GLOBAL OIL

World Oil Market Forecast

Oil prices are creeping higher and our balances show greater tightness, especially compared to last month. Despite growing uncertainties, business sentiment remains broadly positive thanks to supportive economic policies. We remain confident that global GDP growth will stay above 3% in 2019 and 2020. Oil demand growth was revised down for 2018 due to weak December actuals. Yet, YTD actuals have been strong particularly in Asia and the US; we revised our forecasts for 2019 slightly upwards. The oil supply story remains bullish, with worsening turmoil in Venezuela, ongoing uncertainty on Iran sanctions waivers, and Saudi Arabia’s output restraint which is increasingly signaling that the Saudis want to keep oil markets tight and Brent at $70/Bbl. Commercial stocks in the three major OECD markets (US, OECD Europe, and Japan) are forecast to draw by 280 MB/D this year (compared to broadly flat in last month’s report), with a counter seasonal draw likely for 1Q and big draws forecast for 4Q. Crude inventories in these markets failed to build in February and March, but April stocks should build materially (although unplanned FCC outages and flooding in the Midwest, which may also be impairing ethanol production, may dampen the forecast build). The key to today’s oil markets remains Saudi Arabia. We believe the Saudis are intent on driving inventories down so that they, as the world’s swing supplier, can effectively manage prices. We do not expect Saudi Arabia will push prices too high ($75+/Bbl) lest they illicit a shale response. We see Saudi crude output at 10.4 MMB/D in 2H. We are wary of overreacting to the prevailing bullish market sentiment, mostly because even with much downside risk to supply (Venezuela, Iran) a higher call on Saudi production will likely be well within their means (they have at least 1.5 MMB/D of spare capacity, with demonstrated 11.3 MMB/D production). We now see Brent prices at $70/Bbl in April (several months earlier than previously expected), staying in the low-$70s/Bbl in 2Q. WTI is forecast in the low $60s/Bbl in 2Q. We expect a slight pullback in 3Q as OPEC adds supply to the market. But by early 4Q, we see the IMO effect pushing light sweet crude prices higher (Brent at $75/Bbl, WTI $70-71/Bbl by end-2019). Product markets and refining margins are moving out of their winter slump but much more dramatic changes are ahead.

Monster crude draw, everything else performing as expected in Japan

The crude import rate plunged to only 2 MMB/D and while runs eased, crude stocks drew a monster 8 MMBbls. Aggregate demand was higher by 15 MB/D, while the four-week average posted an accelerated decline of 73 MB/D, which was foreseen. Demand continues to decline seasonally, while finished product stocks have managed to squeak out one more solid draw, which is supporting a continuing recovery in refinery margins. That recovery is being led by a recovery in gasoline and naphtha cracks.

DOE Weekly Analysis

Stock build in crude and draws in products were aligned with our expectations. For next week, we forecast a further build in crude stocks, as refining runs will likely stay below the 16.0 MMB/D threshold, and product stocks draws, driven by resumption in demand, after weather impacts in the past few weeks. Also note that ethanol production has been negatively impacted by floods in Nebraska and Minnesota, and the effects will become more apparent in coming weeks.

US January 2019 DOE Monthly Revisions: Demand and Stocks

The EIA released its monthly January 2019 (PSM) US oil supply/demand data on Friday. January 2019 demand came in at 20.452 MMB/D, which was 43 MB/D higher than the Platts Analytics forecast. Compared to the weeklies, demand was revised lower by 582 MB/D, but with distillate raised 80 MB/D, though gasoline and “other” products were lowered 236 MB/D and 391 MB/D, respectively. Total demand growth vs. year-ago continued to slow, with the comparison moving to -9 MB/D, or 0%. Among the products, kero-jet posted a 2.7% gain, or 43 MB/D, and outperformed. Gasoline demand was fractionally changed vs. year-ago. Final end-January total commercial stocks stood at 1,270.5 MMBbls, which were 3.5 MMBbls lower than Platts Analytics had assumed, with products lower by 4.2 MMBbls and crude higher by 0.7 MMBbls. Distillate stocks came in 5.2 MMBbls lower than Platts had assumed. Compared to January 2018 PSM data, total commercial stocks were higher than year-ago by 55.3 MMBbls. By comparison, at end-December, total commercial stocks had showed an excess to year-ago of 30.7 MMBbls.

MACROECONOMICS

Credit Conditions Post a Positive Week

The S&P 500 had a solid week. After dipping below 2,800 on Monday, it moved strongly higher and gained 1.2% for the week with most of the tracked credit metrics performing well. Against that backdrop was a noticeable drop in implied inflation and a stronger dollar against many currencies. Commodities fell 0.8%, but oil was only fractionally lower, and industrial metals gained 2.2%. Uncertainty about the local Turkish elections on Sunday are putting noticeable stress on the lira, raising domestic interest rates, and elevating CDS quotes.

GLOBAL NGLS

Rising US propane inventories continue to pressure cavern prices

US propane/propylene stocks increased by 527,000 barrels to 51.6 million barrels during the week ended March 22, according to EIA data. This marks the second consecutive US inventory build of 2019, marking a likely close to the 2018-19 winter withdrawal season. As inventories rose week-over-week, the supply surplus to year-ago levels continued to widen, adding 1.7 million barrels to reach 16.0 million barrels. Stocks increases were mostly accounted for by a 757,000 barrels gain on the week in PADD 3, while PADD 1 and PADD 4 and 5 added 250,000 barrels and 108,000 barrels, respectively, as well. Wek-over-week builds were partially offset by a 588,000 decline in PADD 1 inventories. Total domestic demand was down 248,000 b/d on the week to 1.0 million barrels moving into the shoulder season, as US population-weighted temperatures remained near normal. Propane imports fell 25,000 b/d on the week to 51,000 b/d, while the EIA reported exports rose 347,000 b/d to 1.1 million b/d. Platts Analytics estimates exports for the current week are averaging 972,000 b/d. Front-month non-LST propane lost 5.125 cents/gal, or eight percentage points, ending the week at 62.5 cents/gal.

GLOBAL BIOFUELS

US ethanol production plummets following Midwest storms

The major winter storm that ripped through the Midwest earlier this month has led to a decline in US ethanol production. While some plants were knocked offline, others were adversely affected by closed routes and flooded railways that stopped the flow of feedstock and ethanol to and from their facilities. Last week, output fell 29 MB/D to 975 MB/D. Inventories, however, rose to a record high 24.448 million barrels. Ethanol-blended gasoline production increased by 94 MB/D to 9,117 MB/D, the second highest level reported thus far in 2019.

AGRICULTURAL COMMODITIES

Another growing season underway

Every new US growing year has to start somewhere and today is legitimately that first step. The Prospective Plantings survey was conducted the first two weeks in March with surveys going out to roughly 83K farm operators, if the numbers duplicate 2018’s total. Last year’s March 29th numbers certainly stood the test of time with the survey at 88 million acres in corn (89.1 final), 89 million acres in soybeans (89.2 final) and 47.3 million in all-wheat (47.8 final). Historic reliability is a toss-up as the last 20 years have shown the surveys to be either above final or below final an equal number of times pretty much across the board (wheat acres in the survey tend to be too high more frequently). The March numbers have missed final by an average 950K acres in corn and 1.2 million acres in beans. The smallest misses over the 20-year span have been close to zero while the largest misses have averaged just over 3 million acres. While the 20-year reliability statistics for NASS were mentioned earlier, given the flooding in the Midwest and parallels being made to 2011 a deeper dive into those numbers is warranted in our opinion given the 11 million acres in Prevent Plant that year. Prospective Planting on March 31st of 2011 saw 92.2 million acres in corn and 76.6 million in soybeans against the final at 91.9 million corn and 75 million in soybeans, proving where there’s a will there’s a way. Every year is certainly different, but “losing” just 1.9 million combined corn and soy acres the “last time” should not be overlooked. For now, Platts Analytics remains comfortable at 90.5 corn and 87.5 in soybeans.

NORTH AMERICAN NATURAL GAS

US Gas Weekly Report

Price action this week has been decidedly negative, with May-Oct futures falling by a dime from last Thursday’s settle to $2.80/MMBtu. Adding to the anticipated seasonal weakness in demand is a reduction in LNG feedgas demand, which has loosened fundamental balances more than was previously expected. April 2019 futures terminated on Wednesday, settling at $2.71/MMBtu — ironically within pennies of the April 2018 futures price. The now prompt May contract, should find support at around $2.60/MMBtu and resistance at, a distant and less likely in the near-term, $2.90/MMBtu. Gains in US production offset a drop in net Canadian imports for the week, lifting total supply higher by 0.5 Bcf/d week-on-week to 92 Bcf/d. Changes in production were widespread this week, with the most pronounced occurring in Texas and the Rockies. In Texas production growth equaled a little more than 0.5 Bcf/d total. Meanwhile, in the Rockies, there was a pick-up of 0.4 Bcf/d week-on-week. In the Rockies, the gain was more likely the result of recovery of gas production lost during recent freeze-offs rather than organic growth. For context, November/December average production for the Rockies was around 9.3 Bcf/d production compared to 9.2 Bcf/d this week. Total demand fell 5.7 Bcf/d week-on-week in part due to seasonally moderating temperatures. Nationally, temperatures warmed about 2 °F, lending to a reduction in power burn, industrial and rescomm demand. In addition to temperatures impacting power burn, wind generation picked up. In ERCOT wind generation increased by 20% while load was fairly flat week-on-week, resulting in losses in gas burn of about 0.7 Bcf/d there. The headline change in demand this week was the reduction in LNG feedgas to Sabine Pass’ Trains 1 & 2 which reduced demand by 1.4 Bcf/d week-on-week. Volumes have been reduced to the facility since gas-day 03/22, sources have indicated that the maintenance should last 2-3 weeks, however, Cheniere has not confirmed as much.

EUROPEAN NATURAL GAS

European Gas Weekly Report

Low wind provides some support for gas demand, although coal benefitted more on the Continent, while nuclear and solar outputs did not allow much pull on gas in the UK. LNG, carbon and coal were down week on week, but carbon and coal have been supported in recent days, seeing a small rebound in the gas curve. A drop in demand throughout NWE provided the opportunity for higher storage injections last week, bringing current stocks 3bcm above GY-15 levels (a previous record). Record high LNG sendouts replaced other supply sources on the Continent, whilst exports towards Italy and Switzerland were also particularly strong. Prompt prices have moved down further as we approach summer, with April ’19 still at the bottom of the price curve for TTF, NCG and ZTP. Strong injection rates should limit further bearish pressures in the week ahead, especially as temperatures are forecast colder than normal in the first days of the month. Booked IUK capacity in Q2-19 will likely allow NBP to move back in synch with continental hubs on 1st April.

NORTH AMERICAN ELECTRICITY

North American Electricity Short-Term Forecast

Pac NW power prices continued to rise year-on-year in March (though lower month-on-month) as sustained cold weather, pipeline maintenance and weaker hydro generation year-on-year drove market area gas prices up sharply. Most Northeast, Midwest and Southeast markets recorded small gains while ERCOT and SPP prices were substantially stronger year-on-year due to colder weather driven loads. ERCOT continued noticeable gains in weather-adjusted load in February, while much of the US reflected more weather driven raw load growth. Although gains in raw load across the US were around 2.6% year-on-year in February, weather-adjusted load grew just 0.7% year-on-year. Northeast market forecasts have moved up especially for winter ’19-20 due to upward gas price revisions. The large up move in ERCOT summer (3Q19) prices are a result of modelling the revised ORDC parameters. Stronger gas prices along with weaker hydro generation forecast has led to strong upward revisions in WECC price forecasts. Recent colder than normal weather has cut ~250 Bcf off gas storage relative to pre-month expectations. End-March inventories now look 200 and 500 Bcf below last year and the five-year average, respectively.

GLOBAL LNG

JKM-TTF: Waiting for maintenance season, not necessarily complete Qatari diversion

Other than visually unnerving, JKM’s move below TTF does not have to mean much. In a market where supply risk is severely diminished and access to storage is increasing in value, the inversion of prices makes complete sense. However, the inversion has been significant enough where it now starts to become interesting for Middle East suppliers to shift cargoes westward from East Asia. Currently, Middle East supplies represent 28% of global LNG. Not all of these volumes are available to dock in Europe, but we’ve already seen a clear shift this quarter in Qatari volumes from East Asia to Europe. This inversion has only been true for a small handful of days, but if it sustains for another month, we would anticipate an increasing shift towards Europe.

US LNG netbacks and production

This slide deck presentation addresses some of the core issues driving the debate around whether or not US LNG production will be shut in during the next two quarters. Lower prices in Europe and Asia will continue to keep this topic at the center of the LNG debate through storage injection season, particularly given the possibility of full storage in NW Europe by mid-August. Additional slides will follow in the days and weeks ahead exploring some of the other areas of the world that will react on either the supply or demand side to the current weakness in the LNG market.

EUROPEAN ELECTRICITY

Record wind tests new lows for coal and triggers unprecedented French nuclear flexing

Similar to February, temperatures in March continued to be particularly warm across Europe. At the same time, wind output reached record levels in Germany, France and the UK, with a clear step change vs previous highs. As a consequence of this and historic low gas prices, coal output came under heavy pressure. German hard coal and lignite generation both set new lows, and for two weeks coal output fell to the same level of gas, previously seen only during Christmas-New Year periods. Meanwhile in France coal generation averaged just 10MW from reported availability of 2.4GW. The dominance of gas dispatch over coal was evident also in Spain, with even Portuguese gas plants being displaced by Spanish ones. While French exports to Spain reached record levels, in Italy they were flat Y/Y, contributing to tighten the Italian system and making it the premium market in Europe. With carbon prices failing to drop below €20/tCO2, the developments on the coal and gas fronts will be key for summer prices, although relatively low nuclear output and low hydro stocks in the 3 of the 4 major markets should offer some support to prices. Besides our price outlook to the end of 2020, in this report we also introduce the first results from our new quarterly publication, the European Power Five Year Forecast, highlighting some of the major developments expected in the European power markets out to 2025.

Impact of wind on French nuclear and hydro output, evident in March, set to reduce in the summer months but probably not for long

The stormy weather of the first half of March have led to record wind output across France, Germany and the UK. In France, nuclear and hydro plants were clearly impacted, as their output reduced on increasing wind dispatch. Output from nuclear and wind have historically complemented each other to cover baseload demand, and weakened their dependence from wind (and solar) output during the summer months, but the government target to double the combined wind+solar capacity by 2023 (+80% of wind to 27GW and +140% of solar to 20.6GW from Jan-19 levels) will soon expand their influence throughout the year.

GLOBAL COAL

The Cape freight market continues to flounder after the Vale Dam disaster

The capesize dry bulk freight market continues to flounder after the Vale dam disaster. This downturn in long haul iron ore supply has combined with robust iron ore stocks in China, weaker overall coal trade and shortening coal trade routes to push rates below $5,000/day. Cape spot rates are drifting down close to rate levels seen in 2016 which did not prove to be a good year for owners.

SCENARIOS

The UK and Germany leading battery storage deployments, despite turbulences

The UK and Germany continue to lead battery storage additions with ~500 MW of grid-scale batteries installed in 2018 between these two countries. In addition, more than half of new residential solar PV installations in Germany were paired with batteries. However, the business model for battery storage in these early-adopting countries has become increasingly complex as frequency regulation markets become saturated, requiring developers to face more merchant risk. In the near term, new markets – such as Ireland and France – will likely open, and new applications and business models will support the market in early adopting countries. In the longer-term, batteries and other forms of power storage will play a key role to provide the flexibility required to integrate renewable.

NORTH AMERICAN ENVIRONMENTAL | GREENHOUSE GAS EMISSIONS

Tighter near-term PJM RECs (and clock ticking on MD bill) - but downside longer-term

PJM higher value non-solar REC prices are trading between $5.50-$6, down from highs last summer. Although 2018 NJ legislation increased RPS requirements, cost containment concerns resulted in a policy switch to a solar carve-out, reducing ex-solar Class I demand. Still, balances are tightening and the near term should see bank draws, providing price support. MD legislation would raise the state’s RPS - the large solar carve-out in the legislation is likely to push MD SREC prices towards Alternative Compliance Payment levels in the near term. It could pass this year, or could be held to 2020. Corporate retiring of wind RECs remains a wildcard for REC supply available for compliance. However, updated modeling confirms a declining long-term Tier I pricing trajectory. Also, the Grain Belt transmission line (or similar large project) would deliver large volumes of renewables into PJM – possibly flooding the REC market towards the mid-2020s. Commitments to offshore wind (through carve-outs) reduce longer term Tier I REC needs- while delays in/failure of these projects are a potential bullish wildcard.

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