Prices to be supported through year end as refinery runs increase, but risks to 2019 are rising
Balances have directionally weakened since last month’s outlook. Stocks in the three major OECD markets (U.S., OECD Europe, and Japan) built nearly 600 MB/D in Q3. Oil demand forecasts were revised lower in 2018 and 2019 on macroeconomic concerns, a bout of higher oil prices, and U.S. dollar appreciation, which has further increased the oil imports costs for many Asian, European and Latin American countries. Oil supply has been coming in higher from Iran, Saudi Arabia, Russia, and other core OPEC members. Libyan output has also been steady at over 1 MMB/D (at least for now). S&P Global Platts Analytics continues to see oil balances as measured, drawing but not exceptionally tight. Market concerns over tight supply have given way to concerns on the macroeconomic and demand picture. In addition, the risk of a global slowdown in 2019 is increasing significantly. Still, we expect oil price upside through the remainder of the year as refineries return from maintenance, crude stocks draw, and Iran sanctions officially snap back (we still see Iranian exports dropping to 1.1 MMB/D in November/December). OPEC’s likely higher price aspirations will lead to more talks of cuts. We believe Saudi Arabia will continue to try to manage prices at the $80/Bbl level, adjusting their supply to the needs of the market. We see Saudi crude output at 10.5 MMB/D in December. In terms of stocks, we see global crude runs increasing by 2.3 MMB/D in November and another 1.1 MMB/D in December, supporting substantial crude stock draws in the three major OECD markets in December (900 MB/D). Geopolitical risks to supply are high, while risks to demand are skewed to the downside.
U.S. ethanol prices to remain low for a couple of months before recovering next year
U.S. ethanol prices were relatively steady during the first half of October, but they declined recently due to near-record inventories and lower RIN values. Domestic ethanol production is estimated to advance to 1,050 MB/D (16.10 billion gallons) this year from 1,040 MB/D (15.94 billion gallons) in 2017. The EPA released its latest data showing that 15 petitions for small refinery hardships have been requested for 2018, up from 11 last month. Brazil’s President-elect Jair Bolsonaro is a strong proponent of the biofuels industry and wants Brazil to retake global leadership in ethanol production. CropEnergies will idle its 400 million liter per year Ensus ethanol plant in the UK at the end of November. European ethanol prices surged to a monthly high following the news.
Mild weather helps avert France/Belgium price spikes, but nuclear risks remain
The reduction in Belgian nuclear availability from 1.9GW before Oct.12 to 1.0GW afterwards corresponded to a €0.4/MWh fall in prices in the following two weeks (also due to fuel/carbon losses). Also, across the month the average Belgian price was €76.0/MWh, a relatively limited raise from Sep. Measures implemented to cope with tightness have reduced considerably the risks of outages Elia anticipated for Nov, with the baseload contract dropping from €205/MWh on Oct.4 to €105/MWh on Oct. 29. However, interconnector risks around loop flows might continue throughout the winter, and cold spells could further exacerbate their impact. This was evident during the cold spell of Oct.29-30, when the BE-FR spread was a touch short of €40/MWh on a daily basis, and hourly Belgian prices peaked at €232/MWh.
Another front opens in the battle for winter gas supply
Mid-Columbia on-peak prices spiked above $100/MWh as a Westcoast Energy (BC) pipeline rupture cut off gas supply at Sumas on October 10, then traded in the $40-60 range for the balance of the month as partial service was restored. For the full month, prices averaged in the mid $40s helping to lift California prices above the $40 mark as well. Increases at Palo Verde, which averaged in the low $30s, were limited by weak demand and E>W and S>N transmission congestion. The pipeline outage drove Sumas spot and forward gas prices higher (as high as $14/MMBtu for October 30 delivery). At the southern end of the WECC, SoCal gas receipts will remain well below capacity this winter, implying an increased likelihood of curtailment and high prices during cold conditions. Power price impacts in both markets will depend on load, hydro supply and transmission availability.
Coal prices start to fade. High-CV FOB Newcastle corrects lower
Seaborne thermal coal prices have faded over the past month headlined by the much-anticipated downward correction in high-quality FOB Newcastle prices. While European gas prices have faded somewhat, coal-fired generation has remained competitive with gas outside of the UK, and Atlantic Basin prices have held up relative to their Pacific Basin counterparts. Chinese demand will remain at the forefront of price formation, and there have been signs that underlying import demand is slowing.
Gasoline weakness likely to trim runs in Europe which will only make distillate tighter later - key is degree of US/EU refinery yield flexibility
Gasoline cracks collapsed in October due to high inventories built up primarily from earlier high runs/production. Although light global crude quality will make yield shifts more challenging, refiners are already starting to readjust operations to rebalance gasoline versus diesel. However, that will require that gasoline-diesel price spreads continue to favor diesel into 2019. Part of the rebalancing is to trim runs in gasoline export oriented capacity and that has likely occurred already in Europe. Diesel cracks will strengthen in November/December as Rhine River levels are assumed to rise. This will allow more economical movement inland to replenish low stocks there. However, that will further tighten tidewater markets. Fuel oil cracks will remain strong with stagnant resid content in crude runs but increasing global conversion capacity. This will all change as 2020 approaches when IMO global bunker spec changes will push clean-dirty spreads much wider. The IMO’s MEPC committee reaffirmed on-time implementation with stronger enforcement measures in two proposals that were addressed at its meeting held Oct 22-26. High freight rates in October/November widen inter-regional crude differentials.
Developed world divergence widens after healthy U.S. job growth and sluggish euro area GDP
U.S. job growth was better-than-expected in October. While the unemployment rate remained at a multi-decade low, three broad indicators of labor compensation (the hourly wage rate, the employment cost index, and the wage growth tracker) did not paint a worrisome picture of labor cost-push. Manufacturing confidence measures in China continued to falter, especially the sub-index for export orders. However, Korean data for October suggested that Asian trade situation remains constructive for now. Flash readings of GDP and the CPI for the euro area were disappointing.
Propane stocks resume building on higher production and imports from Canada
US propane/propylene stocks built by 1 million barrels during the week ended October 26. Production remains above 2 million b/d, over 200,000 b/d higher than year-ago levels. Propane imports increased to 184,000 b/d from a prior four-week average of 116,000 b/d, with nearly all of the increase coming in PADD 2 and likely moving into demand markets based on the overall weekly draw in the region. Lower exports also contributed to the build, with the EIA reporting 662,000 b/d of exports, in line with Platts Analytics’ estimate based on ship tracking data. EIA’s product supplied for the week was 1.4 million b/d, significantly higher than last year's four-week average of 950,000 b/d. Higher demand could be a result of steam crackers running LPG in addition to early seasonal heating and crop drying demand. For the week ending November 2, exports are expected to be 900,000 b/d.
Trump Administration announced eight countries will receive waivers
On November 2, US Secretary of State Mike Pompeo announced that eight countries would receive waivers to import Iranian oil, although he declined to name them. We have long assumed that a handful of countries would continue to import some Iranian barrels, once sanctions were officially reinstated. We forecast 1.1 MMB/D of Iranian crude and condensate exports in November and December. The initial news could amount to slightly more exports, at least in November, although the details remain unclear. Volumes likely to fall shortly thereafter.
US Gas Weekly Report
Henry Hub cash averaged $3.23/MMBtu for the week-ended November 1, down week-over-week by just ~1¢/MMBtu. Moreover, the October 2018 average at $3.23/MMBtu was the highest for cash prices since January 2018 — when the bomb cyclone storm hit the US East Coast. The NYMEX balance of the winter strip jumped the last two trading days of October, rising by ~5¢/MMBtu on average toward $3.20/MMBtu. Winter gas is still trading below October daily-average levels, especially in the wake of yesterday and today’s declines.
Assessing the impact of tariffs on U.S. LNG supplies
Platts Analytics has emphasized that the tariffs may not be a short-term problem, as tight markets generally benefit the players that are long gas. However, in the medium- and long-term, we see cracks growing. Some evidence of that was on display recently as Magnolia LNG delayed their project due to Chinese tariffs negatively impacting their project’s marketability. Whatever your view on the viability of that project or excuse for the FID delay, we are not seeing Chinese buyers sourcing medium- or long-term contracts in a big way with U.S. liquefiers – and it’s not expected to change any time soon.
Brazil’s higher hydro and wind capacity pushes gas into a back-up source of supply
In Brazil, the markets have reacted positively to the election of Jair Bolsonaro, who despite a lack of clarity on policy plans, appears to be pro-business, with the development of energy supplies among his key priorities. It remains to be seen if Bolsonaro will be able to boost the Brazilian economy, where momentum appears to have faded in recent months based on our analysis of real-time electricity demand data. While hydro already accounts for the vast majority of the capacity mix, about 6 GW of additional hydro capacity has been contracted in recent auctions with online dates up to 2023. Wind is better placed than hydro, with costs for developing wind capacity well below global averages also thanks to higher load factors. In this context of growing hydro and renewables, Brazil is still developing some 5 GW of gas capacity – so far, the largest amount of gas-fired projects in South America. The role of gas in Brazil is changing into a back-up one, especially in the dry North East region and in periods of scarcity across the country, a service that currently batteries are not able to secure competitively. So far, the largest gas projects in development are tied to the ramp up of FSRU terminals, although the balance of gas is swaying towards additional domestic supplies.
Another bullish stock draw in August helps keep US coal prices supported
On October 24, the EIA reported end-August electric power sector coal stockpiles of 104.1 MMst, a draw of 6.4 MMst m/m compared with a 5.0 MMst average August draw over the most recent five-year period (2013-2017). It was the fifth month in a row when the EPS stockpile change has come in more bullish (higher draw or lower build) than the five-year average. Two-month forward days cover is projected to fall even further below the five-year average through 4Q18 and into 1Q19 on elevated exports and production restraint.
2017 CA Cap-and-Trade Emissions Expected Lower; QC Moves to Annual Deficit
The annual release of CA covered cap and trade emissions data will follow the November 1 triennial compliance surrender for Compliance Period 2 (2015-17). Ahead of this release, we estimate 2017 emissions to be down year-on-year (following a 2016 year-on-year decline of ~5%) – with decreases in the power sector and supplied natural gas emissions more than offsetting increases in refining and cement, with transport emissions generally flat. With 2017 emissions data, the full cap and trade obligation for CP2 will be known. However, the allowance carryover to CP3 also depends on utilization of offsets. A breakdown of compliance instruments used to reconcile emissions should be made available by year-end. Bearish emissions data releases in 2016 and particularly 2017 were associated with lower market prices in the days following the releases, but the declines were temporary.
Continued product draw on stocks while crude continues building
Overall, commercial stocks drew again last week by 6.4 MMB. As expected, crude recorded a sizeable build of 3.2 MMB, which was more than compensated by a large draw in products. Crude storage has now increased for six consecutive weeks, narrowing the deficit to last year to 28.9 MMB. Cushing storage has also built for six consecutive weeks, adding 1.88 MMB last week (very close to our forecast), bringing overall storage to 31.9 MMB. WTI structure is now in mild contango until August 2019. For this week, we forecast overall crude stocks to continue to increase but at a slower pace as refineries are coming back from maintenance. Overall, US crude stock is forecast to build by 2.7 MMB, with Cushing expected to add 1.2 MMB. The EIA reported U.S. total crude production estimate of 11.2 MMB/D, which was 100 MB/D higher than expected. Right now, the production recovery from past hurricanes has been fully achieved. With production back to normal, the estimate for this week is 11.2 MMB/D. Refinery runs were accurately forecasted at 16.4 MMB/D. For this week, we expect them to increase to 16.63 MMB/D. Meanwhile, gasoline yield should stabilize at ~51.8% despite very low gasoline cracks, as butane blending helps gasoline production to remain profitable. Distillate and jet yields should stay close to the levels recorded last week, with just a very marginal uptick. Finally, crude imports are expected to increase slightly to 7.5 MMB/D from a very low 7.34 MMB/D last week, as shipments from Canada are expected to return to normal levels. Meanwhile, with the export arbitrage still open, crude exports should remain high at 2.2 MMB/D.
Stresses remain, but positive week
The S&P 500 regained 2% of the 4% it lost the previous week. Credit metrics remain strained. While equity volatility fell 19% on the week, oil volatility rose 11%. The oil price has fallen 17% from its high 10/3, while the option adjusted spread (OAS) metric for oil has gain 20%, with the two typically moving inversely. Commodities were lower by 1.3%, but energy was lower by 4.3%. Aluminum has broken to a “lower low”, though copper is holding near 280 cts/lb. Disinflation remains an increasing concern though it faired better on Friday in the wake of the reported strong growth in U.S. employment for Sept. European financial stocks look to still be weakening and that remains a concern, along with elevated Italian bond yields.
U.S. ethanol stocks dropped the most in Eight Years
U.S. ethanol inventories fell by 1.15 million barrels last week to 22.7 million barrels. This was the sharpest decline in eight years and the second largest ever reported. Stocks are still 1.27 million barrels more than they were at this time last year. Domestic production jumped by 35 MB/D to an eight-week high 1,059 MB/D. Ethanol-blended gasoline production decreased 50 MB/D to 9,259 MB/D despite higher gasoline output.
MA CO2 Program Emissions Fall, 2018 Likely Below Cap, Auction Ahead
The annual release of CA covered cap and trade emissions data will follow the November 1 triennial compliance surrender for Compliance Period 2 (2015-17). Ahead of this release, we estimate 2017 emissions to be down year-on-year (following a 2016 year-on-year decline of ~5%) – with decreases in the power sector and supplied natural gas emissions more than offsetting increases in refining and cement, with transport emissions generally flat. With 2017 emissions data, the full cap and trade obligation for CP2 will be known. However, the allowance carryover to CP3 also depends on utilization of offsets. A breakdown of compliance instruments used to reconcile emissions should be made available by year-end. Bearish emissions data releases in 2016 and particularly 2017 were associated with lower market prices in the days following the releases, but the declines were temporary.
Still higher runs and crude stocks in Japan, while a gasoline excess continues
Crude runs continued their rise out of turnaround in Japan, while gasoline demand continues to show signs of impairment, with higher stock length. Gasoil demand continues to hold up comparatively well with corresponding crack strength. Kerosene demand jumped, but stocks still built on higher yield and runs. Refining margins have slipped with strong gasoil and fuel oil cracks unable to overcome the weakness in gasoline. Implied marketing margins have popped as retail prices edged down only slightly, against a larger drop in refinery gate prices.
Global equities partially rebound
Global equities rebounded 3.2% on the week, with the U.S. S&P 500 gaining 2.5% following its 4% decline of the previous week. Housing, materials, and banking all performed exceedingly well, higher by 6-7%, while energy lagged, but still rose 1.6%. Internationally, all the tracking indices posted increases with China, emerging Asia, and emerging markets, all outperforming.
U.S. August 2018 DOE Monthly Revisions: Demand and Stocks
The EIA just released their monthly August 2018 (PSM) U.S. oil supply/demand data. August 2018 demand came in at 21.302 MMB/D, which was a 36 MB/D downward adjustment from the weekly data, but 544 MB/D above what Platts Analytics had assumed. Compared to the weeklies, gasoline was raised 128 MB/D, while “other” was lowered a similar amount. Total demand gained 1,051 MB/D or 5.2% vs. August 2017. It was the strongest growth since Jan ’18, when growth also topped 1.1 MMB/D. While August ’18 performance was exceedingly strong, it was against a weak year-ago base in which demand had fallen 24 MB/D or 0.6% vs. Aug ’16. In addition, the bulk of the gain in August ’18 performance was in “other”, a gain of 826 MB/D or 18.8%, and whose dominant components are NGLs. That growth has been the backbone of incremental product demand gains due to increases in shale production, both crude, condensate, and natural gas. Distillate demand growth was solid at 169 MB/D or 4.2%, while kero-jet also gained 94 MB/D or 4.3%. Final end-August total commercial stocks stood at 1,231.5 MMBbls, which were 1.1 MMBbls higher than Platts Analytics had assumed. Compared to August 2017 PSA data, total commercial stocks are now lower than year-ago by 76.9 MMBbls.
US August Oil Production: Unprecedented Growth, both Onshore and Offshore
US crude and condensate actuals for August 2018 came in at a staggering high of 11,360 MB/D, 420 MB/D higher month-on-month, and +2,090 MB/D year-on-year. The increase is unusually high considering that the average increase in month-to-month production was ~160 MB/D from January to July of 2018. Onshore growth contradicts reports that Permian pipeline constraints have reduced activity and completions while offshore growth stands out absent any major new project starts in August. This is likely to push higher our Reference Case forecast for year-on-year growth in US crude and condensate production of 1.4 MMB/D in 2018 and 0.95 MMB/D in 2019. August through December 2018 will likely be revised ~200 MB/D higher, taking 2018 year-on-year growth to 1.5 MMB/D. 2019 forecasts will likely be revised ~150 MB/D higher, taking 2019 year-on-year growth to 1 MMB/D.
October weather: U.S. normal; Europe and Japan warmer
October weather for the three major OECD markets turned out to be 9% warmer than the 10-year normal and the resulting oil-heat demand impacts were 59 MB/D below normal. On a 30-year-normal basis, the markets were 17% warmer.
Aramco Pricing for December: Saudi raises prices aggressively, willing to let production drop
Saudi Arabia just released their pricing for December. Prices were raised aggressively in the U.S. and cut on lighter grades in Asia, but by less than Dubai structure or product cracks would have suggested. Pricing into Northwest Europe was raised in concert with the narrower discount on Urals-Dated Brent. Platts expects Saudi production to drop back from 10.7-10.8 MMB/D in Oct/Nov to 10.5 MMB/D in December. The pricing structure put forth for December barrels will reinforce that declining trend in production. OPEC will meet in December 4th, at which time 2019 balances will be assessed. Broadly speaking, demand growth has tended to be slower than expected, by Platts and others, while supply is coming in stronger than expected.
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