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S&P Global Platts Energy Market Recap for the Week Ending March 3, 2019

GLOBAL OIL

Global Refining Outlook

The first half of 2019 is expected to be a quite active global refinery turnaround period, similar in scope to what occurred during 1H 2018. CDU maintenance is expected to affect 7.5 MMB/D or over 7% of world capacity on average over this period, with peak in April at just below 10 MMB/D. Downstream units are going to follow a slightly different pattern. FCC outages are currently at the 5-year average level and supposed to peak in March; HCU outages, on the other hand, are at the moment well below the 5-year lower band but supposed ramp up very fast in March and peak in April; Finally, cokers’ outages were high historically in January and February but are supposed to moderate in the coming months. As far as refinery runs are concerned, increases will likely be limited by margins in swing capacity until mid-year. Combining runs and available capacity, we estimate current net utilization at very high levels but still slightly below the 5-year upper-band reached last year. On the margin side, soft margins have led to some discretionary runs trimming over the past few months but margins are starting to improve, led by gasoline cracks recovery from extremely low levels in December/January. Finally, over the horizon a “tsunami” is about to rise: the IMO bunker spec change is going to disrupt the refining markets beginning September, right at a time when mega-refineries in China and Middle East will be commissioned.

Latin American Oil Market Outlook

US sanctions on Venezuela are beginning to bite. According to Platts cFlow, total Venezuelan clean product imports in February have dropped to around 60 MB/D, that’s about 110 MB/D lower MoM and year-on-year. Venezuela’s embattled refining sector is also feeling the pinch. Lack of imported naphtha for oil diluent forced Venezuela to blend domestic light crude with extra heavy oil in order to keep crude exports moving, hurting supply to local refineries. Platts Analytics expects 2Q 2019 Venezuelan runs to average 160 MB/D, 90 MB/D lower year-on-year but risks to the downside are high. In Mexico, Madero and Minatitlan refineries are up and running but overall runs remain weak. In Brazil, crude runs are set to improve modestly in 2Q 2019. Overall Latin American refinery runs are projected to average 4045 MB/D in 2Q 2019, 400 MB/D lower year-on-year.

Decline of China’s auto sales expected to persist in 1Q19 but reverse later on

China’s vehicle sales continued plunging year-on-year in January for the seventh consecutive month, largely on the back of high base last year and weakening fundamentals. The sliding is expected to persist throughout 1Q19 due to lower sales during the Chinese New Year holidays. Yet with stimulus policies to be unveiled over the coming months, we expect the decline in China’s vehicle sales will be reversed in 2H19. For 2019 as a whole, the growth of China’s total vehicle sales is forecast to reach 3.2% before rising to 4.8% in 2020 as against a decline of 1.3% last year. Coupled with improved vehicle fuel efficiency and booming electric vehicle sales, China’s gasoline demand is expected to surge by 96 MB/D in 2019 and 121 MB/D in 2020, compared with 105 MB/D in 2018.

DOE Weekly Analysis

Total commercial stocks had one of the largest drops (almost 18 MMB) in decades, driven by a historic collapse in crude imports (5.92 MMB/D) and strong overall demand (over 21 MMB/D). For next week we forecast continuous stock draws in both crude and products, as demand remains high while crude imports are not expected to bounce back yet.

Trends vs Anomalies in the DOE Weekly Report

The EIA posted some surprising numbers in their DOE weekly report yesterday, some of which are expected to be anomalies while others will be trends. The volume of imports that cleared customs in PADD 2 during the week dropped sharply, falling by 636 MB/D to a mere 2.28 MMB/D on the week. This is expected to be a short-term anomaly. The total import number was another major weekly change, which we noted in our DOE report on Feb 27. While waterborne imports as a whole are expected to rebound in coming weeks, decreases in Venezuelan imports have been accelerating. This trend is expected to continue.

Japan Weekly Analysis

Aggregate demand rose 192 MB/D, while the 4-week average gained 77 MB/D. The seasonal demand uplift still fell short of expectations, but that shortfall has lessened. Most of the underperformance is in jet and kerosene. Finished product stocks drew along seasonal lines and should be supportive to the improvement in refining margins. Crude stocks drew 1.7 MMBbls on lower imports. The implied marketing margin eased again, with gasoline remaining above its statistical high, but gasoil/diesel below.

Oil Market Snapshot

On February 28 the Oil Analytics team launched a new daily report called Oil Market Snapshot - a curated report of high-frequency data focusing on crude, products, refining, chemicals, and freight which will help readers quickly identify key trends and price movements, as well as drivers of crude oil differentials and refining margins. The report contains sections on key benchmarks, crude differentials, refining margins, product crack spreads and forward curves, and more.

February Weather: US is colder than normal, Europe and Japan warmer. Heating oil demand 375 MB/D weaker than last year and 240 MB/D below the 10-year average.

February’s heating degree days were 6% warmer than the 10-year normal for the three major OECD markets with a composite net oil-heat demand loss of 239 MB/D. On a 30-year-normal basis, the markets were roughly 12% warmer than normal.

Saudi Arabia reserves draw again reinforcing need for higher prices

The Saudi Arabian Monetary Authority (SAMA) just released their end-month foreign exchange reserves. End-January foreign exchange reserves drew $6.6 billion USD, a slightly lesser draw than December’s $7.8 billion USD. The change in reserves for January was influenced by higher crude prices, but also in part, by a $7.5 billion international bond issuance done in mid-January. For February, the change in reserves should reflect still higher prices and maybe some spill over impacts from the bond issue. Even so, it took $75-80/Bbl Dubai seen back in Sept-Oct ’18 to stabilize reserves.

US December oil production declines on GOM, while shale still shows modest growth

The EIA reported 11,882 MB/D US crude and condensate production for December 2018 — a 50 MB/D decrease compared to the revised November production. Compared to year-ago levels, production is currently up by 1,850 MB/D. This is the first month that US production has declined since May (-10 MB/D vs. April). Although there was mild onshore growth from the Permian and Bakken plays, this was more than offset by a 125 MB/D loss in the Gulf of Mexico. Looking ahead, we forecast year-on-year growth in US crude and condensate production of 1.3 MMB/D in 2019 and 1.0 MMB/D in 2020.

Decline of China’s auto sales expected to persist in 1Q19 but reverse later on

China’s vehicle sales continued plunging year-on-year in January for the seventh consecutive month, largely on the back of high base last year and weakening fundamentals. The sliding is expected to persist throughout 1Q19 due to lower sales during the Chinese New Year holidays. Yet with stimulus policies to be unveiled over the coming months, we expect that the decline in China’s vehicle sales will be reversed in 2H19. For 2019 as a whole, the growth of China’s total vehicle sales is forecast to reach 3.2% before rising to 4.8% in 2020 as against a decline of 1.3% last year. Coupled with improved vehicle fuel efficiency and booming electric vehicle sales, China’s gasoline demand is expected to surge by 96 MB/D in 2019 and 121 MB/D in 2020, compared with 105 MB/D in 2018.

MACROECONOMICS

Global industrial production: review of 2018 and preview of 2019

The pace of world industrial production growth picked up through 2016 and 2017, but reached a peak in the first half of 2018. After slowing in the second half of 2018, growth is projected to stabilize at a moderate pace this year. European activity will very likely bounce back in 2019, after contracting in 2018 from supply chain disruptions. The outlook remains constructive for the US and Japan. In China, industrial growth is expected to slow somewhat, but a major slump is unlikely.

Financial Stress Continues to Lessen

It was another positive week, where the S&P 500 gained 0.5% and closed back over the 2,800 level. The Dow Jone industrials closed back over 26,000. Volatility metrics on equity and oil were only modestly changed. Implied inflation continued to rise, while industrial metals edged higher. Overall commodities fell back 1.4%, but industrial metals bucked the trend and gained 0.5%. The leveraged loan indicators continue to show lessening stress, while the St Louis financial stress indicator extended its improvement.

GLOBAL NGLS

Upside demand risks for Canadian propane

US propane/propylene stocks declined by 1.2 million barrels to 53.4 million barrels during the week ended February 22, according to EIA data. Total stocks are 10.7 million barrels above year-ago levels, after the supply surplus to last year fell by 809,000 barrels week-over-week. Inventory declines were concentrated in PADD 2 and PADD 3, which drew down 525,000 barrels and 780,000 barrels over the week, respectively. PADDs 4 and 5 stocks also declined by 247,000 barrels. A stock build of 363,000 barrels over the week prior in PADD 1 helped to offset some of the declines across all other PADDs. Draws were weaker compared to the week ended February 15, as domestic demand fell by 433,000 b/d to 1.6 million b/d in the same period, and imports were essentially flat, averaging 182,000 b/d. EIA reported exports fell 159,000 b/d week-over-week to an average 882,000 b/d. Platts Analytics estimates exports for the current week, through March 1, are averaging higher at 950,000 b/d. Production dropped below 2.0 million b/d for the first time in 2019, to 1.97 million b/d, but remains just off all-time highs reached at the end of 2018. Mont Belvieu propane prices were essentially flat this week, averaging 29 cents/gal since February 22, or 1 cent/gal below the prior 7 days.

North American NGL Five-Year Forecast

NGL production is expected to grow going into 2019, with the February forecast showing an averaged raw mix production rate of 5.48 million b/d in 2019. Annualized growth is just over 11% between 2018 and 2019, with growth targeting the Permian basin as new oil pipeline capacity provides a runway for production to grow. Infrastructure limitations are likely to continue to add stress to purity NGL markets, with just 250,000 b/d of new fractionation capacity at Mont Belvieu, but nearly 500,000 b/d of wellhead raw mix production growth. Even with nearly half of that growth coming as ethane, the fractionation constraints that emerged in 2018 are likely to persist into 2019, dependent on fractionator utilization in areas outside Mont Belvieu.

GLOBAL BIOFUELS

US ethanol production rises; new capacity coming on line in April

US ethanol production rose by 32 MB/D last week to 1,028 MB/D, nearly erasing the 33 MB/D decline in the preceding week. Ringneck Energy’s new 80 million gallon per year ethanol plant in Onida, South Dakota, is expected to come online in April. Stocks fell for the third time in four weeks, declining by 204 thousand barrels to 23.7 million barrels. Midwest inventories rose to 8.7 million barrels, the third highest level on record. Ethanol-blended gasoline production fell by 45 MB/D to 8,748 MB/D.

AGRICULTURAL COMMODITIES

Where is everybody?

Whether it’s year-round E-15, China, or a number of other ag-related issues, clarification on where these items stand with the US Government is difficult to come by. While traders typically embrace potential volatility, it’s becoming clear that many are walking away pending more solid information. One such case involves soybeans, which have been in the news for so long that the market is becoming obviously bored with the lack of tangible information and price movement. This can be seen in overall open interest for beans, which stands at less than 650k contracts, the lowest such number in just over 18 months and ~135K contracts lower than last year. Even though the CFTC COT data will not be up to date for another week or so, recent releases point to a broad-based Index fund length liquidation in both corn and soybeans of late. The lack of tradeable information may have something to do with this liquidation, but the more likely culprit is market structure. Indexers typically “struggle” with returns while rolling positions in contango markets, with the “penalty” in corn and soybeans obvious of late as front month contracts have had a tendency to revert to the previous contract’s trading range soon after the rolls take place. This was obvious in the recent soybean roll to May that cost investors 13-14 cents per contract only to revert to the March range.

NORTH AMERICAN NATURAL GAS

North American Five-Year Forecast

Even though the deck seems stacked in favor of supply relative to demand when it comes to our outlook for US balances over the next few years, Platts Analytics latest five-year forecast for Henry Hub was revised higher, albeit marginally. In 2018, US gas production grew at an unprecedented rate. The risk of more intense gas-on-gas competition looms as US gas demand growth slows. Nearly 25 GW of new gas power generation capacity was added to the grid during 2018, and an additional 17 GW anticipated to come online over the next two years. Yet, further large gains in power burns as seen in 2018 not assured. Near-term concerns still cloud long-lead capital commitments to support US industrial demand growth.

US Gas Weekly Report

For the week ended February 28, Henry Hub cash prices averaged ~$2.78/MMBtu, an increase of roughly 6% week-on-week. During the week, prices hit a high of ~$2.93/MMBtu on February 27, which was the highest daily reading since January 31. Cold weather forecasts helped push the Mar/Apr spread back into positive territory this week. Yet, despite very low end March expectations, there is little in the way of market panic, with the March contract expiring below $3.0/MMBtu on February 26. In addition, summer prices remain below the heating season high of ~$2.95/MMBtu. For the week-in-progress, total supply shrunk marginally, as the onshore, offshore and LNG imports each declined slightly while Canadian imports were flat, resulting in a week-on-week decline of 0.3 Bcf/d. Inflows from Excelerate Energy’s Northeast Gateway Deepwater Terminal went to zero this week, after providing supply into the Northeast averaging 0.1 Bcf/d February 1-20. This winter marks the first time since February 2016 that Gateway’s floating storage regasification units have been utilized. All told Gateway delivered 0.5 Bcf to the New England market this winter.

The Wild West: PG&E’s and SoCal’s struggle to fill storage this summer sets up bullish summer and winter 19-20

As cold weather lingers across the West and storage fields in Northern and Southern California are depleted, the outlook for the West this summer and next winter, specifically at PG&E and SoCal, is turning increasingly bullish. PG&E and SoCal storage both sit at their lowest levels in the past five years. What's more, neither SoCal nor PG&E are likely to fill to 2018's very low ending October inventory levels even if SoCal's pipeline receipt corridors run full and PG&E's Redwood and Baja Paths flow at their current contracted capacity commitments this summer. As such, the summer and winter 2019-2020 outlooks for both hubs should yield elevated prices, with a hot summer and/or potential pipeline restrictions driving additional volatility.

Four upcoming expansions target volatile New England/NYC markets

This past January, LNG imports into the Northeast played a crucial role in mitigating price blowouts at key demand hubs in the region. By Winter 2021-2022, four expansion projects targeting downstream demand markets in New Jersey, New York and New England are due online that could further tamp down on price volatility, with the first two due online in the winter of 2019-2020.

EUROPEAN NATURAL GAS

European Gas Analytics Weekly

Bearish coal andvolatile carbon offer limited support for gas, as the loose gas market is itself putting a limit to coal and EUA demand. Oil prices only remain at current levels due to OPEC supply cuts, whilst new European regulation brings further limits to demand in the long-term. Demand continued to ease in NEW on largely above season normal temperatures. At the same time, LNG send outs strengthened, bringing storage withdrawals further down. The NWE year-on-year storage surplus is now close to 9bcm and a continued decrease in withdrawal rates could still bring us near GY-15 levels by end of March. NCS flows to the UK had to turn down on two days due to an outage on Kollsnes, but this did not affect the NBP balance in a significant way due to the decline in LDZ demand. As oil-indexed contracts have moved out of the money on low TTF prices, CEGH-TTF, PVB-TTF and PSV-TTF increased, as Algerian supply to southern Europe remained down on last month’s levels. With limited capacity for NWE to increase exports to CEE and SE, these spreads are likely to remain elevated. NBP-TTF has declined further and the length in the UK balance is likely to leave NBP volatile and de-correlated from continental prices as long as no reverse IUK capacity is booked.

NORTH AMERICAN ELECTRICITY

North American Electricity Short-Term Forecast

Western power prices soared in February as sustained colder than normal weather drove market area gas prices up sharply. Most Northeast, Midwest and Southeast markets recorded small gains while ERCOT and SPP prices weakened at least in part due to higher wind generation. Weather-adj. load growth faded in January with the Eastern Grid up 0.5% year-on-year compared with growth in the 1.7% range during the preceding two months. Western grid weather-adj. loads fell by 0.25%. Most Eastern market forecasts are weaker at the front of the curve and for winter ‘19-20. A stronger CA hydro outlook has led to downward revisions to N CA and Northwest summer price forecasts. Market expectations now point to an end-March natural gas inventory carry of 1.1 to 1.3 Tcf, which would be bullish relative to both last year and the five-year average. Platts Analytics’ leaner summer gas injection profile relative to market expectations is due to higher power burns and lower production forecasts.

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GLOBAL LNG

4Q earnings put focus on Brownfield LNG expansions

Recent earnings release has put a lot of focus on brownfield expansions that may in the end offer better economics than the headline greenfield projects in Africa, Canada and the United States. This is ever exemplified by the continued troubles that McDermott seems to be having in getting Freeport and Cameron ready for commissioning. Nevertheless, major expansion projects in Papua New Guinea and Australia pose serious benefits vis-à-vis North American producers to East and South Asian consumers. On the demand side, several companies have echoed a refrain of growing trucking demand. This industrial demand is the kind of non-seasonal demand that the LNG market needs, to help gird itself against warm winters like we see this year.

Global LNG Shipping Forecast

On February 27, the LNG Analytics team launched a new monthly forecast of the LNG shipping market, including charter rates by basin and technology as well as expected newbuilds. In this month’s edition, the forecast shows rates continuing to decline slightly before stabilizing through to next fall, at which point we see them surging upwards towards last winter’s highs as significant growth in US LNG exports outpaces shipping capacity.

EUROPEAN ELECTRICITY

February prices heavily pressured by unprecedented temperatures, robust French nuclear

Europe has been characterized by particularly warm weather in February, with demand losses averaging ~10GW in the second half of the month. Coupled with strong nuclear output, this pushed French exports to record highs while in Germany coal and gas dispatch were squeezed also by strong wind despite lower lignite output. Following the strong performance of gas plants in Feb, the continued decline in gas prices with respect to coal and carbon ones will test the level of coal-to-gas switching across Europe this summer. Platts Analytics expects 40% of the flexible gas capacity in NW Europe to switch at current prices, but a floor might apply to German coal dispatch as 1/3 of the coal fleet is made of high efficiency plants. Despite having 1/3 of the German coal capacity, coal-to-gas switching in Spain can potentially be of similar magnitude while the extreme case is expected in the UK, where coal is largely priced out of the market over the summer. In this context Italy remains an exception. Gas dispatch was proportionally similar to previous years in Feb and summer gas prices are still too high to trigger any switching despite lower hydro output leading to a larger thermal gap year-on-year.

GLOBAL COAL

As February coal demand disappoints, we turn modestly bearish on US coal prices

US coal generation fell 0.5% year-on-year in February, losing ground to gas-fired generation as the capacity mix has shifted away from coal, and gas prices fell slightly year-on-year. This month, we increased our outlook for US coal stockpiles as 1Q19 demand is expected to come in below our prior projections, and we have turned modestly bearish on PRB, ILB and NAPP coal prices. We also remain bearish on CAPP coal prices based on our outlook for CIF ARA to continue falling as European coal demand declines on lower gas prices and as global seaborne coal market balances loosen.

Prices slide in February, but further downside expected, particularly in Pacific

Global coal prices moved lower over the last month, with both Pacific and Atlantic Basin prices declining by several dollars per tonne. Weak demand has been the main driver of lower prices, with mild weather in Asia impacting demand alongside the Lunar New Year in China, helping to bring Chinese generator stockpiles well above prior-year levels. In Europe, coal demand has downshifted over the last month alongside falling European gas and power prices. We remain bearish on CIF ARA prices, though price declines will be moderated as IMO bunker fuel specification changes come into force in 2020. We are even more bearish on Pacific Basin prices as the slowdown in Chinese imports will be a major force pushing seaborne import demand lower in 2019.

The cape freight market has collapsed in the wake of the Vale dam disaster

The fallout from Vale’s dam disaster has led to iron or supply cuts, which has drove the capsize freight market lower. This disaster is having far-reaching impacts, with Vale plans to decommission tailings dames that will shut down 40 MMmt/year of iron ore production. Concerns remain over the strength in Chinese iron ore demand, while trade concerns between the US and China on agriculture and China and Australia on coal further threaten seaborne traffic. Cape size rates are now at a two-year low, with few signs that this will turnaround soon, or quickly.

POLICY & ENVIRONMENTAL

New crediting opportunities critical for California Low Carbon Fuel Standard balances

California Low Carbon Fuel Standard (LCFS) credit prices are trading near $200/metric ton. Compliance with 2018 requirements must be demonstrated after 1Q 2019, and we expect the bank will be drawn down by about 15% to cover the 2018 credit shortfall. LCFS program amendments take effect in 2019, opening up greater crediting opportunities, but the diesel standard will also resume tightening. Platts Analytics’ 5-yr outlook sees annual deficits continuing to outpace even the expanded crediting. Annual bank draws increase, leading to exhaustion of the surplus and a cumulative – with credit pricing pinned at cost containment levels. A hard LCFS price ceiling will be considered this year. The ramp-up of crediting represents a key wildcard for LCFS balances. New renewable diesel capacity is a major bearish driver. Similar policies in neighboring states/Canada will also require low carbon fuels supply. Higher federal biofuels mandates were finalized in late 2018, but waivers affect their stringency.

California carbon auction clears above the floor (without PG&E), but future vintages fail to sell-out

In spite of PG&E, a major consigner of allowances, failing to participate on the buy-side, the first Western Climate Initiative/California carbon allowance auction of 2019 saw the current vintages clear above the floor. Although it is a large emitter, Platts Analytics had not expected a lack of buying interest from PG&E to threaten full auction subscription. Subsequent auction quantities will be much lower going forward, as CA will no longer be re-offering unsold allowances. While the November 2018 auction results saw the future vintage (V-21s) sell above the current vintage, this time around the V-22s were undersubscribed – a lack of futures trading for the V-22s may have contributed.

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