European Refinery Margins Will Remain Generally Healthy in 2Q-3Q17

Refinery margins will stay relatively firm supporting European refinery runs through the gasoline season. Gasoline stock coverage of demand/export pull will be lower than last year. Distillate stocks will be slower to work off. Consequently, gasoline will outperform diesel in 2Q/3Q17. HFO cracks will trend lower but still remain relatively firm due to reduced Russian and Venezuelan exports.

The Allure of Hub-Indexed Gas Finds its Way to European DES LNG Pricing

As the diversity of global LNG supply dramatically evolves by the month, so does the pricing of LNG in Europe. In the past, buyers were largely expected to pay pricing linked to oil, however, increasingly cargoes are being priced at least partially off of regional hubs. This is the hallmark of two very important changes: further developed European gas markets and increased competition among producers for gas burn. These price developments, combined with Gazprom’s recent proposal to open Eastern European markets, has the opportunity to make Europe a more integrated and less isolated gas ecosystem more akin to the U.S.

Poor Hydro Set to Continue to Support Italian Prices

After setting a new 37-year minimum for January at 36.9% of nominal capacity, water levels in Italian hydro reservoirs continued to stand at multi-year lows in February, dropping to 32.7%. As a result, the 22% year-on-year uptake in hydro output observed in January (2.7 GW) has reversed to a net loss in February (-14% year-on-year to 2.2 GW) and the trend is set to continue in March (-22% year-on-year to 2.4 GW month-to-date). So far in March, across the Italian market, the increase in wind output, +53% year-on-year to 2.6 GW month-to-date, and solar output, +25% year-on-year to 2.2 GW, has more than made up for the hydro shortfall and, together with an +11% year-on-year in combined imports from France and Switzerland (5.6 GW in total), has reduced the need for thermal output, which declined by 4% year-on-year to 14.1 GW.

U.S. Ethanol Prices Gain

U.S. ethanol values advanced the week ending March 17. February RIN generation was slightly less than January a longer month. The D6 RIN carry over during 2016 decreased, but less than anticipated. Brazil is considering a 20% import tax on U.S. ethanol. Spain-based Abengoa sold its European ethanol business.

Rains in the Plains

One rain does not a drought break, but the positioning of this week’s forecasted precipitation could not be any better for those from Texas north to Nebraska and east to Missouri. Whether winter wheat is in the ground or corn has just been planted, these rains will provide a real benefit. Localized flooding is possible in Oklahoma and southern Kansas, but after everything they’ve been through it will be welcomed. These rains will slow down planting in some areas, but not in a wide enough area to make a difference to the market.

California Low Carbon Fuel Standard Market Scorecard

The California Air Resources Board’s Low Carbon Fuel Standard (LCFS) is designed to reduce emissions in transportation fuels as part of the state’s efforts to address climate change. The LCFS policy incentivizes change in the state’s transportation sector and liquid fuel markets and is already impacting refiners, low carbon fuel providers, fuel consumers, blenders, traders and related companies. PIRA’s California Low Carbon Fuel Standard Scorecard offers an updated assessment of the key fundamental and policy drivers impacting LCFS credit prices and compliance in the short to medium term – complementing the longer-term outlook presented in PIRA’s recently released LCFS Study.

Coal Prices Move Lower on Absence of Upside Risks

Seaborne coal market prices moved decidedly lower this week, despite a modest rally in the latter stages of the week. Mild weather conditions, weaker oil and gas markets, and sagging European power prices weighed on CIF ARA prices in particular. In the Pacific Basin, while the recent data releases on the demand side (China, Taiwan, and South Korea) have generally been skewed to the bullish end of the spectrum, the market seems to continue to focus on recovering domestic production in China tamping imports and pricing down. With policymakers in China adopting a more flexible position regarding coal production capacity cuts, and alleviated fears regarding the near term adequacy of European natural gas storage, much of the upside risk potential for coal prices has been removed. These risks had previously been propping up prices and their removal will lead to further downward pressure on pricing in PIRA’s view, barring unforeseen disruptions in supply or demand surges.

Global Equities Continue to Exhibit Rotation

There continues to be noted rotation in the domestic vs. international equity markets this past week. The broad U.S. market was lower on the week. Banking and retail led many of the sectors lower, while utilities was the one sector to post gains. Energy only slightly underperformed the overall market. International indices were led higher by emerging markets, emerging Asia, and China, for the second straight week. Latin America was lower. While all the international tracking indices failed to move universally higher, they did all outperform the U.S. market.

It’s All About Products

Overall U.S. commercial stocks increased just 1.3 million barrels this past week as another sizable 5.0 million barrel crude stock build more than offset a 3.6 million barrel product inventory decline. Both gasoline (-2.8 million barrels) and distillate (-1.9 million barrels) inventory declines figured prominently in the overall product stock decline. Crude stock builds should be largely over now that runs will likely be over 16 MMB/D, though builds at Cushing do not end until April.

Winter’s Return Provides Springboard for Prices

In perhaps a harbinger of things to come, month-to-date Dominion South and Transco Leidy basis discounts have narrowed to levels not seen since 2014 polar vortex. The contraction in the spread between Dominion South and Columbia Gas to ~10¢ this month in relation to the 50¢ gap just a year ago, is also of note. Indeed, it underscores the enhanced year-on-year in-basin interconnectivity brought on by various pipeline projects within the Appalachian Basin and limited growth in Appalachian production year-to-date.

Technology Assessment 2017: Power Generation & Vehicle Transport

This Special Report highlights a number of major technology trends in the power and transportation sectors and reviews PIRA's long-term technology assumptions for its global energy outlook. The report is drawn from PIRA's 2017 Scenario Planning Service Annual Guidebook, which offers a comprehensive country, sector and product-level energy outlook through 2035. Given the importance of the power sector for natural gas and coal demand and the transportation sector for oil use, the key technologies assessed include those for electric power generation and end use, as well as those impacting transport fuel choice.

U.S. Federal Regulatory Calendar

The Trump Administration and the GOP-held Congress have been working to roll back Obama era regulatory initiatives through Executive Orders, the Congressional Review Act and other regulatory means. Congress still has until mid-May to repeal regulations under the CRA. The Stream Protection rule was repealed in February and the BLM Planning rule will likely follow, but a repeal of DOI’s venting and flaring rule is facing resistance. An EO addressing the Clean Power Plan is yet to be released. The Trump EPA will review the final determination not to revise light duty vehicle GHG standards for model years 2022-25 but has not yet taken action on the status of California’s Clean Air Act waiver. Implementation of 2017 Renewable Fuel Standard regs had been delayed, but appears to be going into effect, without revisions. The EPA has also withdrawn an information collection request on methane emissions from oil and gas wells.

S&P 500 Lower as VIX Gains

The S&P 500 moved lower and stress indicators generally increased but remain very low. Volatility (VIX) was higher, and the price of high yield debt (HYG) moved lower. Emerging market debt bucked the trend and rose in price on the week. U.S. government rates, both short and long-term maturities, generally eased. Short-term euro rates rose slightly. Both the total commodity index and ex-energy moved slightly lower, and the dollar was generally weaker.

U.S. Ethanol Stocks Draw

U.S. ethanol stocks fell for the third consecutive week, decreasing by 171 thousand barrels to 22.6 million barrels. Despite the decline, PADD II stocks climbed to a record high 8.5 million barrels. Ethanol production was relatively flat, falling by 1 MB/D to a still-high 1,044 MB/D. Ethanol-blended gasoline manufacture increased to 9,075 MB/D, up 4.1% from this time last year.

2017 Acreage on Tap

While some time remains for U.S. producers, many are past the point of no return on their planting choices, which the market will get a feel for next week. With this week’s numbers of 12% of the expected acreage to be planted in corn and 11% in soybeans currently within areas that are experiencing drought, the thought remains that the drier an area is, the more likely it will be for more corn to be planted as planters keep on moving once they start. That “shift” may encompass 1-2 million acres in our opinion, but given the seed buying pattern exhibited in the spring so far, PIRA doubts much more of a shift can occur.

Propane and Ethane Prices Down Week-On-Week

Price declines were registered throughout all the species, tracking with WTI as well as with the normal seasonal trends. Propane futures ended 4% down to 57¢/gal and ethane by 1% to 22¢. Pentanes plus also declined by 3% to $1.07/gal. Normal butane and isobutane futures remained steady at 75¢ and 77¢, respectively.

Higher Japanese Refinery Maintenance, but Seasonally Lower Demand

Japanese crude runs continued to ease on the week in line with our maintenance schedules, while crude imports fell back sharply. Crude stocks drew 3.9 million barrels, but finished product stocks built 0.5 million barrels. Aggregate major product demand continued to decline seasonally and is being heavily influenced by lower kerosene consumption. Gasoline demand was higher and helped only modestly by the spring equinox holiday and stocks built. Gasoil demand was fractionally lower and stocks also built. Kerosene demand declined along seasonal trends.

2Q Softness Continues to Grow

Europe will likely be required to play a balancing role in global markets this year in contrast with 2016, but probably not as large had been forecast at the PIRA October Seminar. This theory will be tested by what actually happens on the regional AB supply side: if all suppliers step up to produce even at 80% of capacity utilization, there will be excess supply to manage.

Monthly Gas/Power Sensitivity Analysis

Electric power sector gas burn during the April-October period is expected to be down ~2 BCFD from 2016. This projection assumes 10 year average cooling degree days, PIRA’s Reference case gas price forecast, and assumptions on gas and renewables capacity changes and hydro conditions. This report quantifies the potential range in gas burn associated with alternative gas price paths which may result from faster or slower production gains and/or changes in end of injection season storage levels.

Encouraging Pictures Abound in Emerging Economies

One of the most critical macro developments in the first three months of 2017: there are increasing signs that emerging economies (which account for 55% of global GDP) are turning things around. First, there have been tangible improvements in the tone of data – the emerging market economic surprise index, which measures whether data releases have met market expectations, strengthened significantly this year, and is at its highest level since 2010. Second, financial market conditions in the emerging world have exhibited resilience, even as the U.S. Fed continues to tighten its monetary policy.

Shale Past an Inflection Point, On Path of Strong Growth

U.S. shale production finally turned higher in 4Q16 following five consecutive quarters of sequential declines. Shale production, now past an inflection point, is on a path towards strong growth. Initial guidance for 2017 from public shale operators points to a 60% year-on-year increase in spending and a 16% year-on-year increase in shale production. PIRA expects growth will continue to be led by the Permian, but all of the major plays contribute. With activity ramping up quickly, costs are also on course to rise. However, further productivity gains will likely offset some of this inflation.

Ukrainian Industrials to Receive Price Cut

National joint-stock company Naftogaz Ukrainy from April 1, 2017 will cut the price of gas sold to industrial consumers on a prepayment basis by 10.3%. According to a company press release, this price is relevant for consumers buying gas in the amount of more than 50,000 cubic meters per month and under the condition the companies have no debts to Naftogaz. The price for other customers next month will fall by 9.8%.

U.S. Shale Oil: Rising Costs and Breakevens in 2017

Shale costs have begun to rise as surging shale activity has pressured service prices higher. PIRA predicts total well costs will increase by more than 10% between 2016 and 2017. Recent reports suggesting significantly higher cost inflation seem unlikely as much of this year’s cost are locked in under long-term contracts and only certain portions of total well cost are experiencing tightness (e.g. proppants, pressure pumping). In addition, structural efficiency gains are expected to continue and will help offset a portion of this inflation.

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.