Atlantic Basin Distillate Tight, Gasoline Weak, but Both Will Stay Supported by Import Requirements into Latin America

Brent prices firm through yearend but balances adequate despite Iranian cuts. European refinery margins softer but still healthy enough to support runs, as they are the key regional swing capacity available to cover increased product shortfalls in Latin America due to poor refinery operations there. Diesel stock coverage will stay very low. Gasoline physical stocks stay high but gasoline stock coverage is still supportive. Diesel cracks continue to lead and will strengthen when additional move up the Rhine later this year. Gasoline declines in NY and ARA are likely overdone; expect recovery to more normal seasonal levels. Fuel oil cracks stay firm into early 2019 but will dramatically weaken after mid-year 2019.

U.S. ethanol prices lower in September but have shown some strength this week

U.S. ethanol prices fell during most of September. The production of ethanol-blended gasoline decreased sharply, stocks remained relatively high, and RIN values hit multi-year lows. A total of 1.75 billion RINs were generated in August, bringing the total for the first eight months of 2018 to 12.84 billion. Despite the recent rains, the chronic dryness throughout the season is widely expected to bring an early end to crushing in Brazil’s key Central-South Region. Hydrous ethanol sales to the domestic market from April 1 to September 15 totaled 9.0 billion liters, up 39% on the year. U.S. biodiesel producers manufactured a record 163 million gallons in July.

Forward Volatility Ramps Up Towards Winter, with Price Spikes Looking Overdone

On the cusp of winter there is still little market agreement on an appropriate price level for European gas. What’s clear is that dynamics will be very different from those seen over the previous two winters, as southern Europe and France have switched places with north and central Europe into relative comfort. While LNG deliveries are again in question, this has been the case since Q2-18, and pipeline suppliers including Algeria, Norway, and particularly Russia are setting up to deliver additional flows. If there is any spare flexibility available this winter, be it in demand response, storage as well as supply, market participants will be keen to utilize it to capture the peak of a highly backwardated price curve. Sustained high prices are now testing fundamental resistance, and potential price downside is sizable, especially when you consider how correlated gas, carbon and LNG have become over the past six months.

NW Europe keeping its gas supply options open this winter

After shunning the cargos that have sailed into various regional ports this year, NW Europe now looks to be keeping its gas supply options open. European pricing has raced to catch up with JKM LNG pricing to at least limit re-exports, but also potentially with the hope of importing more volumes. There has been a major recovery in European pricing vs Asia with NBP pricing reducing the incentive to reload. Much of the reality of increased LNG volumes into NW Europe this winter in particular will rest on competing pipeline flows from Norway and Russia. Meanwhile in Asia, ex China Platts Analytics estimates for end-Sept. stocks suggest substantial Japan/Korea/Taiwan (JKT) stocks heading into winter which could mute 4Q spot buying.

Belgian premiums creep up but moderate price response so far in N.W. Europe

With the Belgium market already tight, September saw a clear example of the kind of upside risks in the current context of low nuclear combined with limited imports, as hourly Belgian evening peak prices spiked to €411/MWh on Sep.24. While the reaction in the other interconnected European markets was limited, in a scenario where French nuclear availability drops to the same level as 2017, the November contracts have clear upsides for both Belgium and France. We see a more moderate impact on German and the Dutch prices tied to the Belgium shortfall, although a bullish fuel pricing complex will underpin prices there.

Prices tumble as markets return to normal

On-peak prices were sharply lower in every Western market as weaker California loads reduced the call on gas-fired generation alleviating tightness in the Southern California gas market. SP15 on-peak averaged in the high $30s, remaining the West’s premium market. NP15 averaged in the mid $30s with Mid-Columbia and Palo Verde at $29 and $30, respectively. Alberta prices also skidded, falling below C$40/MWh. With Southern California gas storage likely to reach physical, or in the case of Aliso Canyon, regulatory limits, prices are likely to weaken further. There is significant upside risk for winter, however, if receipt point capacity remains below 3 BCFD, particularly if colder than normal weather depletes storage and reduces withdrawal capacity.

Strong Demand Boosts Resupply Requirements, Yet Pricing Still Expected to Fade

Global coal demand remains robust, fueled by weather-related strength in both China and Europe. Coal supply is growing as well, although with the winter peak approaching, the market is growing concerned about the adequacy of the inventory build. Coal pricing was mixed, as physical FOB Newcastle prices faded month-over-month while CIF ARA prices surged. The lack of market easing over the past 1-2 months will make price declines in 4Q18 into 1Q19 difficult to achieve, although fundamentals should loosen over the balance of 2019.

Lower refinery runs should push crude inventories up, despite strong crude exports; Cushing expected to build significantly. Robust clean fuels demand should produce stock draws on the product side

Crude stocks built by 1.85 MMB last week in the U.S., which was aligned with our expectations. Aggregate clean products’ inventories built slightly (720 MB), driven by gasoline and jet stock increases. Total hydrocarbon inventories built by 4.4 MMB. Cushing stocks unexpectedly increased by 0.5 MMB to 22.8 MMB, which was due primarily to lower than anticipated refinery runs in PADD2, plummeting by 482 MB/D. Total inventories in PADD 2 increased by 0.7 MMB, with the steep drop off in local demand impacting the whole region. Refinery maintenance is expected to continue to increase in next few weeks, pushing more barrels into the Cushing hub. As a result, we forecast Cushing inventories to build by 0.8 MMB this week.

Data depict a goldilocks economy, but trade issues loom large

The U.S. central bank delivered several messages at last week’s meeting. Crucially, it provided a reasonably firm guidance about its likely action for the rest of 2018; it also de-emphasized the importance of its economic forecasts pertaining to 2019 and beyond. U.S. economic growth forecast for the third quarter was revised down due to an expansion in the trade deficit. Global trade volume trended constructively in July, but a slowing is expected for the coming months.

› https://secure.pira.com/landing-page?pdf=EconRecap092918.pdf

Propane stock rose last week as cold-season exports ramp up

US propane/propylene stocks rose by 1.6 million barrels during the week ended September 21, according to EIA data. Total inventories stand at 76.4 million barrels, or 41 days of supply inclusive of export demand. PADD 1 inventories built the most last week, increasing 631,000 barrels as only one small LPG vessel was observed loading from the Marcus Hook terminal. The EIA reported exports of 994,000 b/d during the week, compared with Platts Analytics’ estimate of 1.144 million b/d based on ship tracking data. Exports are expected to about 1 million b/d during the week ending September 28. About 824,000 mt of LPG had departed from the US for Asia as of September 21, according to data from cFlow, Platts’ ship-tracking software. With a favorable spot arbitrage margin from the US Gulf Coast to Asia, propane exports should remain strong leading into winter demand season. The discount of propane prices to naphtha prices in Asia has also widened this week by approximately $10/mt, making it increasingly attractive as a possible alternative feedstock.

Déjà vu – All Over Again

At this point corn and soybean bulls do not have to wonder what it feels like to be Bill Murray in the movie Groundhog Day. While it may not be happening every day, bearishness returns to these markets with each and every report. Given this pattern, Platts Analytics fully expects that every “trade” estimate for the October WASDE will include higher yields and higher carry-outs. Why buck the trend? After the pre-September WASDE rally to ~$3.70 in December corn, new lows were made based on a mere 90 million bushels in additional supply. Going into Friday’s Quarterly Stocks report, buyers had been able to get corn prices back to the $3.65 level, only to see another selloff after the QSR showed 138 million “more” bushels in storage at the end of the 2017/’18 Marketing Year than had been previously estimated. While the market is just one day removed from the QSR, that 90 million bushel WASDE jump in 2018/’19 ending stocks caused a 5-day ~23 cent selloff while Friday’s unexpected 138 million bushels in supply caused the market to lose roughly 10 cents on the lows. 23 cents total for 90 million bushels, 10 cents so far for 138 million.

U.S. Ethanol Production and Stocks fall the week ending September 21

U.S. ethanol production declined by 15 MB/D last week to 1,036 MB/D as more plants went off line for maintenance and/or poor margins. Stocks fell for the fourth time over the past five weeks, dropping by 117 thousand barrels to 22.6 million barrels. Inventories fell in every region except the East Coast, which experienced a 780 thousand barrel build to a 7-month high 8.0 million barrels. Ethanol-blended gasoline production sunk by 208 MB/D to 8,957 MB/D.

US Gas Weekly Report – Week ending September 28

Following last Thursday’s surprisingly low EIA storage injection, the prompt November contract temporarily spiked to ~$3.11/MMBtu — a two year high — before settling at $3.05. The settlement marks the highest level in over 12 months. Yet, early Friday trade showed the contract below $3.0/MMBtu once again, highlighting the markets reluctance to price much above $3.0/MMBtu for a sustained period of time. Henry Hub cash prices traded to $3.13/MMBtu last week, the highest level since Q1 2018. Looking ahead, the most recent eight-to-14-day forecast calls for higher-than-average temperatures across east Texas and the Southeast, which could help to keep a bid under cash prices.

A Surprise Surge in Supplies this Month is Capping JKM Prices

Bucking seasonality trends, global LNG supply is picking up and that is a big force in capping pricing. August came with several disruptions, both planned and unplanned, to delivered supplies – unusual for a peak demand month. These disruptions were particularly punishing given the heat waves in Asia. However, a tight August is giving way to an increasingly loose JKM market now. Brent slopes have declined from 15.7% to recently dipping below 14%. LNG has not followed Brent’s lead, as front month oil has gone up 15% since mid-August, while JKM has just gone up 3%..

Another Bullish Stock Draw in July Adds to Upward Momentum in Market

On September 25, the EIA reported end-July electric power sector coal stockpiles of 110.5 MMst, a draw of 11.0 MMst m/m compared with a 10.7 MMst average July draw over the most recent five-year period (2013-2017). The stock draw is the fourth month in a row when the EPS stockpile change has come in more bullish (higher draw or lower build) than the five-year average, mainly due to restrained production and elevated exports as domestic US coal consumption continues to slide.

Decrypting Lithium-ion Battery Technology used in Electric Vehicles and Power Storage

The cost of lithium-ion batteries has significantly decreased in the last 10 years, driven to a large degree by manufacturing scale, with end use currently dominated by light duty electric vehicles and Chinese e-buses. But lithium-ion batteries are far from a uniform commodity, with chemistries, sizes, performance and properties that vary by application. Battery diversity has implications for price levels, potential further cost reductions, and ultimately for the timing of broader commercial uptake. This paper analyzes key battery parameters: chemistries, performance, size and manufacturing scale – that are critical to understanding the trends around the expected costs and penetration into electrified transportation and power storage. In the near term, auto OEMs and battery manufacturers will likely continue to seek supply and price certainty, as supply/demand imbalances for raw materials—including cobalt and nickel—can be a major risk to the current path of lithium-ion battery cost reductions.

Sizeable Crude Draw, while Super Typhoon Trami Takes Aim in Japan

The data last week reflected the leadup to the equinox holiday and the aftermath of the Respect for the Aged holiday. Crude runs rebounded 57 MB/D, with a sizable 4.8 MMBbls crude stock draw due to very low imports. Aggregate demand fell modestly, but gasoline demand was stronger. Finished product stocks built 0.9 MMBbls due to builds in naphtha and jet-kero. Refinery margins have continued to ease, and are again acting weak, while marketing margins have also come off their peak levels.

Mixed Week, but Generally Positive

The S&P 500 eased back on the week, but many key metrics held up well or added further to their gains. This is true of emerging market debt (EMB) and high yield debt (HYG). In the commodity space, energy was the strongest performing subsector. Against this backdrop there was a noticeable rise in Italian yields, Italian CDS quotes, and a small rise in bank CDS quotes. The dollar was stronger by 1%, and was particularly strong against the Argentine peso, but weakened against the Turkish lira. Some of the EM trouble spots are starting to diverge in performance. Many of the industrial metals are holding up with palladium remaining strong, while implied inflation has tended to rise.

VA RGGI Re-Proposal Lowers Cap

VA has released a re-proposal of its cap and trade regulation to join RGGI in 2020. A public comment period is expected to follow the VA DEQ Air Pollution Control Board meeting on September 28th. The most notable feature of the re-proposal is the lower caps, which begin at 28 million short tons in 2020, as opposed to 33-34 million short tons in the prior proposal. This will reduce the consignment allocations to VA sources and hurt the economics of in-state generating plants. Note that RGGI states had asked VA in April to consider stricter caps. Otherwise, the key features of the regulation appear largely unchanged, and VA is poised to participate in the RGGI banking adjustment and Emission Containment Reserve, which also reduce allowance allocations. The re-proposal suggests tighter program balances, but further challenging VA coal plants could lead to more retirements. The rulemaking could still see additional revisions before finalization.

Saudi Arabia: At Current Prices, KSA’s Finances Much Firmer

Saudi Arabiareported their end-August foreign exchange reserves last week. Reserves expectedly rebuilt $8.42 billion USD on the month after having drawn $5.05 billion USD in July. The draw seen in July was seen as a single month phenomena, and the August data confirms that assertion. The three-month average change in reserves moved back to a positive gain of $1.7 billion USD and confirms that at current oil prices, the Saudi fiscal position is much closer to a balanced position. Equally important, the Saudi Monetary Authority (SAMA) raised its key repurchase rate 25 basis points, consistent with the FED’s action, yesterday, to raise its fed funds target by the same amount. As domestic interest rates are being allowed to rise in line with key U.S. rates (both Libor and fed funds), there is much less pull on fx reserves to defend the U.S. dollar-Riyal exchange rate peg.

Global Equities Slightly Lower

Global equities eased 0.3% on the week, while the U.S. market dipped 0.5%. In the U.S., the best sectorial performers were technology and energy, both gaining about 1%, while banking and housing lost ground by about 4%. Internationally, there was some noted weakness in Europe and China, as Italian issues weighed on performance and in China, the trade situation remains a headwind.

U.S. July 2018 DOE Monthly Revisions: Demand and Stocks

The EIA released their monthly July 2018 (PSM) U.S. oil supply/demand data on Friday. July 2018 demand came in at 20.621 MMB/D, which was a 288 MB/D downward adjustment from the weekly data. It was 85 MB/D below what Platts Analytics had assumed and final total commercial stocks came in higher by 2.5 MMBbls compared to our assumption. Compared to the weeklies, the biggest adjustment was in “other”, lower by 184 MB/D. Total demand gained 502 MB/D or 2.5% vs. July 2017. It was a solid acceleration from the June gain of 144 MB/D, and the best growth since March’s 513 MB/D. Gasoline demand grew a modest 45 MB/D or 0.5%. Distillate demand accounted for 316 MB/D of the gain, or a very strong 8.7%. Anecdotally, the American Trucking Association’s “for Hire” tonnage index reached a peak in July, and while it dipped in August, growth remains very strong at 6.9%, on a 3-month average basis. The Federal Highway Administration’s VMT data through July continues to slow on a year-on-year basis, now 0.28%, but short-term momentum has accelerated to a 3.2% annualized rate. Final end-July total commercial stocks stood at 1,212.3 MMBbls, which were 2.5 MMBbls higher than Platts Analytics had assumed with all of the variance in crude. Strong deficits remained at end-July in total commercial stock levels compared to year-ago, though the variance lessened about 16 MMBbls from end-June.

U.S. July Oil Production: Strong Increase in Gulf of Mexico, More Modest Gains Onshore

U.S. crude and condensate actuals for July 2018 came in at 10,976 MB/D, 270 MB/D higher month-on-month, and 1,710 MB/D year-on-year. The large increase expanded on June’s 200+ MB/D month-on-month gains, and was driven by a substantial uptick in the Gulf of Mexico and smaller gains in major shale states. Compared to our latest September reference case, the actual came in 120 MB/D higher, mostly in the Gulf of Mexico. Looking ahead, we still forecast year-over-year growth in U.S. crude and condensate production of 1.4 MMB/D in 2018 and 0.95 MMB/D in 2019, in line with our previous case.

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