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PIRA Energy Market Recap for the Week Ending January 27, 2019

Global Oil Markets

platts logo copyWorld Oil Market Forecast – January

As expected, oil prices have rebalanced to fair value levels over the past month, following the downturn that we saw as overdone at the close of last year. We continue to rely on our fundamentals for our price outlook. And our fundamentals continue to show oil balances as largely balanced and broadly constructive through 2019, with normal 1H builds and large draws in 2H. The global economic picture is still pointing to a broad slowdown, even if it appears less threatening than a month ago. Oil demand growth forecasts were revised a touch lower for 2019, to 1.5 MMB/D. Oil supply growth forecasts were also revised lower for the year on indications of slowing drilling activity by some operators in U.S. shale, reduced expectations of northern Iraqi exports, and a prolonged outage in Libya, although we raised Saudi Arabian and other core OPEC output in 2H on rising seasonal demand. Commercial oil stocks in the three major OECD markets (U.S., OECD Europe, and Japan) are mostly flat for 2019. 1H builds by 300-400 MB/D on a seasonal slowdown, but these builds are in line with historical increases for this time of year. 2H19 balances tighten with big draws (700 MB/D in 4Q). Crude stocks in the major OECD markets are now building, and builds are expected to ramp to 700 MB/D by April and May. We maintain our Brent and WTI crude oil price forecasts. For the next few months, oil markets will struggle to find support for higher prices amidst the seasonally weak period with upcoming refinery maintenance, potentially some economic run cuts, and the release of oil bottled up by shipping delays (the Turkish Straits).

Finished product draws continue, but margins weaken in Japan

Aggregate demand added 119 MB/D, on top of the monster 772 MB/D rebound seen the previous week. The next 4-6 weeks of demand performance is critical to balances, as runs will remain high with no planned maintenance. For now, finished product stocks continue to draw along seasonal lines. The refining margin indicator continued to weaken with all the major cracks losing ground. Implied marketing margins remain strong, but have fallen back a bit.

Large weekly build as crude and gasoline stocks rise sharply in the U.S.

Gasoline storage grew by 4.0 MMB last week, as anticipated, while distillates drew marginally by 0.6 MMB, as distillates demand surprised on the upside. This week, we expect gasoline stocks to continue to build but at slower pace (2.9 MMB), as demand should pick up slightly while refinery runs decrease, but gasoline yields increase. Distillates stocks are anticipated to draw marginally (-0.3 MMB), as demand for transportation diesel remains strong against slightly higher distillates yields and stable net imports. With lower expected refinery runs (16.65 MM/D for next week vs. 17.05 MMB/D this week) and still very high crude production (11.9 MMB/D), crude stocks are expected to build by 6.1 MMB. Crude imports last week came in at 8.19 MMB/D, with a surge in Canadian volumes to its highest level ever. We expect this week’s imports to normalize at 7.2 MMB/D. Crude exports were 2.04 MMB/D, below our expectations. We anticipate exports to stay low at 1.9 MMB/D as logistical issues have stifled traffic in Houston in both directions because of bad weather. Cushing drew by 0.19 MMB, close to our forecast. For next week, lower net flows are expected to result in a 0.7 MMB draw at Cushing. Crude runs were down by 174 MB/D on the week to 17.05 MMB/D. Runs are expected to continue dropping, reaching 16.65 due to the onset of the turnaround season. This is the major factor contributing to our forecast of crude stock build this week.

Southeast Asian demand for refined products dampened by rising use of biofuels

Southeast (SE) Asia has been a major contributor to Asia-Pacific incremental petroleum product demand, and accounted for about one-fifth of regional growth over 2011-18. Platts Analytics expects SE Asian demand to grow by 150 MB/D in 2019, up slightly from 145 MB/D seen in 2018, but lower than the average growth of 185 MB/D over 2013-17. In fact, actual demand for refined products will be weaker due to various government mandates for increasing use of biofuels. In particular, Indonesia expanded its B20 mandate to the non-PSO sector last September in order to cut the cost of diesel imports and support domestic palm oil producers by boosting demand for palm oil-based biodiesel. In addition, Malaysia started phasing in B10 (from B7) for transport in December, and implementation will be made mandatory from February 1, 2019. The B7 mandate will also be compulsory for the industrial sector starting from July 1, 2019. Overall, SE Asia’s ethanol demand is expected to rise by 2 MB/D to 50 MB/D in 2019, while biodiesel demand will surge by 34 MB/D to 150 MB/D. As a result, the demand for refined diesel will be dampened more significantly by the use of biodiesel this year than gasoline by ethanol.

Macroeconomics

Latest Chinese economic data are mixed, but also encouraging in key areas

Chinese economic indicators for the fourth quarter were mixed. GDP growth slowed, and high-tech industries remained under pressure. But spending on infrastructure continued to improve, and consumer spending surprises positively. European business confidence surveys were downbeat in January. Policymakers at the European Central Bank took note the situation; they are unlikely to rush into rate hikes. U.S. initial unemployment claims dropped to a new cycle low. Global trade activity turned weaker in November.

Credit conditions mixed, but stresses generally lessen

The S&P 500 fell marginally on the week, but all the loss took place on Tuesday, following the MLK holiday. Credit metrics were modestly mixed. Commodities weakened 0.4%, with energy falling 2.5%. The St Louis financial stress indicator extended its improvement to three straight weeks. The U.S. dollar weakened about 0.5%. There was some noted return to a disinflationary trend after a period of improvement. Also noted was an improvement in financial equity indices without a steepening in the 10-2 year spread (yield curve). This suggests a degree of caution.

Global equities post a neutral week

Global equities were unchanged on a weighted basis. The U.S. S&P 500 moved lower by -0.2%. Among the domestic tracking indices, tech and banking performed the best, while energy and consumer staples decline by about 1.3%. Internationally, emerging markets and emerging Asia both gained about 1.5%, with China higher by 1.2%.

Global NGL Markets

US propane shrugs off large stock draws

US LPGs climbed at the close of the week, tracking crude futures up Friday. Front-month non-LST propane gained 0.5 cents/gal, or 1%, ending the week at 67.5 cents/gal. Market sources said propane has been in a lull despite a large draw in stocks last week reported by the US Energy Information Administration Thursday. US propane/propylene stocks fell by 3.7 million barrels to 63.8 million barrels during the week ended January 18, according to EIA data. Total stocks are 9.8 million barrels above year-ago levels, with the surplus to 2018 building for the third week in a row. Gains to the surplus slowed this week, adding just 298,000 barrels, compared to a 2.4 million barrel increase in the week prior. Last week’s draw was led by PADD 3, where stocks declined by 2.1 million barrels, followed by a drop of 1.2 million barrels in PADD 2. PADD 1 saw an increase of 121,000 b/d, likely as imports are sustaining elevated levels, averaging 228,000 b/d in the past week, down just 19,000 b/d from the week prior. Imports likely remain elevated as average demand for the week ended January 18 rose to 1.7 million b/d, or 135,000 b/d over the prior four weeks. Export demand strength continues to sustain week-over-week inventory drawdowns, averaging 1.04 million b/d compared with Platts Analytics’ estimate of 1.28 million b/d. Production was mostly flat again week-over-week, averaging 2.03 million barrels.

Global Biofuels

President Trump reaffirms his support for E15

E15 returned to the national radar when the blend was mentioned by both President Trump at the American Farm Bureau Federation’s annual convention and acting EPA Administrator Andrew Wheeler at his Senate confirmation hearing. Wheeler testified that the EPA was “still on schedule” to finalize a rule permitting the year-round sale of E15 before the summer driving season. His remarks came with the caveat that the EPA is one of the agencies impacted by the partial government shutdown. In South-Central Brazil, total ethanol production for the 2018/2019 season has surged 19.4% on the year, reaching 30.12 billion liters as of the end of December.

U.S. ethanol production falls following a sharp increase

U.S. ethanol production fell by 20 MB/D to 1,031 MB/D, stopping the momentum following a sharp increase in the preceding week. Stocks built for the fourth consecutive week, rising by 150 thousand barrels to 23.5 million barrels. Despite the gain, inventories were down year-on-year for the first time since the week ending July 13, 2018. Ethanol-blended gasoline production rose by 203 MB/D to 8,751 MB/D, up 6.3% from this time last year.

Agricultural Commodities

Back to work – now what?

One thing we know for sure is that the February WASDE will be published on February 8th and the January WASDE has been abandoned. That information came in the form of weekend headlines, attributing USDA Chief Economist Bob Johansson as the source. The revelation was ambiguous at best however and has opened the markets up to quite a bit of speculation as to what February 8 will bring because the headline stated that the “February WASDE will include delayed data.” This has caused some to speculate publicly that all of the January reports will be abandoned, leaving the WASDE as a standalone. That scenario is hard for Platts Analytics to put much stock in. Does it seem reasonable that no reports, with the exception of inspections and exports once they restart, will be released before the 8th? Surely, but so much time and effort goes into the “final” Crop Production, Quarterly Stocks, and Seeding’s reports that it seems illogical to forgo those releases, even if they’re a month late, and simply incorporate all that data into the WASDE’s S&D. Obviously the February WASDE will have this data in its numbers, but we would still fully expect the release of all the sub-reports on the 8th as well.

N. American Natural Gas Markets

US Gas Short-Term Forecast – January

At the half-way mark of the winter, recent improvements in storage inventory relative to the five-year average should compel a decline in overall price volatility at Henry Hub, but cold temperatures may disrupt those plans.

North American Gas Regional Short-Term Forecast – January

The in-service of Transco’s Atlantic Sunrise is helping to better connect regional production with downstream demand markets, likely limiting massive price blowouts and coloring Platts’ bearish view on the balance of the winter basis pricing in Transco Z6NY.

US Gas Weekly Report – Jan 25

The NYMEX front month contract fell roughly 12% week-on-week, as market participants appear to be looking past a very cold 1-5 and6-10 day outlook towards signs temperatures could begin to moderate thereafter. Outside of the winter, the 2019 summer strip remains better supported, with prices roughly flat week-on-week, while inching closer to key resistance in the low $2.90/MMBtu range.

European Natural Gas Markets

European Gas Weekly Report – Jan 23

Doubts about global growth and a warm winter in Asia continue to give bearish signals to European gas prices. Carbon price is the one bullish element this week, although recent experience has shown that rapid increases in prices rarely held up. Low temperatures have triggered a demand surge throughout NWE, at a time when LNG send-outs decreased on traders’ stock management. Netherlands had to increase Norg withdrawals (counted under Dutch production) to balance strong L-gas demand, whilst H-gas exports through BBL also moved up significantly. Prices moved back up, although not dramatically given current demand. NWE hubs increased their premium to TTF, whilst peripheral markets (PSV, PVB, and CEGH) that were marked at a significant premium to TTF last week, came closer on stronger NWE prices. Demand is expected to remain high next week, although milder temperatures and higher wind production at the end of the week in the UK have the potential to reduce NBP-TTF as well as outright prices throughout NWE.

Global LNG Markets

Global LNG Monthly Forecast – January

Limited supply growth going into the new year has done little to dispel the bearish price sentiment that is settling over global gas markets: weak Asian demand stemming from a warmer than normal winter going into the final peak month spells trouble for the year ahead, starting with a limited need to replenish stocks in Asia in 2Q. The supplier response to the twin forces of relatively weak margins to Asia combined with what were record high shipping rates has been swift: AB exports to Europe have shot up significantly, and have furthermore remained in Europe. Some suppliers appear to be curtailing shipments, particularly Qatar.

Chinese balances point to a slowing need for LNG this year

It’s no secret that China has been driving LNG demand globally over the past few years. However, it is likely we will see somewhat of a slowdown in 2019 in terms of percentage and outright growth rates for Chinese LNG imports, as other sources of supply start to pick up. Several factors play into this expectation, including a lack of new infrastructure, relatively full storage capacity, increased pipeline imports, and a renewed emphasis on domestic gas production.

European Electricity Markets

Unusually flat CSS leaves Spain immune from price spikes on the

The cold snap that started at the end of Week 3 has tightened the majority of European markets, but Spain has been a notable exception. Prices have been capped at €75/MWh throughout January, despite relatively low hydro output and gas dispatch going as high as 8.1GW on a daily basis, a new 7-yr record for January. Using MIBGAS prices, the distribution of daily CSS as a function of gas dispatch turns out to be virtually flat around €5/MWh month-to-date, a peculiar profile that challenges the general belief that higher CSS corresponds to higher gas dispatch. This is the result of multiple factors, but ultimately leaves Spain relatively immune from price spikes across the Pyrenees, and a reliable supplier of power exports at times of French tightness.

U.S. & International Coal Markets

Prices resume downward trend, supply concerns in Pacific subside

Coal prices across the Atlantic and Pacific Basins fell across the curve last week, resuming a general downward trend in prices that began in 4Q18. Two weeks ago, there were some concerns over Chinese supply as mines in Shaanxi shut down and safety inspections were stepped up in a few provinces. However, those concerns were allayed last week as coal demand growth in China continued to show signs of slowing, despite colder-than-normal weather.

Platts 2019 Outlook for US Crude and Natural Gas Webinar

Join S&P Global Platts analysts for an insightful webinar, Tuesday, February 19, 2019, 2:30pm CT as they look at the current and recent trends in the US crude and natural gas markets, and what we can expect in 2019. Learn more and register today.

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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