of next year. The agreement may use language like returning to originally agreed-upon individual country production levels. But it will likely play down that the cut is larger compared to November levels (1.5-1.7 MMB/D), when Saudi production reached 11.2 MMB/D. We assume Saudi production gets back down to 10 MMB/D (notably, this may prove aggressive on rising pressures by U.S. and Congress). We assume Russia will join in modest cuts, as Russia does not want prices to go to $50/Bbl. Kuwait, the UAE, and Oman also join in cuts. Meanwhile, we see Iranian crude and condensate exports at 1.3-1.4 MMB/D from December to April. Crude prices will be supported from here as OPEC+ cuts will demonstrate their resolve for higher prices. Crude stock draws in the three major OECD markets (U.S., OECD Europe, and Japan) in December (finally) will further support prices.

Modest stock build closes deficit to 2017 levels

Total commercial stocks build as anticipated (+2.4 MMB), driven by crude stocks (+3.5 MMB). For this week, we forecast a crude stock draw for the first time since September (-1.1 MMB), as refinery runs roar back well above 17.5 MMB/D, overwhelming the effect of a slight increase in crude production (+0.1 MMB/D to 11.8 MMB/D), while SPR releases slow as they come close to completion. Crude imports should decrease this week to 7.4 MMB/D as suggested by our model. Moreover, the Houston ship channel has been closed because of dense fog on several days of this week and open only to outbound traffic. On the crude export side, the arbitrage to both Europe and Asia remain open, which suggests continued strength in export rates (2.20 MMB/D). Crude production estimates were reported at 11.7 MMB/D, 0.1 MMB/D lower than anticipated. We expect some modest shale growth to move volumes closer to 11.8 MMB/D for this week. Refinery runs surprised further to the upside and came close to the maximum theoretical runs given planned outages, as still healthy refining margins incented refiners to produce. This week, runs should increase further and exceed 17.7 MMB/D, one of the highest levels for this time in the year. Distillate stocks built as anticipated (2.6 MMB). For this week, we forecast an even larger build (3.5 MMB), driven not only by the increase in refiner runs but also a significant decrease in distillate exports (from 1.7 MMB/D to 1.1 MMB/D). Despite very low gasoline yields due to exceptionally low gasoline cracks, gasoline stocks should continue to build as is typical in this time of the year due to demand weakness. Crude stocks at Cushing surprisingly increased by 1.2 MMB to 36.5 MMB, with a large uptick in net flows more than offsetting higher refinery runs. Flows into Cushing are expected to soften a bit in the coming week, which prompts us to forecast a very slight stock build for this week.

No Holiday Cheer in Japan: Demand lags, products in excess, runs too high

Crude runs inched higher by 20 MB/D as maintenance continues to lessen. Crude imports rebounded strongly, as expected, and stocks built 4.25 MMBbls. Finished product stocks built another 1.8 MMBbls, as the seasonal increase in demand continues to lag the run increase. All the major products, other than mogas, posted stock builds. Product stock length continues to grow and is keeping refinery margins weak. Cracks remain very mixed. Fuel oil remains exceedingly strong, middle distillates are beginning to decline from seasonal norms while gasoline and naphtha remain very weak. Implied marketing margins remain very strong.

Asian gasoline market pressured by Chinese exports but volumes are easing with recent poor cracks

Chinese refiners have been raising gasoline yield due to strong domestic demand growth over the last few years, with gasoline yield rising from 21% in 2011 to 27% in 2017 – an increase of 6 percentage points; while gasoil/diesel yields dropped by around 4% pts over the same period. However, on a closer look, it is worth noting that gasoline demand growth eased sharply over the past two years due to higher fuel prices, and dampened by weaker car sales (contracted by 1.2% year-on-year in the first ten months of this year, down from growth of 1.9% last year and 15% in 2016 ). This year, China’s gasoline demand is expected to post its weakest growth since 2007. Even with the recent slowdown, gasoline yield continues to stay high.

US September Oil Production: Onshore Growth Remains Strong

The EIA reported 11,490 MB/D US crude and condensate production for September 2018 — a 130 MB/D increase over the prior month. Compared to year-ago levels, production is now up by 1940 MB/D. Offshore volumes declined from record-high August volumes, but onshore growth remains strong, especially in Texas and New Mexico. Looking ahead, we forecast year-over-year growth in US crude and condensate production of 1.5 MMB/D in 2018 and 1.1 MMB/D in 2019, a moderate increase compared to our previous case.

U.S. September 2018 DOE Monthly Revisions: Demand and Stocks

The EIA released their monthly September 2018 (PSM) U.S. oil supply/demand data last week. September 2018 demand came in at 19.951 MMB/D, which was a 475 MB/D downward adjustment from the weekly data and 630 MB/D below what Platts Analytics had assumed. Total demand growth slipped from 1,051 MB/D in August to only 310 MB/D, or 1.6% in September. However, this September, demand was impacted by both hurricane Florence and tropical storm Gordon, while hurricane Harvey hit the Houston-Gulf Coast region last September. The strongest demand growth remained in “other”, higher by 351 MB/D or 8%, which is being driven by NGLs associated with shale oil production. There was also demand strength continuing in the middle of the barrel, both kero-jet (+4.5%) and distillate (+2.2%). Gasoline demand continues to lag, and declined 260 MB/D, or -2.8%. Final end-September total commercial stocks stood at 1,271.6 MMBbls, which were 15 MMBbls higher than Platts Analytics had assumed with crude higher by 5.5 MMBbls and products lower by 9.7 MMBbls. Compared to the preliminary weeklies, total commercial stocks were revised higher by nearly 20 MMBbls, with crude raised 10.5 MMBbls and products raised 9.2 MMBbls. Compared to September 2017 PSA data, total commercial stocks are now lower than year-ago by 32.5 MMBbls, while at end-August, they had shown a deficit of 76.9 MMBbls, with most of that change originating from products.

G-20 Meetings: A thaw in U.S.-China trade tensions?

The G-20 meetings kicked off last week, with the much hyped dinner between President Trump and China’s President Xi scheduled for Saturday. Like another high-profile meeting – the one that took place between Trump and North Korea’s Kim Jong Un back in June - the anticipation is huge, while concrete results are still, and will most likely continue to be, a work in progress. In this report, you can find a synthesis of our updated view on the trade negotiations between US and China, and its potential reverberations across the global economy in 2019.

Most U.S. Shale Oil Producers Unlikely to Reduce much Activity despite Lower Oil Prices

WTI has decreased by more than a third in the past two months, the largest percentage drop since early 2016. Currently, prices stand in the low $50s/Bbl range. With a few exceptions, shale oil producers who have provided guidance have generally done so with $50-55/Bbl WTI price assumptions, so there is little need to change strategy now. Also, average breakevens (half-cycle or full-cycle) stand below current oil prices. However, a few operators who have higher shale breakevens or whose plans are based on higher oil prices will likely reduce activity next year.

Macroeconomics

Fed updates its policy roadmap for 2019; U.S. data continue to depict a goldilocks economy

Key Fed policymakers signaled that the central bank will change its course next year, after increasing the policy interest rate at a gradual and predictable pattern over the past two years. The estimated level of the neutral interest rate will start to inform monetary policy decisions heavily; when the actual policy rate is near the neutral rate, the central bank is expected to move gingerly. October U.S. data pointed to healthy economic growth and benign inflation. Europe’s latest confidence data were not alarming. India and Brazil reported reasonably strong GDP growth for the third quarter.

Global Equities Post Strong Gains

Global equities gained 2.8% on the week, with the U.S. S&P 500 rebounding 4.7%. In the U.S., technology and consumer discretionary posted gains of about 6%, while industrials rose 4.1%. Energy lagged, but improved 3.5%. Internationally, the tracking index for China rose 4.6%, while the tracking index for Europe gained only 1.3%.

Positive Week, but Stresses Still Elevated

The S&P 500 rebounded almost 5% on the week, while both equity volatility (VIX) and oil volatility (OVX) fell about 14%. Despite a gain in the U.S. dollar of 0.4%, commodities still posted a 1.3% gain, with energy outperforming and rising 2.6%. Copper and aluminum held their own, while palladium has continued higher. The St Louis financial stress indicator has continued to indicate higher stress levels and reached its highest level since spring 2016, but even so, the levels are historically low and contained.

Global NGL Markets

Propane prices drop even as winter demand picks up

US propane stocks fell by 634,000 barrels during the week ended November 23. Total stocks are nearly 8 million barrels, or 11%, above year-ago levels, while days of cover including export demand remains just above year-ago levels, at 36 days. Production hit a new high of 2.03 million b/d. The EIA reported exports of 1.08 million b/d for the week, compared with Platts Analytics’ estimate of 940,000 b/d based on ship tracking data. For the week ending November 30, exports are expected to be 975,000 b/d. EIA’s product supplied last week remained near 1.2 million b/d, in line with the previous week. Platts Analytics expects that recent colder-than-normal weather in the Midwest, and another cold period in the forecast, should manifest in relatively higher product supplied, though this response often occurs belatedly, and over time, as distributor refills to inventories can lag weather. US Gulf Coast propane prices dipped Friday but maintained their value at 57% of front-month crude futures, as market sources noted fewer US cargoes loading in December. Front-month non-LST propane lost 3.75 cents/gal, or 5%, ending the week at 69.5 cents/gal.

Global Biofuels

U.S. ethanol production rises despite weak margins

U.S. ethanol production rose by 6 MB/D last week to 1,048 MB/D as many plants continue to manufacture ethanol despite decade-low prices and weak margins. Most need to fulfill supply contracts to gasoline producers. Stocks built by 139 thousand barrels to 22.9 million barrels, even though inventories on the East Coast dropped to a five-month low. Ethanol-blended gasoline production decreased by 33 MB/D to 9,169 MB/D. December ethanol futures were down 0.4¢ today to $1.218 per gallon as of 11:50 AM CST, despite higher corn prices.

EPA finalizes biofuels mandates for 2019; total renewable fuels mandate raised 3.3%

On Friday, the EPA released its final renewable fuel mandates and standards for 2019 and the biomass-based diesel requirements for 2020. In the Final Rule, the Agency substantially reduced the requirements for total, advanced and cellulosic biofuels from the volumes set forth in RFS2, but made them all higher than in 2018. The 2019 total renewable fuel mandate was set at 19.92 billion ethanol-equivalent gallons, up from 19.29 billion this year. The advanced biofuels mandate was increased to 4.92 billion gallons from 4.29 billion while the cellulosic biofuels mandate was raised to 418 million gallons from 288 million. The implied mandate for conventional biofuels (the difference between total renewable fuels and total advanced biofuels) remained at 15.0 billion gallons. The biomass-based diesel mandate is set on a different schedule than the others. The EPA finalized the 2020 mandate on Friday at 2.43 billion gallons. The 2019 mandate had already been set at 2.1 billion gallons, unchanged from 2018.

U.S. ethanol prices tumble to 13-year low; Values to remain low through early next year

The EPA finalized the 2019 biofuel mandates on Friday. The total renewable fuel mandate was set at 19.92 billion ethanol-equivalent gallons, up from 19.29 billion this year. The advanced biofuels and cellulosic biofuels mandates increased as well. Chicago ethanol prices plunged to $1.175 per gallon yesterday, the lowest since May 2005. Ethanol production in Brazil’s South-Central region declined in the first half of November as mills are shutting down for the season. In Europe, RME prices soared this month, reaching a record high as low Rhine levels impacted supply. Manufacturing cash margins for Platts Analytics’ model biodiesel plant based on Chicago prices declined during November as biodiesel prices sunk to a two-year low.

Agricultural Commodities

They Said, She Said

Sunday was filled with rampant speculation. Calls for a 40-60 cent higher opening in soybeans permeated social media and traditional pro-ag media outlets throughout the day as farmers and speculators, who were heavy Call buyers late last week, seemed almost giddy at their fortune based on the White House Press Secretary’s version of results from the Xi/Trump dinner. Non-ag equity analysts joined the fray by sending weekend emails to clients claiming that Saturday’s dinner was extremely bullish for the Ag sector. Sunday’s open was as anticipated an event as that of a summer weekend. That much hype was hard to match once the markets did indeed open and while January beans gapped higher and traded almost 30 cents higher soon after the opening, neither the Chinese opening nor the European opening saw any follow through. So, what happened?

N. American Natural Gas Markets

US Gas Weekly Report

The month long rally that has sent the 18/19 NYMEX winter strip from $3.16/MMBtu at the start of the month to 4.42/MMBtu as of November 29 has by and large been isolated to the winter strip. In fact, over this corresponding period the 2019 NYMEX summer strip has only increased by 10 cents and is actually ~4% below realized summer 2018 prices. Clearly, the market is currently comfortable with the expected pace of restocking next summer.

Higher cash prices across key regional markets appear to be allowing coal to pick up some marginal market share from gas. In MISO, coal’s percentage of thermal loads is up to 70% this month relative to around 65% in October.

European Natural Gas Markets

European Gas Report - Weekly

Lower-than-normal temperatures throughout NWE were met by a strong increase in LNG sendouts (concentrated in the UK) and an increase in UKCS and Dutch production, complemented with storage withdrawals although NWE storage levels were only ever higher (at this time of year) in GY-14.

Global LNG Markets

Tempering Forecasts for South Asia, But the Region’s Needs Remain Strong

The Indian subcontinent will be the key region for LNG demand in the next five years. However, hiccups now remind us of just how risky counting on this demand growth will be – whether affected by government policy, infrastructure delays, or upstream developments. Due to these issues, Platts Analytics has steadily lowered our Dec ’18-Mar ’19 forecast by 12.7% to 131-Mcm/d since our April forecast.

European Electricity Markets

Market passes first cold spell test of winter, but nuclear and water level issues persist

While blackouts have been avoided, Belgian hourly prices have gone as high as €499/MWh in Nov, with on-peak prices averaging close to €100/MWh over the month. Part of the reason is the limited import flows at times of particular system tightness despite assurances from neighbour TSOs to limit bottlenecks on the interconnectors. Meanwhile Italian prices have been pressured by exceptional precipitation in Nov, pushing hydro output up by 2.5GW month-over-month to the top-end of the historical range. As a result, poor output from other renewables had limited influence on prices in Nov and the average came in at €66.6/MWh, more than €10/MWh below our expectations.

North American Electricity Markets

Location, Location, Location

November on-peak prices increased at all U.S. hubs, ranging from a $7/MWh jump at Palo Verde to a $14/MWh increase at SP15. However, margins diverged, with generators on the western end of NWPL’s system or served by SoCal gas out of the money while other Northwest, California and inland Southwest units saw spark spreads rise. The latter group also benefited from an extended outage at Palo Verde 2, but faced increasing competition from coal units as gas prices moved up across the region. Much colder than normal weather is expected to move into the West in the near term. Markets will meet the challenge with a combination of increased Northwest hydro output and withdrawals from Northwest and California gas storage, but sustained drawdown of reservoir storage (both water and gas) to meet demand during the period of constrained gas supply may present downside risks to hydro and gas generation later in the winter.

U.S. & International Coal Markets

Surging Gas Prices Materially Boost Outlook for Winter Coal Burn and US Coal Prices

After the recent surge in natural gas prices, we believe that US coal prices face upside risks from current levels, particularly in the PRB and ILB where we project prices will hit $13/st and $50/st, respectively, due to the potential for gas-to-coal switching this winter. Our view on CY19 US coal prices has changed from bearish to the forward curve to bullish to forwards through 3Q19. However, we still foresee fundamental supply/demand weakness in 4Q19 as gas prices are expected to come in below prior-year levels, and we take a modestly bearish view on 4Q19 prices.

Coal Prices Tumble on China Import Limits and High ARA Stockpiles

Global coal prices declined sharply on news that Chinese policymakers will bar thermal coal over the balance of the year and near-full ARA stockpiles are limiting purchases of cargoes into Europe. However, the inevitable increase in European buying after low water levels on the Rhine recover should provide temporary value relative to the CIF ARA forward curve. For 2019, weaker fundamentals in China, not policy, will keep import demand and global coal prices subdued.

Environmental Markets

Slower NEPOOL Renewables Growth, Stronger Demand Support Class I Prices; Tight MA SREC I

Since our August New England REC Market Outlook, REC credits qualified in New England state RPS markets have been issued through 2Q 2018. Class I REC prices have seen V-18s fall below $5/REC and V-19s below $10 in 2018, but have firmed in November. The MA Clean Energy Standard (CES) increases Class I REC requirements beginning in 2018, and key details of CES implementation, including reduced requirements in 2018 and 2019 tied to exempt loads and banking restrictions, have been clarified through recent guidance. REC growth, particularly wind, has slowed this year after a very strong 2017. Class I solar (not serving the MA carve-outs) REC creation remains robust. MA SREC I prices have grown this year on concerns of tightness – updated Platts Analytics’ projections confirm a cumulative deficit this year and into 2019, with likely use of ACPs.

Road to U.S. National Carbon Pricing Faces Obstacles in the Senate

Efforts to pass national carbon pricing legislation in the U.S. face an uphill battle in the coming years. Despite support among Democrats for a national carbon price, the Senate will remain a significant obstacle to passing comprehensive climate legislation. The Senate’s structure, weighting each state equally, favors more rural, carbon-intensive, states. Since the 1990s, party affiliation has increasingly correlated with attitudes and voting on environmental and climate policy. The 2018 Senate election was no exception, with carbon-intensive states flipping Republican, while seats in relatively less carbon-intensive states flipped Democratic. The path to a carbon-pricing friendly majority appears challenging in 2020. For 2022, in addition to control of the White House and House of Representatives, climate legislation will need Democrats either to take advantage of a favorable 2022 electoral map and/or break Senate protocol by passing significant legislation with a simple majority. Otherwise, Democrats will have to defend against a more challenging electoral Senate map in 2024.

The information above is part of S&P Global Platts Analytics weekly Energy Market Recap – which alerts readers to our current analysis of energy markets around the world as well as the key economic and political factors driving those markets. To read S&P Global Platts Market Recap first, subscribe here.

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