Global Oil Markets
Large stock build across major products as 2018 ends on soft demand
End of year surge in commercial stocks as demand experienced typical end of year downturn. Inventory added 14.6 MMB, one of the highest weekly builds of the year. Combined gasoline and distillate storage surged by 16.4 MMB, with gasoline up by 6.9 MMB and distillate adding 9.5 MMB. For the next week inventory is expected to add a further 7.7 MMB for gasoline and 11 MMB for distillate. Crude stocks were little changed although Cushing added about 0.6 MMB. For the next week crude is anticipated to draw by around 6 MMB, although Cushing continues building by 0.3 MMB. Reported U.S. total crude field production was 11.7 MMB/D, same as last week. With no new pipeline expansions until 2Q19 in the Permian, U.S. production growth should be relatively gradual for the next few months. For the week ahead, we expect U.S. production to remain at 11.7 MMB. Crude exports fell back to 2.2 MMB/D from nearly 3 MMB/D the prior week. Exports are anticipated to move back to 2.9 MMB/D for the next week. Rather unusually the adjustment factor continued quite high at 0.91 MB/D, down just 50 MB/D from the previous week. We are marking the factor down to 0.55 MB/D for the next week. Refinery runs spiked by 410 MB/D on the week to 17.76 MMB/D, the highest level since early September. For the next week runs are expected to moderate.
The contraction of China’s automobile market is likely to reverse in 2019, but what about gasoline demand?
While China’s automobile market is set to have shrunk in 2018 for the first time in more than two decades, the decline is likely to reverse in 2019 as much of the contraction was due to the effect of a higher sales base in 2017. This sales base was created by government tax cuts as well as soaring penetration of auto financing options beginning in 2015 that frontloaded car sales. We see that car sales will resume positive growth in 2019and beyond. Yet this does not necessarily bode well for China’s gasoline consumption growth, a key driver that has been feeding China’s overall oil demand in the past decade. A fading obsession with SUVs, improved new car fuel efficiency as well as rising shares of non-gasoline/diesel cars mean that the slowdown of China’s gasoline demand growth will be here to stay.
Finished products stocks continue their pullback in Japan, crude stocks rebound
Crude runs increased 32 MB/D for the week ended Dec. 22, but still show evidence that refiners are tempering runs in response to weak margins. Crude imports rebounded, as expected, from 1.92 MMB/D to 4.2 MMB/D, which increased crude stocks 6.8 MMBbls. Product stocks continue to draw and excess length continues to lessen. Another very strong kero draw occurred, along with solid draws in jet and gasoil. Light product cracks have bottomed with a recovery occurring over the last few weeks and supported by higher seasonal demand and run restraint. Refining margins again improved, but remain soft, while implied marketing margins remain very strong.
U.S. October 2018 DOE monthly revisions: demand and stocks
The EIA released their monthly October 2018 (PSM) U.S. oil supply/demand data last week. October 2018 demand came in at 20.774 MMB/D, which was spot on the Platts Analytics forecast. Compared to the weeklies, demand was raised 188 MB/D, with distillate raised 174 MB/D and gasoline raised 71 MB/D. Total demand growth accelerated to 784 MB/D or 3.9%, following the demand impacts of hurricane Florence and tropical storm Gordon in September. “Other product” demand gained 608 MB/D or 13.4% and continues to reflect growth in NGLs. There was also demand strength in distillate, higher by 367 MB/D or 9.1%. Final end-October total commercial stocks stood at 1,261.3 MMBbls, which were 5.8 MMBbls lower than Platts Analytics had assumed, with crude lower by 3.5 MMBbls and products lower by 2.3 MMBbls. Compared to October 2017 PSA data, total commercial stocks were lower than year-ago by 11.0 MMBbls, while at end-Sept, they had shown a deficit of 32.5 MMBbls, and at end-Aug they were at -76.9 MMBbls. Crude stocks were 27.3 MMBbls below year-ago at end-Oct, with Cushing stocks lower by 31.1 MMBbls. For products, the excess to year-ago, which had been 20.9 MMBbls at end-Sept, narrowed to 16.3 MMBbls at end-Oct.
Aramco pricing for February: pricing to comply with lower volumes
Saudi Arabia released their pricing for February last week. Prices were generally adjusted to reinforce the declining attractiveness of lifting Saudi crude, which will allow production to further drop from their November peak. In Asia, prices were raised on all but the heaviest grade, and while in general alignment with market expectations, there were compelling factors that suggested a cut was in order. In the U.S., prices were again raised by $0.15-0.35/Bbl, with the competitive attractiveness of Saudi crude continuing to slip. In Europe, prices were left unchanged on the benchmark Arab light and seen as competitively priced, though the discount on Urals vs. Dated Brent narrowed and could have justified a tightening in terms. Saudi production peaked in Nov. at 11.3 MMB/D, fell in Dec. to 10.7 MMB/D, and is forecast at 10.2 MMB/D in Jan-Feb.
December Weather: U.S., Europe and Japan warmer than normal. Heating oil demand 600MB/D weaker than last year and 292 MB/D below the 10-year average.
December was 6% warmer than the 10-year normal for the three major OECD markets with a loss of 292 MB/D of oil-heat demand versus normal. The markets were 10% warmer on a 30-year-normal basis. In the U.S., much warmer-than-normal weather prevailed in the second half of December after colder-than-normal weather in the first half; the U.S. weather came out 4% warmer than normal for the month, losing 75 MB/D of oil-heat demand versus normal. Across the Atlantic, Western Europe was also warmer than normal. Western Europe was 11% warmer than normal in December losing 207 MB/D versus normal. Japan was warmer than normal by 1% while losing 10 MB/D of oil-heat demand versus normal. Versus December 2017 which was colder for a positive 308 MB/D, the markets this year were weaker by 600 MB/D with the U.S.'s contribution of -294 MB/D being the largest followed by Europe which contributed -158 MB/D and Japan which contributed -148 MB/D.
Fundamentals should bring Brent back to 60-70 USD/Bbl in 2019
We view the recent downturn in oil prices as overdone and expect a rebalancing to fair value prices, based on fundamentals. Our fundamentals show oil balances as largely balanced and broadly constructive through 2019, with normal 1H builds and large draws in 2H. Global economic growth is turning weaker, but remains close to long-term averages for now. Demand growth forecasts are largely unchanged, although downward revisions cannot be ruled out in coming months. OPEC+ cuts are material and in line with expectations. We expect Saudi Arabia, as well as the UAE and Kuwait, to stay very close to markets and prices, and adjust supply as necessary. Commercial oil stocks in the three major OECD markets (U.S., OECD Europe, and Japan) are forecast to build by 400-500 MB/D in 1H, on a slowdown coming out of the winter, but these builds are in line with historical seasonal builds. For 2H19, balances tighten with big draws (600 MB/D in 4Q). Overall, commercial oil stocks in the major OECD markets are up very slightly on the year. For January, we forecast a 500 MB/D build in crude stocks in the major OECD markets, with global crude runs down similarly. Crude builds in the first few months of 2019, in line with historical seasonal norms. Refining margins will be pressured in 1Q19 with ongoing weakness in gasoline offsetting strength in middle distillates and fuel oil.
Asia coping with changing and volatile dynamics of both crude oil and product markets
Asia-Pacific petroleum product demand is projected to grow by 880 MMB/D in 2019, up from 825 MB/D this year. China’s demand growth is expected to moderate to 450 MB/D in 2019 while India’s product demand growth is likely to improve to 275 MB/D next year on robust economic growth. The Middle East continues to be the top supplying region for China though Russia is likely to retain its position as the No.1 crude oil supplier to China in 2019. The U.S. can be an important source for China as its appetite for crude continues to grow and the two countries continue their negotiations to avoid an escalation of the trade war. India’s exports of key products are likely to ease next year due to its robust domestic demand and heavier refinery turnaround. In Asia next year, there is still a mismatch with potential gasoline supply exceeding demand, and diesel cracks are likely to outperform gasoline for a second consecutive year in 2019.
Latin American product demand seen recovering modestly in 2019, but refining woes are set to persist
Platts Analytics projects 2018 Latin American refinery crude runs to finish at 4250 MB/D, 450 MB/D lower impacted by persistent outages (mechanical issues, lack of oil to run, etc.). Crude unit outages this year in the region are estimated at 1570 MB/D, over 400 MB/D higher year-on-year. In 2019, we forecast L. American runs at 4200 MB/D, 50 MB/D lower year-on-year. Mexican runs in 2018 are projected at 615 MB/D, 155 MB/D lower year-on-year and expected to remain at around that level in 2019 although the continuation of oil imports and refinery maintenance programs remain key uncertainties. Brazilian crude runs are projected at 1665 MB/D, 10 MB/D lower year-on-year with 2019 runs forecast at 1800, 135 MB/D higher year-on-year. On the demand side, we project 2019 L. American gasoline demand (incl. ethanol) at 2685 MB/D, close to flat year-on-year. Mexican gasoline demand is set to average 795 MB/D in 2018, flat year-on-year and is expected to be about 10 MB/D lower in 2019. By contrast, Brazilian gasoline/ethanol demand is projected 35 MBGE/D stronger year-on-year in 2019. Latin American distillate demand (including biodiesel) in 2019 is projected at 2785 MB/D, 15 MB/D higher year-on-year. Finally, with the expectation of relatively low refinery crude runs/product output in the region, imports are set to remain strong in 2019: gasoline imports are forecast to average 1385 MB/D, 105 MB/D higher year-on-year. Likewise, 2019 diesel imports are forecast at 1335 MB/D, 55 MB/D higher year-on-year.
Macroeconomics
Busy start to 2019: Blockbuster U.S. job report, dovish Fed signal, and Chinese easing
U.S. job growth significantly surpassed expectations in December. Wage growth accelerated somewhat, but the labor market did not appear to be overheating. The ISM manufacturing confidence index disappointed, but for now, jobs data are more accurately reflecting the underlying economic condition in the U.S. At the 2018 central economic work conference, Chinese policymakers expressed the willingness to support economic growth via policy easing.
Financial stresses lessen slightly
The S&P 500 gained 1.9%, on the week and reclaimed the 2,500 level, with a big drop in equity volatility. Oil had a better week, with lower volatility (OVX), and outperformance in the energy complex. Commodities gained 1%. Our bellwether indicators, copper and aluminum, bounced higher. The dollar moved lower by 0.2%, but there was deeper weakening against a host of key currencies. While the equity and credit markets are still stressed, a rally of sorts appears to be in the early stages. Many of the credit metrics are starting to look better and a bottom may be forming, though it remains too soon to say.
Global equities start 2019 with gains
Global equities gained 1.2% on the week, with the U.S. S&P 500 higher by 1.9%. Among the domestic tracking indices, energy and banking did exceptionally well, and gained 5%, while housing and retail gained nearly 4%. Technology and utilities were largely unchanged and lagged. Internationally, Latin America was a strong performer and gained nearly 8%.
Global NGL Markets
Strong domestic and export demand driving lower propane stocks despite higher production
US propane/propylene stocks fell by 1.5 million barrels to 70.7 million barrels during the week ended December 28, according to EIA data. Total stocks are 2.7 million barrels above year-ago levels, having narrowed the surplus from 5.3 million barrels a month ago. Last week’s draw was led by PADD 3, where stocks declined by 950,000 b/d, while PADDs 4 & 5 reported a relatively strong combined draw of 335,000 b/d. Strong domestic and export demand have driven the drawdown over the past month, despite production levels remaining robust. EIA reported record high production of 2.145 million b/d for the week ended December 28, a nearly 90,000 b/d increase week over week that was driven by PADDs 2 and 3, where production rose by 57,000 b/d and 28,000 b/d week over week, respectively. EIA’s product supplied was 1.59 million b/d last week, while exports were reported to be 934,000 b/d compared with Platts Analytics’ estimate of 902,000 b/d. For the week ending January 4, exports are expected to be 1.05 million b/d. Front-month non-LST propane lost 1.25 cents/gal, or 2%, ending last week at 63.25 cents/gal.
Global Biofuels
U.S. ethanol production declines
U.S. ethanol production fell sharply last week, dropping 31 MB/D to 1,011 MB/D as more companies reduced output due to weak margins. Total inventories increased by 29 thousand barrels to 23.2 million barrels, with all of the build occurring in the Midwest. For the second consecutive week, stocks fell in all other regions. Ethanol-blended gasoline production plummeted by 673 MB/D to 8,596 MB/D, though it remained higher than at the same point in the previous year.
U.S. ethanol prices now higher than gasoline
U.S. ethanol prices rose during the holiday-shortened week, and are now higher than gasoline in both Chicago and New York. The cash margins for S&P Global Platts’ model ethanol plant rebounded last week as product prices rose despite a decline in corn costs. According to preliminary figures from the Secretariat of Foreign Trade, Brazil exported 107.4 million liters of ethanol in December. In Europe, T2 ethanol prices have slumped after reaching a 20-month high on December 10. Chicago biodiesel prices were relatively stable following the Christmas holiday, while ULSD values fell to a 1.5-year low.
Agricultural Commodities
What’s next for Brazil?
2018 will be known as the year that Brazil took the lead from the United States in agricultural exports. Clearly the Trade War with China accelerated Brazil’s growth, but the trend was already in place, and in our opinion there will be no looking back. In the December 8, 2018 issue of Opening Print titled “Brazilian Threat-Expansion under Bolsonaro” we discussed this increased competition in more depth, highlighting the fact that Brazil had been under military dictatorship less than 35 years ago and faces a daily struggle with socialistic tendencies. Last week, less than 24 hours into his presidency, Bolsonaro said publicly that his focus was to eradicate socialistic thinking from Brazil. Of course this is a man who was stabbed during his campaign for the highest office in the land, so emotional opposition to his opinions can run strong.
N. American Natural Gas Markets
US Gas Weekly Report – Week Ending Jan. 4
NYMEX prices experienced significant selling pressure last week. Weakening prices are a direct response to a very bearish 15-day weather forecast, which in turn has re-rated end-March inventory forecasts to the upside. Currently, ICE end-season inventory expectations are now at roughly 1.5 Tcf – an increase of ~150 Bcf relative to a few weeks ago.
European Natural Gas Markets
European Gas Analytics Weekly Report – Jan. 3
Most price anchors point to a bearish outlook, with the high EUA price (~€25/tCO2e) being one of the few bullish factors helping to support the coal switching price (CSP) level, as well as depressed UK wind generation and cooler temperatures over the first days of 2019.
Global LNG Markets
Cross basin economics are shifting, leading to a significant volume shift next month
In recent scorecards, Platts Analytics highlighted how shipping rates had increasingly forced supplies to be consumed within basin and discouraged long-haul trips. This dynamic seems to be changing, as rates drop and Europe becomes more and more bloated. This phenomena is best highlighted by U.S. volumes, which typically travel some of the farthest distances to consumers – 61% of production stayed in the Atlantic Basin last month – in contrast to last January when only 14% stayed in the basin. As shipping rates have precipitously dropped from nearly $200k/day to now $85k/day in the Pacific, it is becoming increasingly likely that Europe will see less volumes as economics improve to shift volumes further east.
North American Electricity Markets
Mild December allays gas supply concerns
Following a strong start to the month, Northwest gas and power prices faded as temperatures rose above normal and deliveries at Sumas rebounded. Mid-Columbia on-peak energy, which traded at nearly $100/MWh for delivery on December 4, dipped below $40 two weeks later. California on-peak energy followed a similar trajectory falling from triple digit levels on December 3 to below $40 during the last week of the month. Below normal precipitation in both regions has, for the moment, been overshadowed by weak demand. Columbia River Basin precipitation above The Dalles averaged 79% of normal for December (through 12/27), and near term forecasts show weakness continuing. California precipitation has also been below normal with the Northern Sierra index at 72% for the water year to date.
The Mystic Effect: Despite Mystic 8 & 9 being treated as price-takers, outlook for FCA 13 slightly bullish
Supply and demand have largely offsetting implications for clearing prices in the ISONE Forward Capacity Auction (FCA) 13 for the 2022/23 capacity commitment period. While the demand curve outlook appears weaker relative to FCA 12, supply curve considerations are bullish, with several retirements relative to FCA 12 and ISONE’s termination of the Clear River 1 CSO, despite Mystic 8 & 9 behaving as price takers in the supply curve. Platts Analytics forecasts the FCA 13 primary auction clearing price within the range of $4.30 - $5.20/kW-m. FCA 13 will exhibit a secondary substitution auction, a result of ISONE’s Competitive Auctions with Sponsored Policy Resources (CASPR) project, which Platts Analytics anticipates will be oversupplied by qualified resources.
European Electricity Markets
European Electricity Monthly Outlook - January
Alongside the typical seasonal drop in consumption over the holidays, Western Europe was characterized by almost consistently warm weather through December, and demand losses of 3.5GW led to lower prices of the order of €8/MWh in France, €5/MWh in Germany and €3/MWh in Italy vs. our projections. However, Spanish prices were in line with our expectations due to unplanned nuclear outages and low wind output. December saw also robust hydro output across the various markets and a sharp rebound in German river levels, with a notable effect on coal dispatch. Furthermore, in Belgium the on-time restart of Doel-4 in mid-Dec was followed by the restart of Tihange 3 on Jan.1, two months ahead of schedule. Combined with a resurgence of Dutch imports, this has stripped some of the risk premium out of the Belgian market for the balance of 1Q-19, lowering also French prices, but with limited impact on German ones. A loose gas market in N.W. Europe and healthy hydro output expected across the Continent add downside risks in Feb-Mar, but the outlook turns more neutral for the remainder of the year and firmly bullish as we move into 2020.
U.S. & International Coal Markets
International Thermal Coal Market Forecast
Seaborne coal prices rebounded slightly in December, following a sharp decline in November. Coal demand over December has been relatively weak, with mild temperatures in key markets deflating power demand and coal consumption. Hopes that China’s imports would re-strengthen in 2019 were dealt a blow with the NDRC signaling it will limit imports on a monthly basis in 2019 rather than an annual cap. Bearish risks lie ahead as Chinese coal production is keeping pace with demand even with import restrictions.
Though gas-to-coal switching limited to date, outlook for US coal remains bullish
Our view on US coal prices remains bullish to forwards through 3Q19 on rising winter coal burn. Though we reduced our winter coal consumption estimates slightly, the supply side also appears slow to respond to higher demand, and we cut our production estimates modestly, keeping our bullish stockpile forecast intact. The one exception to our bullish outlook is CAPP, where we believe we should see limited upside given negative export margins.
Environmental Markets
Seasonal NOx emissions lower but several states still above caps, for now
Seasonal NOx allowance prices trended lower for the second compliance year of the power sector CSAPR Update program. Emissions continued to fall further below the aggregate cap in 2018, though a few states were above their caps and a couple were close to “variability limits”, which restrict interstate trading of allowances and use of the bank. Coal retirements in 2018-2020 alone could push nearly all states to surplus. EPA used CSAPR to demonstrate state compliance with “Good Neighbor” Clean Air Act obligations for 2008 Ozone NAAQS (and to reject petitions from those downwind states looking for further emissions reductions). Decisions on legal challenges to the CSAPR Update are expected this year. Despite implementation of the new, more aggressive 2015 Ozone NAAQS, EPA is not looking to tighten the CSAPR Update program. While a number of upwind emitters could be impacted by the new NAAQS, EPA is affording them maximum flexibility to limit additional compliance obligations.
Rollback of Obama regulatory legacy continues
The Trump Administration advances efforts to undo the Obama regulatory legacy through a methodical and more tempered rulemaking process, with many high profile and impactful rulemakings set for finalized rollbacks in 2019 (Clean Power Plan repeal/replacement, review of GHG emission guidelines for new power plants, federal light-duty vehicle emissions standard rollbacks, revisions to regulations of methane emissions in oil & gas industry). There will be a push to finalize these rules in 2019 to provide time for legal defense and avoid potential Congressional Review Act nullifications after the 2020 elections. Key recent updates include revisions to the regulation of criteria air pollutants and mercury from the power sector, a delay of landfill methane regulation deadlines, a rollback of reporting requirements for LNG exports, and the setting of annual renewable fuel standards targets. Ryan Zinke is leaving the Department of the Interior and similarly to what occurred at EPA, former oil and gas industry lobbyist Acting Secretary David Bernhardt will likely provide quieter, more process-oriented, leadership.
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