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S & P Global Platts Energy Market Recap, Week Ending February 3, 2019

Global Oil Markets

European Oil Market Forecast

Brent prices will be generally stable for next few months but stronger into year end. Sanctions on Venezuela are a wild card but are mostly logistical effects for now. Venezuelan crude sales will be hindered but likely continue to other countries avoiding US dollar transactions. Weaker refinery margins are weighing on European runs over next few months but margins will be much stronger later in the year. Diesel cracks will ease near term but then grow much stronger. Some gasoline crack recovery beginning in March but the gasoline season will be lackluster. HFO strength will ease by midyear then plummet towards year end. IMO bunker spec change will disrupt markets beginning in 2H19 but especially in 1H 2020.

Sanctions set to stop the flow of U.S. refined products into Venezuela

U.S. sanctions aimed at Venezuela’s oil sector are set to halt product exports to Venezuela, impacting about 50 MB/D of naphtha for crude diluent and ~60 of gasoline/distillates. The sanctions also effectively stop crude imports from Venezuela into the U.S. immediately. This volume will need to be placed at larger discounts in alternative markets, like Asia. Venezuela is also dealing with social unrest and heightened political instability as the majority of the international community has recognized the Juan Guaidó as the country’s legitimate President. In Mexico, motorists have struggled with gasoline shortages throughout the month due to government action against fuel theft. Logistics have improved somewhat but distribution remains far from normal, and imports of clean products were impacted. Platts Analytics projects 1Q19 L. American gasoline demand 50 MB/D lower year-on-year but with the expectation of recovery over the rest of the year, carried by Brazilian demand strength but partially offset by Venezuelan and Mexican weakness. 1Q19 L. American diesel demand is projected at 2655, 45 MB/D lower year-on-year but is also expected to recover later in the year. Refining operations remain a weak link in the region. We forecast 1Q19 Latin American refinery crude runs at 3915 MB/D, 350 MB/D lower year-on-year with heightened downside potential given the recent developments in Venezuela. Mexican runs in 1Q19 are projected at 530 MB/D, 70 MB/D lower year-on-year but the good news is that Madero and Minatitlan refineries have restarted after prolonged outages. Brazilian refinery operations are set to improve in 2019, starting in 1Q19 when we project runs at 1660 MB/D, ~120 MB/D higher year-on-year. Finally, given the ongoing refinery issues and low output of refined products in the region, 1Q19 L. American gasoline imports are forecast to average about 1410 MB/D, a 115 MB/D year-on-year gain. Similarly, 1Q19 distillate imports into the region are seen at around 1360 MB/D, 100 MB/D higher year-on-year.

Balances performing as expected, but refining margins weak in Japan

still drew 1.8 MMBbls. The next month of demand performance is critical to balances, as runs will remain high with no planned maintenance. For now, finished product stocks continue to draw along seasonal lines. The refining margin indicator continued to weaken with all the light product cracks losing significant ground. Implied marketing margins remain strong, but have fallen back a bit.

Firm product demand leads to stock draw in the U.S.

Decline was led by gasoline (-2.2 MMB) and distillate (-1.1 MMB), with overall product inventory down by 5.7 MMB for the week. Expect a small gasoline build this week of about 0.9 MMB, while distillate declines by over 1 MMB. Crude oil storage added 0.9 MMB for the latest week, with a large 8.8 MMB build anticipated for the next week. Cushing stocks were just 0.1 MMB lower on the week, but given PADD II run cuts and the influence of the extremely cold conditions, are expected to build by 1.3 MMB for the next week. Domestic field production was flat at 11.9 MMB/D for the third consecutive week, but the EIA’s balancing item fell for one of the few times in the past year, by -445 MMB/D. This reversal led to reduction of about 580 MB/D in reported domestic crude supply. For this week field production is flat at 11.9 MMB/D, with the balancing item assessed at +400 MB/D. Refinery runs were down sharply to 16.46 MMB/D for the week, with runs expected to decline further to 16.34 MMB/D for the following week.

Saudi Arabia: Needs higher prices to stabilize FX reserves

The Saudi Arabian Monetary Authority (SAMA) released their end-month foreign exchange reserves last week. End-December foreign exchange reserves drew $7.8 billion USD, the biggest draw since April ’17. Such performance reflects the drop in realized prices in November in December. January reserve figures will be influenced by a $7.5 billion international bond issuance done in mid-January, along with a slight recovery in pricing. The 2019 Saudi budget projects a continuing deficit, similar to what was seen in 2018. That will require continuing issuance of domestic and international debt, but the goal remains to reach balance by 2023.

U.S. sanctions on Venezuela’s oil sector might lead to some runs trimming in the U.S.

The U.S. announced significant sanctions against Venezuelan oil on January 28, which appear to include a de facto ban on Venezuelan crude imports to the U.S., and an official ban on U.S. diluent exports to Venezuela. U.S. refiners are technically allowed to import Venezuelan crude until at least April 28, but the revenue will be blocked from the Maduro government, leaving little reason for Venezuela to continue sending cargoes to the U.S. Revenue from tankers already en route is assumed to be unblocked and allowed to flow to Venezuela, but this remains uncertain.

Malaysia: New Pengerang refinery to shift domestic and regional product balances

Initial operations of Malaysia’s new Pengerang refinery have begun with a view towards full operations later in the year. The Petronas-Aramco joint venture comprises a 300 thousand barrels per day (MB/D) refinery along with associated petrochemical units. Output from the refinery will be mainly directed towards the domestic market to meet fuels demand, but will also include substantial volumes of petrochemicals feedstock. It will run mainly imported Saudi crude and push Malaysia into a net importer of crude while expanding total national refining capacity to 964 MB/D. Malaysia imported about 250 MB/D of major oil products in 2018, the bulk of which was gasoline and gasoil. Major products imports currently account for about 30% of domestic consumption but will decline sharply with output from the new refinery. Alongside recent and planned refinery startups in Vietnam, Brunei, China and the Middle East, additional supply from Pengerang stands to have a negative impact on regional cracks and refining margins.

Heavy truck sales through 2020 should boost diesel demand in the US

A backlog of truck orders and a bullish outlook for new truck purchases through 2020 is expected to result in on-highway diesel demand growing by 1.8 % and 1.2 % in 2019 and 2020, respectively. This should provide a strong underpinning to distillate demand through 2020 in contrast to gasoline demand, the other major road fuel, which is expected to essentially flat line over this same period.

U.S. November 2018 DOE monthly revisions: demand and stocks

The EIA released their monthly November 2018 (PSM) U.S. oil supply/demand data last week. November 2018 demand came in at 20.893 MMB/D, which was 220 MB/D higher than the Platts Analytics forecast. Compared to the weeklies, demand was lower by 221 MB/D, with distillate 121 MB/D higher and gasoline was higher by 131 MB/D. Total demand growth decelerated to 586 MB/D or 2.9% versus 784 MB/D year-on-year in October. “Other product” demand gained 478 MB/D or 9.6% and continues to reflect growth in NGLs and is a by-product of the strong growth in shale oil production. Distillate demand slowed to 104 MB/D above last year or 2.5%. Gasoline demand growth accelerated 1.4% (131 MB/D) year-on-year from -0.9% in October despite the fact that VMT growth was up 0.3% year-on-year in November and 1.2% year-on-year in Oct.

Global Political Risk

Venezuelan political turmoil could accelerate oil production declines

An effective U.S. ban on Venezuelan crude imports is an increasing possibility, which would raise costs for PDVSA by shifting over 500 MB/D to more distant and lower-valued markets. A potential U.S. freeze of PDVSA assets could become a de facto crude import ban, if Venezuela voluntarily reroutes shipments. Concerns over the economic impact on Gulf Coast refiners and the Venezuelan population persist, and could cause the U.S. to choose a more modest ban of refined product exports to Venezuela (~120 MB/D in 2018). This would raise diluent and production costs for PDVSA. A potential government transition hinges on the support of military leaders, which still looks highly uncertain at this point. Significant low-hanging fruit exists at underinvested brownfields, if a political transition and notable foreign funding materialize. We currently forecast crude production to decline by 170 MB/D between 4Q18 and 4Q19, to 1.16 MMB/D. The outlook will be heavily influenced by political developments in the coming weeks and months.

Macroeconomics

U.S. job growth is solid, but Fed is dovish

The U.S. economy started 2019 on a strong footing. Job growth in January was much stronger than expected, and the ISM manufacturing confidence index also bounced back last month. But the employment cost index increased only by a measured pace, so wage growth remains under control. The Fed announced a dovish shift in its interest rate and balance sheet policy. GDP growth in the euro area accelerated modestly during the fourth quarter. Chinese confidence readings for January were mixed.

Financial stresses continue to lessen

The S&P 500 gained 1.6% on the week and closed back above the 2,700 level. Both equity and oil volatility fell back. Many of the credit metrics continued to improve, with the market’s assessment of the FED’s policy meeting suggesting that the prospects for rate hikes have vanished, while the odds for potential cuts later in 2019 are rising. Interest rates fell, disinflation trends continue to abate, while industrial metals and precious metals have again performed well. The St. Louis financial stress indicator extended its improvement to four straight weeks.

Global equities post a positive week

Global equities were higher by 1.4%, while the S&P 500 gained 1.6%. Among the domestic tracking indices, housing, energy, consumer staples and industrials all outperformed and gained 2.6-3.9%, while retail fell 1.9%. Internationally, China and Latin America did the best and gained slightly more than 2%. Also noted, the UK market was among the strongest individual market performers, higher by 3.9% in dollar terms, as prospects for a resolution to Brexit came into better focus.

Global NGL Markets

Cold temperatures and Permian pipeline conversion support NGL prices

Prices for purity NGLs on the USGC rose over the week, which market sources attribute in part to an Enterprise Product Partners' announcement that it will convert the Seminole NGL pipeline, which carries NGLs from the Permian basin to Mont Belvieu, TX, to a crude pipeline. Front-month non-LST propane gained 1.75 cents/gal, or 3%, ending the week at 69.25 cents/gal. Nationwide inventories fell 3.6 million barrels for the week ended January 25 to 60.2 million barrels, according to the latest data from the EIA. Midwest stocks saw the largest week-on-week draw, with stocks falling 1.6 million barrels to 17 million barrels last week. US propane stocks fell by 3.6 million barrels to 60.2 million barrels during the week ended January 25, according to weekly EIA data. Total stocks are 7.1 million barrels above year-ago levels, with the surplus to 2018 narrowing by 2.7 million barrels. Last week saw inventory draws across all regions as US population-weighted temperatures averaged 3 degrees below normal. Draws were the largest in PADD 2, where stocks declined by 1.6 million barrels. Exports were mostly flat at 1.1 million b/d from the previous week, and Platts Analytics estimates exports for the current week remain flat week-over-week at an average 1.1 million b/d. Production averaged 2.0 million b/d for the week ended January 25, down just 50,000 b/d.

Global Biofuels

Rulemaking for E15 and RIN reform will headline an eventful month for the biofuels industry

February is expected to be a busy month for the biofuels industry, with proposed rulemaking on E15 and RIN reform on the regulatory agenda. S&P Global Platts Analytics forecasts that domestic ethanol production will fall in 2019, which would be the first decline since 2012. Total ethanol production in Brazil’s key Center-South region in the current season reached 30.2 billion liters through January 15, up 19.5% year-on-year.

U.S. stocks build for fifth consecutive week despite falling output

U.S. ethanol production dropped by 19 MB/D to 1,012 MB/D, nearly replicating the 20 MB/D decline in the preceding week. Stocks built for the fifth consecutive week, rising by 479 thousand barrels to nearly 24.0 million barrels. Total inventories are at the fourth highest level ever despite falling for seven straight weeks on the West Coast. Ethanol-blended gasoline production fell by 122 MB/D to 8,623 MB/D, up 1.4% from this time last year.

Agricultural Commodities

Lost in translation

On the eve of its New Year, China remains front and center; an extended Groundhog Day if you will. While the market seems to have slightly more clarity on the statement that China would buy 5M MT per day of soybeans uttered in the Oval Office by an interpreter last Thursday, even those in attendance seemed confused. Unlike many news organizations, Ag professionals knew that 5M MT per day was impossible as an entire year’s worth of supply could be bought in 16-18 days at that pace, but why let the facts get in the way of a good story. At first the statement was modified from per day to today, an interpretation backed by Secretary of Agriculture Sonny Perdue who attended the briefing. Since “today” was Thursday, much attention was focused on Friday morning’s overnight export sales release since that daily report is now available with the USDA back to work. Unfortunately no such sales materialized, yet optimism remained, pushing March futures through that December 12th high of $9.28 for the prompt contract as many seemed eager to jump on the bandwagon.

N. American Natural Gas Markets

US Gas Weekly Report – Feb 1

Forecasts showing a rapid warm-up in the first week of February — in conjunction with a bearish EIA storage report — drove the now prompt March NYMEX below $2.80/MMBtu this week, a decline of ~9% relative to the prior Friday close. Price action suggests that the polar intrusions were a little too late to drive concerns over storage, as winter premiums continued to erode, i.e. the March/April spread fell to roughly 5 cents. Outside of the winter, summer 2019 came under some selling pressure this week too. Of note, as of Thursdays close, the strip is off ~3% relative to last Friday’s settlement of $2.91/MMBtu. Nevertheless, the strip remains in the upper band of the $2.60 to $2.95 range that has been on display this winter.

European Natural Gas Markets

European Gas Analytics Weekly Report – Jan 30

JKM Mar-19 fell 11% over the last seven days, erasing its premium to Summer-19 contracts and pointing to continued strong LNG deliveries into Europe. EU CSP was also down, albeit only 3%, on bearish coal and carbon. EUA prices remain volatile with prices now back to mid-January levels. As France returned to being a net power exporter, CCGT demand is back to more typical levels. The warming weather in the past week has come with an increase in NCS flows, leaving the continental balance much longer, which allowed for strong exports to Italy and a reduction in storage withdrawals. The UK balance was stable and strong imports from the Netherlands (40mcm/d) were maintained. NWE preserves a strong y-o-y storage surplus despite recent withdrawals, especially in the Netherlands, where this surplus is in excess of 2bcm. This length in the Netherlands explains how TTF has maintained its discount to other hubs, as all prices have come down. Fundamentals point to a narrowing in spreads to NBP and PEG, whilst NCG, GPL and CEGH will likely remain close to current levels. Spread moves in southern Europe (SE) have been related more to NWE outright prices than trends within Italy and Spain, and loose NWE fundamentals point to on-going elevated South/North spreads.

Global LNG Markets

What will Germany’s coal phase-out mean for LNG demand?

Germany is the biggest gas consumer in Europe, outside of Russia, and on January 26th the German coal commission published its much anticipated report on the coal and lignite phase-out. The decision to shut coal certainly did not come as a surprise and was well factored into our medium and long-term gas and power balances for Europe. The announcement left some elements unanswered, in particular the actual closures at the plant level. Either way, the proposed closures turn out to be quite aggressive, especially in the short term and have important implications for natural gas demand. Germany will be increasingly available to provide swing LNG demand, particularly when gas is priced favorably versus imported coal for power generation, but will unlikely be able to be a reliable and significant contract holder for long-term supply contracts, unless potentially for the purposes of bunkering.

North American Electricity Markets

North American Electricity Short-Term Forecast – January

All East and ERCOT markets are showing large declines in January prices year-on-year due to milder weather-driven loads (and weaker gas prices). Western grid prices were mostly higher year-on-year in January as hydro generation was significantly lower year-on-year with loads similar. Our forecast for February power prices is down from last month as fuel prices have come under pressure after a mild January. Weather-adj. loads increased 1.6% year-on-year in December 2018 across the Eastern Grid and ERCOT, driven by gains in PJM, Midwest and ERCOT. Western Grid weather-adjusted loads showed a 0.5% decline. Even assuming colder than normal February/March, an end-March gas inventory sub-800 Bcf is extremely unlikely. Aside from weather, a key risk to Platts’ 2019 gas forecast is Northeast production.

European Electricity Markets

Germany gains market share as French exports fall on low nuclear and hydro output

The aggressive coal and lignite closures proposed by the German coal commission turn out to be bullish for coal (and gas) generation levels out to 2022. Despite robust renewable additions, German margins continue to shrink and turn negative in 2021, offering support to CDS and CSS contracts. As for 2019, high stock levels are bearish for gas prices, with the impact already reflected in German gas dispatch in January. Supported by strong wind output, German exports reached their highest monthly level since at least mid-2015, preventing major price spikes in neighboring markets as low nuclear, hydro and wind output reduced French exports to just 1.6GW. The Nemo start up on Jan.31 is expected to further strengthen the resilience of N-W European markets at times of system tightness. Reduced imports from France and low hydro output had a major impact in Italy, driving gas dispatch to a 7-yr high on Jan.21. But the daily CSS was limited to €15/MWh as unconstrained flows between price zones prevented the Nord from becoming exceedingly tight. By contrast, French tightness had a limited impact on the Spanish market, with prices maintained steady by the unusually flat CSS profile. At the same time, Spanish tenders may add significantly to renewable capacity by the end of 2019-early 2020, and move our price forecast from a €~1/MWh premium to market to a €1/MWh discount in 2020.

Global solar PV market outlook

This report illustrates major trends shaping solar PV penetration across the world. Solar PV remains the largest source of incremental power capacity globally and is a key driver in our global power and fuel balances. Platts Analytics outlook assumes solar additions will grow from the 2018 levels of ~92 GWdc and move in the 100-110 GWdc/year order of magnitude for the period 2019-2025. While China will remain a major market, India, together with Europe and the Middle East, will see increasing additions. In key utility-scale solar auctions around the world, solar PV is clearly competitive against LNG-burning plants in a growing number of markets, but LNG was already in a difficult position anyway. With upsides for solar additions set to be the largest in key coal-burning countries, such as China and India, coal is more clearly the fuel at risk from solar deployment in the medium-term.

U.S. & International Coal Markets

Limited gas-to-coal switching caps prices, but low stocks to lend support

US coal generation fell 2.5% year-on-year in December and is on track to decline by nearly 15% year-on-year in January as little gas-to-coal switching has materialized. Near-term upside risks for coal prices have been diminished by the fall in natural gas prices, but we take a slightly bullish view to forward curves through 2Q19 due to low stockpiles and the potential for very cold February weather.

The Cape Market has eased and now faces fallout from the Vale dam disaster

The dry bulk freight market has been on a bearish trend in the opening weeks of 2019, although a catastrophic iron ore tailings dam rupture in Brazil and related disruption to iron ore shipping represents a new major downside risk to our latest Cape freight rate forecasts. In this report, we also examine the potential impact of the IMO 2020 bunker fuel specification change on dry bulk freight rates.

Price strength shows cracks in Jan, and prices face further downside in 2019 & 2020

Most physical coal prices moved decidedly lower over the last month, led by declines in the CIF ARA contract. Forward prices were mixed, with longer-dated prices rising. As a result, the CIF ARA curve shifted into contango, which is anomalous, in our view. We maintain that weakness in Chinese thermal coal imports will be the primary pricing influence in 2019, pushing both Atlantic and Pacific Basin prices lower. This month, we also add 2020 balances to our report and though we expect Chinese imports to stabilize in 2020, further demand weakness in Northeast Asia and Europe will limit any price increases.

Environmental Markets

IOUs expected to ramp up sales of California RECs

Bucket 1 California REC prices (PCC 1) increased in 2018 despite another strong build in the surplus/bank of credits. This is likely because of the willingness of IOUs to continue to accumulate credits and also the new SB 100 law increasing RPS requirements. There was little incentive for the IOUs to sell RECs at market prices prior to the CPUC’s October PCIA decision, which rejected IOU-preferred mandatory portfolio allocation of RECs. A second phase of the proceeding will deal with managing the oversupply of renewables in the IOUs portfolios. But with mandatory allocation off the table, we believe IOUs will become more active sellers, particularly given long-term downside risks to REC prices (as declining costs of solar and storage capacity and rising carbon prices, will squeeze the gap between solar costs and energy value). SB 100 may prove not to be a bullish factor if RPS targets stagnate beyond 2030 while “clean energy” requirements grow. This will either lead to structural oversupply in the REC market, or lower marginal REC costs.

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