Oil Prices to Recover
The reflation narrative has come back to life supported by a broad based economic expansion which is in progress. The lack of visible stock declines have undermined oil market confidence and dragged prices lower. Market jitters are unwarranted; oil on the water is declining, OPEC output is declining and surplus stocks are declining. Onshore stock declines are inevitable, though the exact timing is tricky. Refinery runs worldwide have been contained by refinery outages, closures and a heavy maintenance schedule. The resulting very strong refinery margins are creating pent up demand for crude. Gasoline cracks stay healthy for now while diesel crack continue to slowly recover. Geopolitical risks to supply are growing.
Prices Struggle to “Weather” Initially Robust Storage Refills
Mild temperatures in April have resulted in robust initial inventory builds, raising questions on the relative tightness of supply/demand balances. With the heaviest restocking typically occurring in May, the more modest inventory builds we see beginning next month will likely revive ongoing underlying supply concerns, along with upward price pressures. Moreover, it is growing increasingly clear that, as the window closes on potential supply gains this season, the overall dependency on demand destruction will increase. Consequently, we revised the front of our price curve to better reflect the slower than anticipated supply recovery — as per the guidance given during the N.A. Gas webinar given live on Wednesday, April 18th. Note that the recording is now available on Dimensions, PIRA’s website.
U.S Ethanol Prices Traded in a Narrow Range During April
Manufacturing margins were also steady. D6 RIN prices plunged as March RIN generation was higher than many expected. The 2017/2018 sugarcane harvest in the South Central region of Brazil officially started in April, but rain caused delays in output. European T2 ethanol prices bottomed.
June Setting Up as Pivotal Month for Summer Balances
The U.K. is no longer a source of incremental gas-to-power growth, as its fleet has completely switched, however, Continental demand has proven to be well correlated with weather, and even political developments in Europe and abroad. In the U.K., Power is not the only flexible demand disappearing, especially with the loss of Rough and limited slack Interconnector capacity at times. However, the bigger current issue has been the cold April weather across much of Europe that has displaced storage injections in favor of satisfying residential/commercial demand. Injections came in at nearly half of PIRA expectations, however, June looks to pick up a lot of the slack and spot levels versus daily injections are cementing this point.
Worsening Drought Drives Price Recovery
With hydro reservoirs remaining at multi-year lows, we have revised the French hydro for 3Q to 4.9 GW (-1.9 GW versus our prior monthly report), which is bullish for prices, as this is the lowest ever recorded for 3Q since 2001. With French exports to Italy and Spain set to reach new highs, there are risks of higher utilizaton of the gas fleet in France, especially as lower water levels could also lead to cooling-related losses at nuclear plants. Spain continues to offer the most upside in the near term, with higher CCGT dispatching bullish for the spark spreads in the upcoming months. As for Italy, recent official data shows that the Italian system can become easily strained under a lower hydro availability, with imports necessary to guarantee sufficient reserve margins at on-peak hours, especially if renewable availability is below normal as well. As coal plants continue to be squeezed out of the mix, German plant operators are increasingly opting for a way out of the market by submitting closure notices to the regulator. With the latest notifications, German total firm thermal capacity is set to drop below maximum winter peak demand for the first time in 1Q 2018.
Stockpiles Rise in Feb, Slight Uptrend in Place for Mar, Apr
Electric power sector coal stockpiles rose in February to sit at 162 MMst according to a Tuesday report by the EIA, which was consistent with PIRA’s estimate of 162.4 MMst in last month’s stockpile report. We foresee a slight uptick in stockpiles over March and April, though the forecast is below the normal stockpile build for this time of year.
Markets Ease Post-Cyclone, Asian Demand Robust
Coal prices initially surged in early April in the immediate aftermath of Cyclone Debbie making landfall, although prices have moved largely in line with end-March levels. Strength in Asian demand, led by China, should support prompt pricing, although this support is expected to fade in 2H17, at which PIRA shifts to a bearish outlook.
U.S. Product Stocks Gain as Crude Inventory Declines
Overall commercial stocks built by 6.6 million barrels for the latest reporting week, led by products which added about 10.3 million barrels. Overall commercial storage is about even with last year. Gasoline led the build with an inventory increase of 3.4 million barrels, with distillate gaining almost 2.7 million barrels. By contrast crude stocks declined by 3.6 million barrels, with Cushing storage falling by 1.2 million barrels. The spike in crude imports to 8.9 MMB/D was partly offset by the sharp increase in crude runs to a weekly record of 17.3 MMB/D.
Excluding U.S. Consumer Spending, Recent Data Are All Very Healthy
During the first quarter, U.S. GDP expanded at a sluggish pace, as consumer spending became stagnant. In PIRA’s judgement, this slump was a temporary soft patch, and the household sector will recover solidly in the second quarter. In fact, given the recent strength in U.S. business investment, second quarter growth is expected to accelerate substantially. In South Korea, first quarter GDP growth accelerated on the back of higher business spending. In the euro area, consumer inflation turned faster in April, but the European Central Bank maintained its dovish policy stance.
Propane Inventories Draw Due to High Exports
Propane stocks registered an 8 thousand barrel build, the first build of the injection season after continuous draws through most of April. Total inventories amounted to 39.6 million barrels which is 31.5 million barrels below last year’s levels. Exports continued to exert downward pressures on PADD III inventories which drew by 1 million barrels to 23.6 million barrels.
Wild Weekend Weather Reawakens Grain Bulls
In theory problems for this year’s HRW crop began some 8-10 weeks ago, in February, when record high temperatures of 80F+ were seen in many parts of Kansas and Oklahoma. Not expecting a late-April snowstorm the crop broke dormancy fairly early, as if it had a choice, and had settled in for an expected easy transition to spring. Instead, the western Kansas crop received over 12” of snow yesterday to go with sub-freezing temperatures and up to 50 MPH winds. While a moist blanket of snow wouldn’t be the worst thing that ever happened to a HRW crop, the depth and weight of yesterday’s snow has certainly caused irreversible damage to some of the Kansas crop given the advanced stage of development, heading, of much of the affected plants.
Prices Headed Higher on Further Affirmation of Tightness
Mild temperatures in April have resulted in robust initial U.S. inventory builds, raising questions on the relative tightness of supply/demand balances. Yet, with little signs of a production turnaround, most regional cash prices, along with Henry Hub (HH) should remain well bid as demand competition with storage injection heats up. In Appalachia, production volumes merely ramped up by merely a little more than 0.1 BCF/D compared to March. Such an increase may seem minor compared to sequential gains seen in years past — especially given the partial completion of the Transco Dalton expansion — but is more representative of the “new reality” limiting gas production growth in Appalachia. This is an important contributing factor behind the bullish price risks we see ahead.
U.S. Ethanol Stocks Rise
U.S. ethanol inventories rose by 235 thousand barrels to 23.3 million barrels the week ending April 21, as PADD I stocks reached a five-year high. Domestic ethanol production decreased by 6 MB/D to 987 MB/D, only 1 MB/D higher than the six-month low achieved two weeks earlier. Ethanol-blended gasoline manufacture soared to a 2017-high 9,220 from 9,044 MB/D in the preceding week.
India/China FSRU Market Swap as Niche Market Matures
Regas tanker maneuvers between the largest emerging new LNG buyers reveal a new dimension to an aspect of trade that has, for the most part, been relegated to buyers that have been smaller, short term, more remote, or seasonal. India and China, both of which boast multiple large-scale conventional regas facilities, will be essentially swapping FSRU capacity, which shows a different scenario for such capacity utilization. The deal indicates that such niche markets have expanded considerably and are being strategically utilized by large growing conventional long term LNG buying markets as well as less stable, seasonal, and short term buyers.
Ukraine's Industrial Gas Prices Get Price Reduction
Naftogaz of Ukraine from May 1, 2017 will reduce the price for gas supplied to industrial customers and other economic entities, the company’s press service reports. “The offered prices for natural gas from the Company's resource are differentiated depending on the volume of purchases, terms of payment and the state of previous settlements with Naftogaz. In May 2017, prices will be reduced by 3% compared with the prices in April of this year,” reads a report.
Heat, Outages, Gas Buoy Southwest Markets
Neither snowmelt nor rainfall nor light of day could keep SP15 prices from rising in April. Driven by heat in inland markets, generation outages, and rising gas prices, SP15 on-peak climbed $3.50/MWh to average $27/MWh. In contrast, Northwest and Northern California markets remained submerged near March levels. With precipitation more than twice the normal level in April, the Northern Sierra 8 station index has risen above 90 inches, the highest level ever recorded. This did not translate into much incremental generation, in part due to outages at the Oroville complex undergoing repairs to the damaged spillway. NW precipitation remained above normal and runoff increased, but much of the incremental flow will likely be spilled.
Huge Japanese Crude Stock Build, Along With Higher Runs
Japanese crude runs rose 143 MB/D on the week and crude imports surged, which ballooned crude stocks 6.6 million barrels. Finished product stocks also built 1.8 million barrels, with stock increases in all the major products. Demand trends remain largely seasonal, but are holding up well. Kerosene demand fell back modestly, and the stock change rate transitioned from a modest draw to a modest build of 8 MB/D. Margins improved again, this week by $0.53/Bbl, and are now verging on acceptable, but not exceptional. All the major cracks improved on the week.
Reduced European Risks Keep Stresses Low
Financial stresses remain extremely low. Most noted is an increased divergence between bank equity performance (higher) and a flatter yield curve. This is noted in the major regions (US, Europe, and Japan). The election outcome in French was extremely bullish for Europe. Their equity market moved sharply higher, while sovereign and “fragile bank” CDS quotes eased noticeably. Energy credit indicators are not as soft as cash oil prices, with high yield energy credit still looking solid. Emerging market debt performance was noticeably higher on the week. There still is a good level of comfort in the higher yield debt instruments, both in general, in energy, and in emerging markets.
Peak Seasonal Build Likely to Disappoint
With the heaviest restocking typically occurring in May, we expect that the more modest builds we see ahead for inventories next month will likely revive supply concerns. Our provisional projections through May suggest weekly builds will more often be below the five-year average levels, and also often below the corresponding 2016 builds, thereby enabling the Y/Y storage deficit to re-widen.
U.S. February 2017 DOE Monthly Revisions: Demand and Stocks
EIA just released its final monthly February 2017 (PSM) U.S. oil supply/demand data. February 2017 demand came in at 19.188 MMB/D, 515 MB/D lower than the weeklies. Total product demand declined -2.5% versus year-ago (-492 MB/D), compared to the February 2016 PSM data. It was the first decline since July 2016. Resid demand showed growth of 70 MB/D (35%), while kero-jet was flat with year-ago. Distillate demand declined -1.4%, but outperformed, while gasoline fell -2.4% (218 MB/D), and was near the barrel average. End-February total commercial stocks stood at 1,357.2 million barrels. Compared to final February 2016 PSA data, total commercial stocks were higher than year-ago by 36.3 million barrels, versus an excess of 43.5 million barrels seen at end-January.
Global Equities Post a Broadly Positive Week
Again, most equity tracking indices posted a positive week. The broad U.S. market rallied back towards record highs. Technology and consumer discretionary did the best. Energy was only modestly changed. International indices also were mostly higher, with Europe doing the best.
Can Offshore Projects Compete with U.S. Shale?
Shale breakevens have fallen dramatically over the last several years, displacing offshore and other higher cost projects on the supply cost curve. Rightsizing, efficiency gains, and service price reductions have lowered breakevens for both shale and offshore. However, relative to offshore, shale has seen a larger portion of its breakeven reductions come from structural efficiency gains versus cyclical pricing adjustments. Offshore will likely see costs continue to deflate in the near-term as long-term contracts continue to roll-off and move to lower spot pricing but it seems unlikely that offshore breakevens will move significantly lower or again move below shale.
Indonesia will Remain a Major Outlet for Refined Products
Indonesia is the largest importer of refined products in Southeast Asia. Indonesia’s oil demand has far outpaced its domestic production due to a lack of refinery capacity additions, leading to large and growing import requirements, particularly for gasoline and gasoil/diesel. However, net imports for the two products have weakened over the past few years due to factors such as economic slowdown, subsidy reduction, and re-start of a mothballed refinery, as well as the commissioning of a new RFCC unit at Pertamina’s Cilacap refinery. This declining trend is likely to continue this year before reversing next year.
Earthquake Activity Subsiding in Oklahoma
The significant increase in earthquake activity in Oklahoma in recent years became a growing concern for the state’s oil industry. There appears to be a strong link between increased salt water disposal and seismic activity which has caused regulators to impose restrictions on the disposal of produced water. These restrictions, which impacted a small amount of Oklahoma’s oil production (<30MB/D), appear to be working as shown by a recent study from the Oklahoma Geological Survey. The study shows a significant decrease in earthquake activity (from 5 per day in 2015 to around 1 per day now) as water injection in the Arbuckle formation was cut in half (1.5 MMB/D now versus 2.8 MMB/D in 2015).
February 2017 U.S. Crude Production Rises On Strong Texas
U.S. crude and condensate actuals for February 2017 came in at 9.03 MMB/D, up 193 MB/D month-on-month, down 116 MB/D year-on-year and 160 MB/D above PIRA’s forecast. The miss relative to PIRA’s Reference Case was driven by strong growth from the Lower 48, up 222 MB/D month-on-month, with Texas alone growing 119 MB/D.
Aramco Pricing Adjustments: Further Discouraging U.S. Liftings, Staying Competitive in Asia
Saudi Arabia's formula prices for June were just released. Pricing for the U.S. was raised for the second straight month on all grades as Saudi continues to discourage liftings. Differentials in Asia were cut reflecting a wider Dubai structure, while Europe was tightened in line with a lessening in the Urals discount to Dated Brent. Aside from the tightening in the U.S., the adjustments were reflective of the key regional drivers used to set pricing. As such, Saudi is choosing to remain competitive with market fundamentals as exports have already been cut to agreed levels.
April Weather: U.S. Warm, Europe Normal and Japan Cold
April weather was warmer than normal by 8% in the three major OECD markets, bringing the month’s oil-heat demand below normal by 69 MB/D. The three-region composite was almost 17% warmer on a 30-year-normal basis.
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.