U.S. Stock Deficit to Last Year Continues to Widen
Commercial oil inventories resumed their decline, falling 4.6 million barrels this past week led by a 6.5 million barrel decline in crude oil. The stocks of the four major products built 1.9 million barrels last week, the first build in eight weeks, and gasoline contributed 3.4 million barrels, a hefty build after seven consecutive weekly declines. Cushing crude inventories have generally drawn since early April and this past week they had their first significant build of 0.6 million barrels; next week’s inventory is forecast to show a slight increase, as the HollyFrontier Tulsa outage continues. Crude inventories are forecast to show another substantial decline next week.
Summer Over Already?
Spot on-peak energy prices were lower y/y (but higher m/m) in most Eastern markets with a few notable exceptions. Loads in the East fell by 2.8% as cooling demand fell from the warmer than normal prior year. ERCOT and SPP loads rose slightly. Henry Hub spot prices averaged near $2.96/MMBtu in July, up 4 cents from June levels. Milder forecast for August weather has colored recent NYMEX trading, with the market sending prices to an injection season low below ~$2.80/MMBtu. PIRA has revised down balance of year prices as well as some longer dated forecast. Longer term price recovery in 2018 and 2019 is still on the cards due to underlying structural tightness.
CA Carbon Pricing Tempered by Upcoming Auction
With cap and trade extended, California carbon allowances reached multi-year highs in July (though on low volumes). As the Aug. auction approaches, pricing has retreated to levels closer to the expected 2018 auction reserve. Inflation indicators that will set next year’s auction floor slowed in June. Upside pricing potential is limited in the near term by growing surpluses as unsold allowances return to the market - likely beginning in Nov. CARB must soon determine the implementation of moving allowances unsold after 24 mos. to the APCR. By the end of this year, CARB must adopt a Scoping Plan consistent with AB 398. The adopted Cap and Trade Amendments include linkage with ON, but a 2018 link is not a certainty.
U.S. Inflation Remains Sluggish; World Industrial Activity Is Solid
The U.S. core CPI stayed sluggish for the fifth consecutive month in July. Vehicle prices continued to fall at a faster pace than usual, and rent increases were unusually subdued. Global industrial production growth accelerated during the second quarter. In the developed world, the U.S., the euro area, Japan and Canada reported healthy results, while the U.K. disappointed. In emerging Asia, expansion in trade supported industrial activity, but an increase in the high-tech sector inventory was a negative influence.
LPG Prices Continue to Strengthen Relative to WTI
For the third consecutive week, propane and butanes prices have strengthened relative to WTI. The propane/WTI ratio of 67% is abnormally high for the stock build season and is more like the winter demand season ratio. Propane stock build for week ending August 4th was virtually non-existent, and propane stocks remain on the low side of the five-year average. This contributed to the 4.4% week-on-week increase in propane prices. The rise in ethane prices is tied to the commissioning of three world-scale steam crackers through the end of the year.
Margins for Manufacturing Ethanol in the U.S. Improve
The EPA announced it will reject the petition to shift the point of biofuels obligation from the refiner and importer to the blender. RIN assessments were lower during the week ending August 4. U.S. fuel ethanol exports declined to 85.3 million gallons in June. Brazil returned to a net export position in July. European ethanol prices declined.
Mild Weather and Growing Production Weigh on Market
Last week’s smaller-than-expected weekly storage report added fuel to this week’s NYMEX rally, with the Sep’17 contract recovering more than 20 cents off last Friday’s calendar year low. As supply gains continue to weigh on the market sentiment amidst seasonally waning power burns, we see little support for price gains in the immediate future. Contributing to price recovery headwinds are the August balances, currently shaping up to yield a ~25 BCF reduction in the Y/Y storage deficit. Even so, we remain steadfast in the underlying strength of demand due to structural growth.
Time To Move Along
Arguing with the August Crop Production report at this point is futile. The numbers will either be confirmed or disputed at the end of next week after a thousand samples are taken from Ohio to South Dakota during Crop Tour. The markets cannot sit around and wait however as other influences take over for the rest of August, especially in soybeans as wet weather over the next four weeks should have a dramatic effect on the national yield.
As India Stalls, China Quietly Sucks Up Global Excess within Limits
As active spot buyers and sellers, and as the only acknowledged “price sensitive” buyers, Indian companies get a lot of press in the global LNG trade as evidenced by the recent kerfuffle with US liquefaction developers regarding possible contract re-negotiations. The fact is, Chinese buyers have –without comment – been sucking up close to 30% of incremental global LNG supplies this year, the largest incremental buyer this year. While this 38% Y/Y increase in imports on the part of Chinese buyers is wholly sanctioned by contract obligations, it was not necessarily a given that these contracts would be honored to such an extent – at least not initially.
Improving Nuclear Availability in Continental Markets Bearish for Sept. and 4Q Prices
Since early spring, the markets have been focused on the drought in Southern Europe, which has led to increased tightness across Italy, Spain, Switzerland, and France. Moreover, the bullish sentiment has been sustained by record low nuclear output in France, with total generation of 225 TWh in the period January-July, the lowest level since at least 2001. While hydro remains well below year ago levels, nuclear outlook in France and surrounding markets is now turning bearish.
Russian Force Majeure Maintains Bullish Coal Market
Coal prices moved higher again this week, spurred on by a force majeure declaration in the Far East of Russia. Wet weather damaged railroad infrastructure, curtailing coal exports from the ports of Vostochny and Maly. This was the latest in a litany of several external forces that have served to tighten prompt physical balances and push market prices higher. CIF ARA forward prices increased by the largest extent, breaking the pattern of the previous several weeks. For the prompt market, the risks remain skewed to the upside as demand is seasonally high, although PIRA continues to assert that rebalancing fundamentals will exert downward pressure on balance of the year pricing, although the downside has been trimmed due to sizeable stock draws.
EUA Fundamentals Turning Bearish in Upcoming Months
Ongoing post-2020 market reform talks (with an upcoming meeting on September 13th) can offer a degree of price support for European Carbon prices, as can rising implied carbon prices from German coal-to-gas switching. However, PIRA expects that the increasingly poor supply-demand fundamentals in the EU ETS will outweigh those more positive indicators in the coming months. This includes the increases in auction supply starting in September, and expected decreases in power sector EUA demand for the remainder of the year.
Japan Gasoline Demand Kicks Higher for Upcoming Mountain Day Holiday
Japanese runs continue rising post-turnaround. Crude imports rose as expected and crude stocks built 5.1 million barrels. Finished product stocks were modestly lower, with good draws on gasoline, gasoil, and jet. Aggregate demand was higher and continues to rise, on trend. Gasoline demand kicked up 151 MB/D, which was close to expectations with the upcoming Mountain Day holiday and stocks resumed drawing by 0.35 million barrels (50 MB/D). Gasoil demand was surprisingly higher by 60 MB/D and stocks drew 0.37 million barrels (53 MB/D). Kerosene demand jumped 44 MB/D to a strong 125 MB/D. Refining margins were slightly lower on the week, but remain supportive to rising runs, for the moment.
Financial Stresses Move Higher Amid Global Tensions
Stresses ticked up significantly, this past week, largely because of the potential for conflict with North Korea. The St Louis financial stress indicator ticked slightly higher, but other indicators showed a much bigger rise in stress. Volatility (VIX) jumped much higher, while high yield (HYG) and emerging market debt (EMB), along with other non-Treasury credit indicators, all posted noted losses. Commodities were modestly higher, with energy pretty much in line with overall performance. The dollar was on balance, slightly weaker.
U.S. Inventories and Production Increase
U.S. ethanol inventories built in four of the five PADDs last week, reaching 21.3 million barrels. It was the first increase in three weeks. Domestic ethanol production jumped 10 MB/D to 1,012 MB/D though output outside the Midwest dropped to a three-month low 80 MB/D. Ethanol-blended gasoline production fell 116 MB/D to 9,296 MB/D as the summer driving season draws to a close.
If Yogi Berra was still alive today he’d probably reach into his famous bag of one-liners and proclaim, “It ain’t over ‘til it’s over”. That may be true but as a friend said yesterday, “Thursday is just another large hole poked in the already sinking boat that is the U.S. farm economy”. With fewer bushels to sell, and sinking prices, the last thing that a Midwestern farmer wanted to hear was that the SE U.S. was expected to harvest record yields, but that’s exactly what happened.
High Nuclear Production is Denting Gas Demand
Even though many coal and nuclear power stations will eventually be shut down, in the short-term gas still needs to contend with these other fuels for market share. With winter coming and the near market gas curve in contango, this competiveness looks at greater and greater risk. But these risks are only tempered by the fact that hydropower is still hobbled. Nevertheless, the story of gas demand over the past year has centered on the gas-to-power renaissance. A lot of it has been assisted not only by increased price competitiveness versus coal, but also the absence of cheaper thermal capacity in the form of hydro and nuclear production. Two of these supportive elements are disappearing at the moment. In August, we are seeing how not only nuclear is reasserting itself in European balances, but how gas is also pricing itself increasingly less competitively versus coal.
Seasonal NOx Emissions Fall in May/June
Preliminary Seasonal NOx data for the CSAPR Update program show emissions have fallen in May/June - in line with the lower 2017 cap. In particular, covered coal units with SCR saw their average NOx emissions rate drop. Individual states such as PA, IN and MO saw very large YOY emissions decreases, while others like TX were up, flagging the possibility of binding variability limits (AR and MS appear most challenged). Allowance pricing remains in the range of $600 to $650/ton. EPA recently announced it would not delay implementation of the 2015 Ozone NAAQS, which could tighten seasonal NOx limits down the line.
Saudi Arabia: Foreign Exchange Reserves Post a Small Increase in June
Saudi’s foreign exchange (fx) reserves for June increased $1.7 billion from May levels to $501 billion. It was the first increase seen since May 2016. The three month average draw rate of fx reserves slowed further to $2.6 billion, having been as high as $9.1 billion in March 2017. Since oil prices moved structurally lower in mid-2014, there have only been three other individual months where fx reserves have risen month-on-month. In this context, the increase posted for June is of itself noteworthy. More so, the slowdown in the fx reserve draw rate occurred during a period when oil prices had been generally declining.
Global Equities Ease on Increased Tensions
Global Equity markets fell back broadly on the week from record highs on increased global tensions. In the U.S., the S&P 500 eased -1.3%, with banking, retail, and energy being the weakest performers. Consumer staples and utilities managed to hold their ground, showed only modest changes and outperformed. Internationally, most of the tracking indices performed worse than the U.S, with Europe being the weakest performer, while the Latin America tracking index was the best and showed little change.
The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.