Fracking Policy Monitor

As the Trump administration eases regulations for the oil and gas industry, some states and the private sector are stepping in. The EPA has completed the rollback of Obama administration NSPS drilling guidelines, and is close to repealing the already stayed BLM venting and flaring rule. However, a number of producing states are proposing to reinstate stricter compliance requirements for well monitoring, leak mitigation and flaring. While the EPA is looking to expand disposal options for fracking wastewater, states have taken active measures to limit handling, storage, and disposal within state boundaries. Beyond federal and state initiatives, an expanded consortium of large global majors announced target methane reductions and a branded “responsible” gas supply transaction has taken place in the Northeast.

US Gas Short-Term Forecast - October

Platts Analytics is calling for November-March Henry Hub prices to average $3.28/MMBtu. Henry Hub price risks remain asymmetrical to the upside for at least the next several weeks — barring sustained above normal temperatures. Production gains outpacing demand-side growth for at least the first half of next year continue to inform our bearish 2019 outlook for the benchmark, which is now at $2.88/MMBtu.

A short-term fix for Australia’s domestic gas market – while the future looks dimv

The interconnected southern and eastern gas markets of Australia have a gas shortage. Recent domestic prices have at times, reached parity with international LNG levels. Several companies are considering starting LNG imports at slightly different start dates in either New South Wales or Victoria to help alleviate the situation; including ExxonMobil (2022), AGL Energy (2021) and JERA (2020). The gas shortages have been a feature of this regional balance since the start of the first LNG export trains four years ago at Curtis Island.

Cape Freight Rates Hold Below $20,000/Day Awaiting Market Direction

The Cape freight market has bounced back from its September dip, but the Baltic’s five-route average is struggling to push back over $20,000/day. The short-term market outlook also appears to be in limbo. There are several drivers suggesting that rates could push higher, such as strong iron ore production and figuring. However, there are also negative factors at play, notably weakening Chinese demand and mounting trade war concerns.

Shifting trade flows related to the Iranian sanctions have caused crude tanker rates to soar in October

After suffering through nine months of depressed tanker markets and rising bunker costs, fleet operators welcomed the early arrival of a strong winter market in October on improved fundamentals providing some relief to their bottom lines. Tanker fleet growth has been muted this year as a result of the highest number of demolitions in nearly a decade allowing demand growth to absorb excess tonnage. Meanwhile an increase in core OPEC (i.e. Saudi Arabia and the other Gulf States) output and shifting trade flows related to the U.S. sanction on Iran over 2H 2018 have created some regional imbalances causing crude tanker rates in all the major size sectors to escalate sharply in October. The impact was most evident in the Atlantic basin, as more tonnage was needed for moving Atlantic Basin volumes, including rising U.S, exports, to Asia to compensate for lost Iranian supplies. This was most evident in the Aframax sector in the Caribbean where rates have climbed to nosebleed levels.

US consumer spending powers economic growth again in 3Q; slump in investment should be short-lived

U.S. GDP expanded at a strong pace for the second consecutive time in the third quarter. Consumer spending powered growth yet again. Business spending disappointed, but the slump is expected to be short-lived. Housing continued to contract, but government spending strengthened. Data on trade and inventories stayed volatile. In the euro area, October business survey results were mixed. The European Central Bank decided not to change its forward guidance on policy, in spite of negative economic headlines. Global trade data for August were better-than-expected.

Jump in propane demand kicks off winter withdrawal season

US propane stocks fell by 300,000 barrels last week, marking the first inventory draw of the 2018-2019 withdrawal season. Last week’s draw occurred in PADDs 2 and 4 & 5, where stocks fell by about 160,000 barrels in each EIA region. The EIA reported exports of 779,000 b/d, compared with Platts Analytics’ estimate of 1.1 million b/d based on ship tracking data. Understated exports likely contributed to a spike in EIA’s product supplied, which reached 1.4 million b/d, a 63% increase week over week. Correcting for the swing in exports, product supplied last week was still above both the same-week and 4-wk average from last year and the 5-year average. Separately, the EIA reported an increase between July and August in prime supplier sales volumes of propane, from 530,000 b/d to 615,000 b/d, which could point to an early increase in winter demand, higher petrochemical demand, or crop drying demand.

U.S. Ethanol Prices Lower

U.S. ethanol prices declined last week, pressured by near-record inventories. The EPA plans to issue a proposed rule expanding the Reid Vapor Pressure (RVP) waiver for gasoline with up to 15% ethanol by February. A total of 1.58 billion RINs were generated in September, bringing the total for the first nine months of 2018 to 14.43 billion. Year-to-date, total RIN registration is up 0.8% from last year. Heavy rains are interrupting the Brazilian sugarcane harvest. California received more shipments of renewable diesel from Neste’s plant in Singapore.

North American Gas Regional Short-Term Forecast - October

The Sumas winter strip traded as high as $5.63/MMBtu this month, well above historical levels. This strength is the result of Western Canada supply restrictions due to a pipeline explosion. The Chicago winter basis forecast was increased by $0.23/MMBtu this month given a likely tug-of-war between the Midwest and the West for Rockies gas. Rockies prices are also higher, due to the expected stronger pull from the PNW this winter.

Large commercial stock draw in US led by product stock decline

After building for the four previous weeks, overall commercial stocks drew by almost 8 MMB for the week ending October 19. With an even larger decline last year, the deficit narrowed to 16.9 MMB, the lowest so far this year. A large build in crude stocks, which was anticipated, only partly offset the large 14.3 MMB product draw. Crude storage has now increased for five consecutive weeks, adding over 6.3 MMB for the latest week, thus narrowing the deficit to last year to the lowest so far in 2018 or 34.6 MMB. Cushing storage has also built for the past five weeks, adding 1.4 MMB for the latest week, bringing overall storage to 30 MMB, less than one-half last year’s level. Overall, crude stocks are expected to build once again for this week by 6.4 MMB, with Cushing expected to add 1.6 MMB. Despite higher regional runs, net pipeline flows are expected to be somewhat higher. Crude production of 10.9 MMB/D was below expectations, as the EIA is not showing any recovery from the effects of Hurricane Michael. It is expected that the recovery will appear this week leading us to mark output back to 1.1 MMB/D. Refinery runs moved slightly lower for the week to 16.27 MMB/D, due to some unplanned outages. With turnaround season past peak it is expected that runs will pick up to 16.46 MMB/D for this week. Gasoline yield fell to 51.3%, off from the quite high level the previous week. For this week yield is expected to move back to 52.3%. Distillate and jet yields are also expected to move higher for this week. Crude imports are expected to decline slightly, while crude exports show indications of falling to 1.85 MMB/D from 2.2 MMB/D the prior week. For this week, key light product stocks are expected to decline once again, led by a 3.3 MMB draw in distillate as demand is expected to show an increase.

Brazilian Elections

The Brazilian presidential election did not yield much of a surprise as hard right-wing candidate, and now president-elect, Jair Bolsonaro won by 10.2% of the vote with 99% reported. After posting a 2% gain last week, the BRL was off to the races again Sunday night once the results became official, pulling soybean prices with it. Bolsonaro, considered friendly to Brazilian farmers, has also been very critical of the Chinese on trade of late, seemingly siding with President Trump, and somewhat contradictory to his established pro-farmer stance. While Platts Analytics has been unable to locate the president-elect’s “official” opinion on farmland, he was backed by the “ruralistas” who push for expansion of farmland.

Spare flexibility in Dutch market leaves TTF with plenty of room to supply winter demand

Dutch production has the potential to increase significantly going into November when colder than normal days finally impact continental NWE. Current L-gas stock levels in the Netherlands and France add further comfort in ensuring Dutch conversion capacity is sufficient to fulfil L-gas demand.

Rising Shipping Costs Obscure a Quickly Weakening Market

Strong prices are hiding behind a veneer of high shipping rates. One could easily argue that had shipping rates been at long-term averages, JKM spot could easily be $1.50/MMBtu to $2.00/MMBtu lower. Shipping rates have been on an incredible run with spot levels reaching $170k/day in Pacific Basins. The amazing thing is that shipping rates have been rising, as spot prices are falling, quickly eroding profitability for producers. In the case of significant demand growth – after exhausting Qatari supplies – the price to attract reloads from Europe would be nearly $13.00/MMBtu – likely more, as a $2.50/MMBtu rise in JKM would certainly cause a lift in European pricing as well. A big driver of the shipping strength is that not only are supplies growing, but much of these supplies are also far from consumers – such as the U.S. and Russia.

Offshore wind emerging as a strong contender for renewable investments

Despite a rebound from the lows of 4Q-17, the achieved price levels of both German onshore and offshore wind are still well below those observed in other countries. Continuous technology improvements make these technologies (and solar) increasingly competitive against thermal plants, but higher load factors might not necessarily play to their advantage. In fact, higher load factors are clearly linked to lower capture prices for onshore wind and solar. By contrast, this is barely the case for offshore wind. The ability of this technology to reach very high load factors and keep steady capture prices makes it a strong contender in the race for renewable investments.

Coal Prices Weaken, Signs of Looser Fundamentals Ahead

CIF ARA forward prices declined considerably last week, driven lower by weaker European natural gas prices, although it is worth noting that physical assessments declined by a much smaller extent. Additionally, clean dark spreads in Western Europe remain solidly positive, which will keep demand levels strong. FOB Newcastle forward prices held relatively steady last week, with prices finishing on Friday slightly higher than at the end of the previous week. FOB Richards Bay prices were flat to slightly down, although there were pockets of strength at some points along the forward curve. The global seaborne coal market remains fairly tight, and, although the recent downturn in Chinese import demand (more below) has made the market slightly looser than it was in September, the market is hesitant to move significantly lower ahead of peak demand season.

EU e-Bus Adoption: Limited Direct Diesel Impact with Valuable e-HDV Learning

On October 18, the European Parliament’s (EP) Environment Committee backed a 35% cut in CO2 emissions from new heavy-duty vehicles (HDVs) by 2030 - the first CO2 standard for HDVs in the EU, which currently account for almost one quarter of the bloc’s transport-related emissions. In addition to tougher climate targets than those proposed by the European Commission (EC), the EP proposal mandates that 50% and 75% of new urban bus sales must have zero tailpipe emissions by 2025 and 2030 respectively. If passed and ratified, this legislation will mark the beginning of a swift transition in the EU urban bus fleet. This paper analyses the EU bus fleet, evaluates the potential for fuel switching and the implications for traditional petroleum product demand. Taking into account EU public transport diesel fleet sizes, Platts Analytics estimates suggest that limited diesel demand is vulnerable to being supplanted by e-buses.

Gasoline demand impaired and dragging down refining in Japan, while runs rise

Crude runs began to rise out of turnaround, while gasoline demand continues to show signs of impairment from higher prices and slower disposable income growth. Gasoil demand held up and recorded a moderate stock draw. Kerosene posted a second straight stock draw on lower yield, despite low demand. 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 have continued higher against the backdrop of weaker refinery gate prices.

Financial Stresses Are Rising

The S&P 500 fell 4% on the week, with VIX volatility rising sharply. Credit metrics didn’t fair nearly as poorly, with yields falling back. Oil was lower and volatility jumped, but not nearly as much as the deterioration in equity. Commodities fell back 1.1%, with energy dropping 2.4%, but precious metals gained. The dollar was stronger by 0.7%. Certain industrial metals are looking notably weaker, such as aluminum, and to a lesser extent, copper. The precious metals complex still looks strong, particularly palladium. Implied inflation trends dropped back sharply. Italian bond yields remain elevated with some spillover impacts into peripheral European sovereigns.

U.S. Ethanol stocks fall but production increases the week ending October 19

U.S. ethanol production increased by 13 MB/D last week to 1,024 MB/D, rebounding from a six-month low. Stocks fell for the first time in four weeks, dropping by 233 thousand barrels to a still-high 23.9 million barrels. Inventories are 2.86 million barrels more than they were at this time last year, the largest year-on-year differential since December 2017. Approximately 4.4 million gallons were imported into the West Coast. Ethanol-blended gasoline production increased by 75 MB/D to 9,309 MB/D despite lower gasoline output.

US Gas Weekly Report

November NYMEX Henry Hub futures have consolidated in a range between $3.10/MMBtu and $3.25/MMBtu ahead of Monday’s contract termination. Futures prices for 2019 are down week-on-week slightly with the summer trading $2.70/MMBtu and winter 2019-20 trading at $2.89/MMBtu a $0.30/MMBtu discount to winter 2018-19.

Ontario power supply could become tight amidst transition to PJM-like capacity market

Capacity markets in Ontario’s IESO are beginning to take form in 2018, with a completed high-level design expected in 1H 2019. The “Incremental Auction” is intended to competitively procure generation beyond the existing contracted resources. The market closely resembles PJM’s, with the key distinction of holding a separate auction for the winter and summer periods. A number of large nuclear outages could lead to supply issues around 2023, as new contracted resources may not be forthcoming while old contracts expire.

Asian Exporters Continue to Dominate Australia’s Product Markets

Australia’s net imports of total petroleum products averaged 570 MB/D over the first eight months of this year, up 0.7% year-on-year, driven by stronger demand growth even as domestic production edged higher. Australia imported some 630 MB/D of refined products, largely gasoil/diesel (55%), gasoline (18%) and jet fuel (17%), and exported 60 MB/D of products (mainly LPG). Gasoil/diesel imports posted strong year-on-year growth of 10.8%, with jet fuel imports growing at 2%, but gasoline inflows declined 7.8%. Traditional top Australian suppliers largely maintained their market shares for gasoil/diesel and jet fuel, but there emerged new entrants to the gasoline market from the Atlantic Basin. The latter is partly driven by more than ample gasoline supply in the Atlantic Basin in 2018, which is likely to carry over into 2019 as well. Going forward, Australia’s product demand is likely to moderate after recent strong growth, with limited upside for product imports. Overall, competition is likely to intensify next year as Asian refiners fight for product market shares in the nation down-under as new refineries come on stream in the region, which include Malaysia’s 300 MB/D RAPID complex in 1H19 and Brunei’s 160 MB/D Hengyi refinery in 2H19.

Global Equities Fall Notably

Global equities fell 3.4% on the week, with the U.S. S&P 500 falling nearly 4%. In the U.S, energy was the worst performer, lower by 7%, while industrials and banking also lagged, but retail was fractionally higher. Internationally, most of the other regional tracking indices performed similar to the U.S. in their degree of decline, though China only fell 1.6%, and Latin America was modestly higher by 0.5%.

2018-19 winter preview: narrowing US demand growth to allow supply to overwhelm balances this winter

US demand for the 2018-19 winter is apt to breech the 100 Bcf/d mark for the first time ever, barring mild temperatures. Even so, year-on-year gains will continue to narrow, with growth anticipated to be limited to ~2.3 Bcf/d — well below this summer’s gain of ~6.8 Bcf/d and a far cry from the ~9.3 Bcf/d increase posted during the 2017-18 winter. With US-production led supply growth poised to continue to yield outsized year-on-year gains in the area of ~8 Bcf/d, bullish price concerns tied to the still massive storage deficit will fade as the heating season unfolds — without extended and sustained cold weather.

Rig Count Growing in the Permian Despite Takeaway Constraints

One third of all U.S. oil and gas land rig count growth over the past six months was due to additions in the Permian. Interestingly, these additions coincided with a rise in concerns over production growth in the region due to takeaway capacity constraints. However, almost all of the Permian rig growth is due to five oil operators that appear to be minimally affected by takeaway limitations due to hedging and firm pipeline commitments. These operators also account for almost 30% of all Permian active rigs. We forecast Permian production to average 3.3 MMB/D in 2018 (+0.8 MMB/D year-on-year) with growth slowing down in 2019 (+0.6 MMB/D year-on-year) due to takeaway capacity constraints that will be resolved by end of 2019. Production is expected to average 3.9 MMB/D in 2019.

Cold winter would have significant impact to prices

With this year’s injection season nearing the end, all eyes turn to winter and the possible outcomes that come with a warm or cold season. US natural gas storage inventories currently sit just slightly above 3.1 Tcf, about 0.5 Tcf below the five-year average for this time of year. Moreover, this puts the US on track to record the lowest inventory level for end-October since 2005. Historically, such low inventory levels would be a point of major concern for the natural gas market, but the steady increase in production over the past two years has created a buffer for how much gas is needed from storage for a normal winter. Because of the low storage levels, it’s important to analyze the impact a cold winter might have. Conversely, because dry gas production continues to grow, it’s also important to consider the consequences of a warm winter.

Crude deliveries to China’s independent refineries weaker than expected in September; inflows to rise in 4Q

Crude deliveries to China’s independent refineries came in weaker than expected in September. While imports grew 100 MB/D month-on-month to 1.64 MMB/D during the month, they were broadly flat over the year even though more refineries were awarded rights by the NDRC/MOFCOM to process imported crudes this year. It is worth noting that most of the refineries that won approvals to use overseas crudes in 2017/2018 have tended to be smaller players with weaker balance sheets and they were not able to sustain their crude runs and imports given higher crude costs and stricter regulations this year.

China issues 2.93 million mt of product export quotas

China recently issued 2.93 million mt of product export quotas to five state-owned oil companies. Should this be the last round of quotas, which is likely in our view, this would have taken the total quotas granted this year to 45.93 million mt compared to our previous forecasts of 46-47 million mt. Although overall quotas were broadly in-line, volumes granted this time around to the individual products differed from our previous estimates in such a way that notably less gasoil and more jet fuel quotas were issued, which came in 740,000 mt for gasoline, 590,000 mt for gasoil, and 1.6 million mt for jet fuel.

Rail Car Constraints Pressure Canadian Differentials

October started with a steep step downward in the WCS differential, with the front month closing $4/Bbl lower on Oct 1 than the previous day. The differential weakened further from there, closing at $47.7/Bbl under WTI on the final day of the November contract month (October 16) after having dipped as low as -$51.7/Bbl the week before. From an outright standpoint, WCS averaged $27.75/Bbl from October 1 – 16, which is below the average breakeven price in Western Canada.

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