U.S. Commercial Stocks Declining
Overall commercial stocks declined by 5.1 million barrels for the latest week, led by a decline in crude inventory of 1.8 million barrels and other products falling by 3.6 million barrels. Refiners have been recovering from the aftermath of Hurricane Harvey somewhat faster than expected with runs up by one million B/D from the previous week to 16.2 MMB/D. Runs are expected to reach 16.3 MMB/D as turnaround season commences, and some refiners are seeing delays in crude arrivals due to rough waters brought about by hurricane activity. For the next week crude storage is expected to fall by just around 1.3 million barrels, as Cushing storage sees a further gain.
Uptrend in Global Economy and Markets During the Third Quarter
During the third quarter, several encouraging economic trends became clear. In the U.S., even though distortions from Hurricanes Harvey and Irma muddled the picture, the underlying growth momentum remains constructive. Europe is also on an uptrend, based on positive business survey results. World financial markets had a solid quarter. The performance by the Korean equity index was particularly encouraging, a conclusion echoed by the September Chinese business confidence reading. Meanwhile, the U.S., the euro area, and Japan all reported slower-than-expected inflation this week. The mystery of low inflation in developed markets is becoming a major issue for monetary policy.
LPG Exports Top 1 Million Barrels per Day for Second Consecutive Week
Propane and butane prices continue to rise with the propane price increasing to 78% of the WTI crude price. LPG prices are being supported by a combination of high exports and tightening supply caused by flat production and inventory draws. LPG exports totaled more than 1 million barrels per day for the second consecutive week, and a weekly propane stock draw of 1.4 million barrels brought propane inventories down to 7% below the five-year average as the LPG heating season approaches. U.S. NGL production was down 1% week on week but remained above 3.9 million barrels per day. Ethane prices were basically flat last week, and the ethane Btu premium to Henry Hub natural gas remained strong to support ethane extraction. U.S. ethane and propane demand will be increasing as DowDuPont’s new build 1.5 million tonne per annum steam cracker.
U.S. Manufacturing Margins Improved During September
The EPA revealed that it is considering reducing the biofuel mandates proposed earlier this year and possibly allowing RINs attached to ethanol exports to count towards compliance. RINs and biomass-based diesel prices tumbled. Ethanol output in the South-Central region of Brazil jumped. European ethanol values continued to decline.
Weather Buoys Pre-Winter Inventory Stocking
Weather related looseness in U.S. supply/demand balances has lifted our end October storage estimate to ~3.8 TCF. This elevation of inventories coupled with domestic production growth, suggests that the industry is better positioned to offset winter-time demand. Consequently, we have further trimmed our 4Q17 price forecast by an additional ~$0.08/MMBtu, with the largest markdowns of 10¢ reserved for October and November. Our price guidance for 2018, however, remains unchanged at $3.37/MMBtu.
Hurricane Harvey Causes Wide Swings in Aframax and Product Tanker Markets
VLCC and Suezmax rates continued to weaken in August and September, but Hurricane Harvey caused sharp increases in Aframax and product tanker markets in the Atlantic Basin.
Gas Pricing Buoyed by Regulators – Near and Far
With European gas’ lockstep movement alongside coal, recent decisions by Chinese and Indian regulators to helping stem the rise in coal may be a little late after coal stocks remain incredibly low in both countries. Also, French nuclear news continues to send gas pricing to ever new heights, thanks to an immediate shutdown of the 4 unit 3.6-GW Triscatin power plant ordered by ASN. Nevertheless, strong September deliveries, thanks to Russian maintenance on the Nordstream pipeline, is ensuring that storage facilities remain busy due to in-the-money cycling opportunities. Weather will be an important factor for October if these injection nominations actually become fulfilled. PIRA models don’t indicate major injections will fully materialize though.
Low Stockpiles Pose Near-Term Bullish Risks
Seaborne coal prices largely pushed higher over the past month, despite a weaker turn in the second half of September. Heighted levels of coal demand in 3Q17 have drawn on coal stockpiles, notably in India and China. These reductions pose a significant upside risk to prompt pricing, particularly if there were to be a disruption to supply and/or unanticipated strength in coal demand. However, prices are expected to fade considerably over 2018 on weakening demand fundamentals and rising supply.
Japan Demand Better, Big Crude Draw
Aggregate demand improved on the week, though finished product stocks still posted a modest build. Crude stocks posted a sharp draw of 7.8 million barrels, due to a very low implied crude import rate. Runs eased as maintenance again begins to gear up. Gasoline demand rose 74 MB/D, but still characterized as lackluster. Gasoil demand eased 37 MB/D, and the robustness has begun to ebb. Kerosene demand was surprisingly strong at 137 MB/D, but the supply side gained sufficiently to accelerate the stock build rate. Refining margins eased slightly on the week, but remain good and supportive of a high level of runs, though fall turnarounds are gearing up.
ASN Turns the Screws on EDF
With nuclear revised sharply lower in October, French prices have significant upside, coupling more often with Italy for Baseload. November prices have also upside since this is the month with the largest capacity affected by the Creusot review set to restart, but the dike issues found in the Tricastin site and the concerns around Belleville could spell trouble for the French nuclear availability, if the ASN remains strict. The ASN approach is, however, clearly unrealistic during the winter months, especially as the French system’s ability to cope in periods of system stress (colder weather) would be seriously jeopardized under lower nuclear availability. Will ASN take the risk of a system failure or even demand disconnections or other exceptional measures, or rather allow the plant checks or work to be postponed once again?
Milder Weather Prunes Premiums
A pendulum shift in inventory restocking has sent NYMEX futures on a wild ride this month, with the Nov’17 contract falling from a mid-month high of $3.21 back down to ~$3/MMBtu as traders reassess pre-winter supplies. Looking ahead, the latest weather guidance indicates a milder weather regime will unfold during the first half of October, raising the risk of relatively stout injections ahead.
Venezuelan Economic and Sanctions Risks Coming to a Head
PIRA understands that Venezuela has yet to issue a loadings program for October, a particularly worrying development amid U.S. financial sanctions and deteriorating economic conditions. In addition, reports indicate Venezuela is now demanding refiners pay for shipments in euros, causing some customers in the U.S. to balk. The payment issue appears linked to U.S. sanctions announced by the Trump administration in August, which ban trading in certain Venezuelan securities. As a result, alternative heavy crudes are seeing a boost, given the uncertainties and as some buyers seek alternatives. PIRA expects the loadings program to be issued shortly, and its volumes should be relatively normal, but the delay and payment uncertainty are causing a dislocation. The September loadings program was about 1.7 MMB/D.
Financial Stresses Very Low, Credit Remains Constructive
Much like the previous week, credit conditions again remained highly constructive, with the S&P 500 setting new records, volatility (VIX) declining further, and some high yield credit prices still rising. Emerging market debt, however, is still sluggish and moved down fractionally, while other credit instruments gained, particularly energy and high yield energy. The commodity space was weaker, but energy was again stronger. The dollar was strongly higher. The St Louis financial stress indicator again moved lower for the fourth straight week.
China’s Key Product Exports to Decline in 2H17 Due to Lower Quotas
PIRA has long believed that China’s product export quotas would be lower this year. China last week allocated some 1.6 million MT of oil product export quotas for the fourth quarter under the traditional processing trade route to two state-owned oil companies. This is likely to be the last batch of quotas granted this year, and would bring the total export quotas granted for both normal and processing trades this year to 38 million MT, down 16% from last year. Overall, China’s key product exports are expected to decline in 2H17 (vs 1H17) by as much as 28% under the assumption of 85% utilization rate. As a result, this is constructive for regional refining margins and should add to the expected strength in gasoil/diesel.
Production Plunged the Week Ending September 22
U.S. ethanol production plummeted the week ending September 22, falling by 37 MB/D to 996 MB/D as more plants went offline for scheduled maintenance. This was the largest weekly drop since June 2016. Inventories declined by 398 thousand barrels to 20.7 million barrels, with Midwest stocks sinking to a 2017 low. Ethanol-blended gasoline output rebounded to 9,054 MB/D from a six-month low of 8,887 MB/D during the preceding week as overall gasoline production increased.
Too Much Corn
While 2.3 billion bushels of corn in the Quarterly Stocks report released Friday was 60 million less than expectations, and the September WASDE, the number was a multi-decade high for September 1st and 32% higher than last year. Usage during the 4th quarter of the Marketing Year was down 40 million bushels, despite much larger stocks, obviously not a “good” sign. A deeper dive into the state-by-state statistics paints a sobering picture, reflective of either a strong belief that prices will go much higher or an emotional attachment to corn. PIRA certainly understands that it “pays” to store corn given the current market structure, but at some point capitulation is coming given harvest is upon us, to say nothing of hungry bankers looking to recoup a major portion of their lending.
Sidelined Speculative Money Awaiting Clearer Signs of Tightening
Shrugging off yesterday’s lighter-than-anticipated weekly storage report, the market walked back the previous session’s gains to close the Nov’17 futures contract at $3.017/MMBtu, ~4 cents lower on the day. With short-term weather forecasts now pointing to a reasonably strong build in inventories ahead, the newly minted NYMEX contract will remain anchored near the $3 mark. Taking stock of the season as whole, daily cash prices have vacillated in an exceptionally narrow trading range of ~50¢, between $2.75 and $3.27/MMBtu. Importantly, despite prices currently entrenched in the middle of this range, revisiting the low end in the final weeks of the injection season cannot be ruled out — especially as a timely start to October heating loads appears to be delayed.
LNG Trade Talk in Asia Reveals Ongoing Doubts about Next Generation U.S. Supply
Twin oil and gas conferences in Singapore and Sakhalin reveal deep seated industry concerns about the ability of the next generation of global liquefaction to cope with a lower oil priced environment, even as ample untapped reserves are uncovered throughout the Russian east as well as in East Africa. Added to these concerns are stronger demands from the end-use buyer side for ultimate contract, price and destination flexibility, virtually ensuring that the next projects to be sanctioned will be underwritten mainly by the largest portfolio players that have the balance sheets to support the price and demand risk. As the generally accepted period for market clearance keeps getting pushed out, now to around 2023-24 from the latest 2022 period, end-use buyers continue to bide their time.
Saudi Arabia: Foreign Exchange Reserves Continue Drawing in August
Saudi’s foreign exchange (fx) reserves for end-August were just released. They declined -$6.9 billion, an acceleration from the -$6.2 billion monthly draw posted in July. The improvement in the financial draw rate seen in May and June has apparently proven temporary. Reserves have now been drawn $258 billion (-34.6%) since their peak in August ’14. The improvement seen in May and June appears to have been related to the Kingdom’s first dollar dominated $9 billion Islamic bond offering back in April.
Summer Coal Stockpile Draw Above Average
The EIA reported end-July electric power sector coal stockpiles of 148.1 MMst on September 26, a decline of 12.5 MMst M/M for what is typically the largest monthly stock draw of the year. The July 2017 stock draw was ~14% greater than the five-year average for July of 11 MMst and came close to the 13.7 MMst stock draw of July 2016. U.S. coal prices, particularly in the PRB, rose in response to the July 2017 stock draw, but price action was more muted than last year, when the industry was rebounding from depressed Spring natural gas prices.
DOE’s New Category for Subsidy, “Fuel-Secure Generation”, Would Undercut Natural Gas Power Gen
The U.S. Department of Energy has taken steps to bolster the economics of at risk coal and nuclear capacity, directing FERC to finalize a rule ensuring that “fuel-secure generation” in competitive markets is made whole. While the overall approach and aggressive timeline are sure to be strongly contested – the potential impact on coal burn (positive) and gas burn (negative) in the short term will depend on whether the required tariffs to support “eligible units” are channeled through energy prices, or are more like “capacity prices” (with more limited impacts on dispatch and fuel burn). In the longer term, under either approach, potential coal and nuclear retirements could be re-evaluated, lowering the incentives for new generation – which is bearish for natural gas demand.
Australian Gas Producers Pressured to do More for Domestic Users
The Australian Competition and Consumer Commission has criticized the country's east coast-based LNG exporters' efforts to address the region's gas supply problems. ACCC's criticism could be seen as a harbinger to the tone of its soon-to-be-releasd report to the Treasurer which will feed into the government's deliberations on whether or not to implement LNG export restrictions next year. In a speech at the nation's capital, Canberra, on Wednesday, ACCC's chairman, Rod Sims, reminded those in attendance of the advice he had given to Queensland's LNG producers six months ago: support the domestic market as much as possible at this crucial time.
Global Equities Setting More Record Highs
Global equity markets continue to set broad based record highs in a host of countries and across a host of market indices. In the U.S., the S&P 500 gained 0.7% and pushed further above the 2,500 level. The best performers were banking, housing and retail, while energy also outperformed and gained 1.9%. The utility tracking index was again the worst performer, -0.3%. Internationally, some of the key tracking indices lost ground, particularly, China, Latin America, emerging markets, and emerging Asia. Europe and Japan moved higher on the week, and came in just under U.S. performance.
Cape Freight Rates Climb but the Market Faces Headwinds
Capesize dry bulk freight rates have surged over the past month, with rates rising to over $22,000/day. Chinese steel production has been strong recently, with output rising ahead of mandatory cuts for pollution control. With iron ore prices fading along with Chinese steel prices, the market looks ready for a downward correction. Looking further ahead, we are seeing China’s steel sector moving towards becoming a smaller, higher-quality, and less polluting industry. This change, along with the potential for tightening credit controls will weigh on freight rates over the short-term forecast horizon.
U.S. July 2017 DOE Monthly Revisions: Demand and Stocks
EIA just released their monthly July 2017 (PSM) U.S. oil supply/demand data. July 2017 demand came in at 20.0 MMB/D, 848 MB/D lower than the weeklies had indicated. Total product demand growth slowed to 1.2% versus year-ago or 244 MB/D vs. the 3.5% or nearly 700 MB/D growth in June. Distillate demand outperformed the barrel average, correlating well with continued acceleration in the trucking activity indicators. Gasoline demand declined -0.1% vs. year-ago and lost marginal volume, which corroborates with slower VMT growth reported through July. Compared to July 2016 PSA data, total commercial stocks are now lower than year-ago by 52.4 million barrels, an improvement from what was seen end-June for both crude and product.
U.S. Production in July Grows on Gulf of Mexico; Growth Stays Modest in Texas
U.S. crude and condensate actuals for July 2017 came in at 9,256 MB/D, up 144 MB/D month-on-month, up 560 MB/D year-on-year. This is 9 MB/D above PIRA’s forecast. Despite the small miss for total U.S. production relative to PIRA’s Reference Case, significant variances were seen in Texas and the Gulf of Mexico.
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.