Global Oil Markets

Canadian differentials surged on Alberta’s mandatory production cuts

The Canadian Syncrude and WCS differentials took large steps downward in October, while the Midland discount strengthened for a second month on increased pipeline capacity. The rail arb from the Bakken to the East Coast was wide open during October. Exports rose again during the month after a large step up during September. Inventories at Cushing built considerably in October, with further builds expected.

China Oil Market Forecast – January

China’s economy continued to lose steam in November. Manufacturing and consumer confidence remained lackluster as passenger cars sales exhibited a third consecutive month of double-digit decline. These weaknesses will put policy markets under more pressure to stimulate the economy and we believe the government will do whatever it takes to avoid a hard landing. China’s crude runs grew by just 236 MB/D year-on-year to 12.64 MMB/D in November due to high products stocks, weak margins and more limited exports. Stricter environmental checks also raised turnarounds by independent refineries, curbing runs growth. Refining margins remain weak but more export quotas became available in December, which along with lower maintenance helped lift runs. Our runs growth estimate is 592 MB/D in 2019 though the final results on the country’s demand outlook, which is becoming increasingly uncertain. China’s crude imports jumped by 1.4 MMB/D year-on-year to a historical high of 10.5 MMB/D in November. Imports are estimated to have remained relatively high in December due to significantly higher crude deliveries to independent refineries. Given the slow growth in refinery runs, much of the imports were translated into to a material built in crude stock. For 2019 as a whole, we expect China’s crude imports to rise to 9.7 MMB/D, up from 9.2 MMB/d last year. China’s oil demand growth is estimated to have slowed down to 590 MB/D in 2018 versus 720 MB/D growth seen in 2017. Total oil demand growth will likely slow further to 450 MB/D in 2019 on increasing external uncertainties. Gasoline demand growth is likely to slow on improving new car fuel efficiency and teetering economic fundamentals while gasoline exports will likely increase less on fewer quotas and weak margin. Gasoil demand is forecast to grow faster in 2019 on infrastructure stimulus while more available quotas in the first batch hint that Beijing intends to export more gasoil this year.

Large stock build in major products in the US

As anticipated there were large stock builds for the key products for the week ended Jan. 4. Gasoline storage grew by over 8 MMB, while distillate inventory surged by 10.6 MMB. For the next week the builds moderate, but are still relatively high at around 6 and 3.5 MMB for gasoline and distillate respectively. Crude inventory declined less than expected falling by 1.7 MMB. This week is anticipated to have a modest 0.7 MMB build. Cushing storage built by just 0.3 MMB, with the next week expected to see a 0.2 MMB draw on increased net outflows. Crude production was flat at 11.7 MMB/D and is expected to remain at that level for the next week. Most notably there was large shift in the adjustment item going from a positive 0.9 MMB/D to a negative almost 0.2 MMB, for around a 1.1 MMB/D swing on the week. We are assuming a 0.45 MMB/D factor for the next week. Crude exports moderated to 2.1 MMB/D and are expected to move back toward 2.4 MMB/D for the next week as the arb is open. Refinery runs fell by 200 MB/D to 17.57 MMB/D, largely on several unplanned events. With a number of planned and unplanned issues runs are anticipated to decline to 17.2 MMB/D for the next week.

First data of 2019... Holiday impacts abound in Japan

Two weeks of data were reported this week due to the holidays. Runs rose about 75 MB/D and finished product stocks built as the seasonal gasoil demand weakness produced a sizeable, but predictable, build over the last two weeks. Aggregate demand generally eased over the two week period. Crude stocks moved lower over the last two weeks. Light product cracks continue to recover but remains soft, while implied marketing margins remain very strong.

Macroeconomics

Benign inflation data will allow Fed to be more patient; it looks like China will need more help

Policy communication from the Fed has turned more dovish in recent days, signaling that a pause in the monetary tightening cycle may be in sight fairly soon. That, however, is contingent on U.S. inflation staying benign. The consumer price index for December did not raise a red flag, as core inflation matched expectations. On the other hand, the Chinese producer price index was worrisome, as prices for manufactured goods continued to weaken. While the latest industrial production data disappointed, fundamental drivers of European economic growth remain constructive.

Stresses lessen, credit metrics improve

The S&P 500 gained 2.5% on the week, but was unable to climb back above 2,600 level. There was another big drop in equity volatility, along with oil volatility. Oil had a solid week, as did the energy commodity complex. Total commodities were higher by 1.7%. While the equity and credit markets are still stressed, there has been a notable reduction in the stress levels seen from late last year and very early 2019. Implied inflation has moved notably higher.

Global equities extend 2019 gains

Global equities gained 2.9% on the week, with the U.S. S&P 500 higher by 2.5%. Among the domestic tracking indices, housing, industrials, and energy, all outperformed notably, while consumer discretionary, retail, and technology also posted good gains. Internationally, China and Latin America were particularly strong, while Europe and Japan lagged.

Freight Markets

Strong seasonal improvement in tanker rates during 4Q 2018 likely to abate in 1Q 2019 as OPEC production cuts are implemented

The strong seasonal improvement in tanker rates in 4Q 2018 is likely to abate in 1Q 2019 as OPEC production cuts are implemented. The improvement in balances in 4Q can be attributed in part to capacity rationalization measures; capacity growth in 2018 slowed to 0.8%, the lowest level in more than 15 years due to scrapping and delivery slippage. OPEC cuts, commencing in 1Q, will reduce tanker demand and rates in major crude groups.

Global NGL Markets

US propane production grows while domestic and export demand support prices

US propane production continues to rise, with the EIA reporting 2.09 million b/d of production for the week ended January 4. Despite this, PADD 2 saw the largest production drop from the week prior, down 31,000 b/d, followed closely by PADD 3, which was down 24,000 b/d. US Gulf Coast January non-LST propane prices rose at the close of the week, bucking trends in crude futures amid a nationwide drop in temperatures. Front-month non-LST propane gained 4.625 cents/gal, or 7%, ending the week at 67.88 cents/gal. A regional market source attributed the increase in values to higher exports. EIA’s product supplied was 1.5 million b/d for the week ended January 4, while exports were reported to be 993,000 b/d compared with Platts Analytics’ estimate of 1.09 million b/d. For the week ending January 11, exports are expected to be 1.1 million b/d. Domestic demand fell week-over-week, though drawdowns have remained robust on export demand strength. In other news, US Gulf Coast natural gasoline (C5) experienced a slight uptick mid-week despite a pipeline glitch. Enbridge’s Southern Lights pipeline, which transports diluent from the US Midwest to West Canada, was heard to be unexpectedly shut Thursday.

Global Biofuels

Ethanol production falls to 1MMB

U.S. ethanol production fell for the fourth time over the past six weeks, dropping 11 MB/D to an eight-month low 1 MMB/D. Stocks increased by 92 thousand barrels to 23.3 million barrels. Most of the build occurred in the Midwest, where inventories reached the highest level since March 2018. Ethanol-blended gasoline production sunk by 523 MB/D to 8,073 MB/D, though it was up 2.0% from this time last year.

U.S. ethanol and biodiesel prices start 2019 on the rise

Both ethanol and biodiesel prices rose in the U.S. last week. D6 RIN values declined for the second consecutive week, while D4 prices continue to increase. Brazil’s ethanol exports soared 19% in 2018. December was extremely dry in Brazil’s key Center-South region, sparking discussions about cane availability next season. In Europe, T2 ethanol prices have flattened out over the past two weeks due to thin market liquidity.

Agricultural Commodities

No data, no buying

With the January, 2019 WASDE temporarily little more than an asterisk in the archives, the market is left to wonder what would have happened Friday with a “normal” release. Unfazed by a potential drop in soybean yields for both Americas since no new data will be available for more than a week after the shutdown ends, if at all, the algos continue to feed off last week’s failure to break the 12/12 high of $9.28 despite three attempts. Traders will trade but producers need to make planting plans in fairly short order so the lost data may be more relevant to them should the delay stretch much longer.

N. American Natural Gas Markets

US Gas Weekly Report – Jan. 11

Since hitting $2.65/MMBtu on Jan 3, the NYMEX summer 2019 strip has rebounded to ~2.76/MMBtu as of Jan 10. The increase in bullish sentiment can be tied back to some cooler forecast changes. Moreover, production remains well below the record highs observed in November, while recent commentary from some producers showcase 2019 plans that feature less growth relative to prior forecasts.

European Natural Gas Markets

The market gets back in touch with reality as the bears emerge from hibernation early

We’ve barely started putting away the Christmas lights and the bears have already re-emerged from their slumber. Looking at how prompt pricing out-turned over the past 9 months the market has consistently been 3 months ahead of itself. The rally that started in April was sparked by a cold end to Winter-17. Yet despite record storage stock builds across Europe through summer, it continued right into September, as irrational fears of endless LNG maintenance and a pullback in Russian production were met with rocketing EU E TS carbon prices and another round of continental nuclear worries, this time in Belgium. September seems a very long time ago. As we move towards what should be the highest demand period of the year we’ve seen prompt prices continue to fall. Despite this period remaining in front of us, prices are close to back to where they started, with TTF DA now in line with where it last traded in May-18. Even after considering the potential for a cold February, the big question for us isn’t if the recent price fall is justified, it’s how far the bear cycle can fall before it finds any real support again?

Global LNG Markets

Low French hydro enhances bullish risk tied to colder weather forecast

After a robust performance in December, French hydro output has started 2019 on an unusual downward trend. This year’s profile matches the one of 2017, when January was among the driest on record. Despite healthy nuclear output, French exports have been strongly impacted by this development and dropped by almost 80% Y/Y in the first ten days of the months to only 2GW. This leads to renewed tightness in N.W. Europe at a time when most weather forecasts anticipate colder weather from Week 3 to the end of the month, with some forecasts extending it into February.

Atlantic, Pacific prices continue slide on limited buying

CIF ARA physical prices and prompt forwards shifted modestly lower last week, continuing a month-long slide. Spot physical coal prices declined slightly faster than forwards across both Atlantic and Pacific Basin contracts, likely driven by the near-term uncertainties of Chinese import policy and the upcoming Lunar New Year. FOB Newcastle 6,300 kcal/kg GAR spot prices fell 2% on the week. We continue to believe that CIF ARA price declines will be limited by strong European coal demand, but look for FOB Newcastle prices to fall further.

Scenario Planning Service

Electric Vehicle Sales and Policy Scorecard – Jan. 10

The quarterly Electric Vehicle Sales and Policy Scorecard assesses the potential impact of major policy initiatives and investments on EV adoption momentum at the national and company level, and offers Platts Analytics reference case fossil fuel displacement forecast and EV adoption forecast for major auto markets. In 4Q2018, EV momentum was characterized by sizeable investments in charging infrastructure, new EV model roll-outs, and urban e-bus purchases. China and the EU lead EV adoption in both the short and long term, driven by favorable economic factors and strong policy support.

EV Essentials

EV Essentials conveniently assembles data and resources that support Platts Analytics’ transport electrification outlook. This collection of vetted historical data tracks the progression of EV sales growth, trends, prices, and impacts in key and emerging auto markets around the world. Datasets are updated monthly and provided in both graphical representation and as a separate excel files for SPS, GHG, and EMS clients. EV Essentials offers access to global and regional data covering topics such as: electric vehicle sales, EV emissions analytics, charging infrastructure availability, battery manufacturing capacity and metals pricing, transportation fuel demand and price metrics.

Environmental Markets

WCI carbon pricing drifts down in New Year

WCI carbon allowance prices were stable in December and the benchmark contract has rolled. Pricing has declined in the New Year, with January delivery contracts converging to the 2019 auction floor. Trading volumes rose in December, and Open Interest ended 2018 10% higher year-on-year, with future vintages accounting for larger shares. Delivery spreads sit at twice year-ago levels. WCI emissions are expected to be relatively flat year-on-year for 2018-19. A growing allowance bank and the next full compliance surrender not until November 2021 translates to little compliance pressure. PG&E’s financial issues tied to potential wildfire liability could be bearish for prices to the extent they impact hedging behavior and positions. As expected, CARB has adopted the 2018 Cap and Trade Amendments setting cost containment and offsets restrictions. Platts Analytics’ updated long term balances and price outlook sees cost containment come into play closer towards 2030.

With Brexit still looming, weaker gas prices put downward pressure on EUAs

The 2019 EU ETS compliance year has begun without clarity on whether the U.K. is participating. This depends on the Brexit outcome, though we continue to assume that the U.K. will remain in the EU ETS through at least 2020. Should the U.K. leave in a “No Deal” scenario, U.K. emitters would instead face a £16/tonne national Carbon Tax starting in Apr 2019. They will also face the £18/tonne Carbon Price Support regardless of the final Brexit scenario. The NL government lowered its proposed power sector carbon price floor from €18/tonne in 2020 to €12.30. However, NL is maintaining a 2030 phase-out deadline for coal gen (4.8 GW), though Platts Analytics assumes this will be achieved earlier. EU policymakers informally agreed to implement a 550 gCO2/kWh requirement for capacity payments, which coal-fired units would not meet. This impacts new units immediately and existing units in 2025, exempting capacity agreements signed by end-2019.

S&P Global Platts 14th Annual Northeast Power and Gas Markets Conference

Exchange best practices and gain cutting-edge knowledge about the Northeast energy markets at the S&P Global Platts 14th Annual Northeast Power and Gas Markets Conference. This event will be held on May 30-31, 2019, and the pre-conference workshop will be held on May 29th. Both events will take place at the New York Marriott Downtown Hotel in New York, New York. Learn more.

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