Syncrude Fire Lifts Canadian Prices; Midland Diffs Weaken
Syncrude’s 350 MB/D Mildred Lake upgrading site suffered an explosion and fire on March 14, squeezing light crude supplies and sending Canadian and Bakken differentials sharply higher. Midland differentials fell sharply on rising Permian Basin production and local refinery maintenance, as the region awaits several pipeline capacity expansions later this year. The crude import arb remained closed, and the export arb remained open in the wake of this week’s Census report showing exports surpassing 1 million barrels per day in February.
Production Recovery Remains Muted – Supports Rising Prices
With the May contract adding eight cents W/W, price formation remains cemented in a bullish trending pattern – with former key resistance levels now providing strong technical support. Yet, the momentum behind this recent rally appears squarely rooted in fundamentals. To be sure, while U.S. gas production is no longer declining M/M, recent gains — ~0.2 BCF/D over the past two months — have been tepid to say the least. As such, slower than anticipated production growth is giving rise to increased inventory concerns.
Recent Loss of an ex-VLCC Ore Carrier Conversion Could Have Implications for Future Freight Rates
The tragic loss of a VLCC that was converted into an iron ore carrier last week raises questions regarding the safety and longevity of such vessels. Former VLCCs are on the older end of the spectrum of dry bulk vessels, but represent a meaningful percentage of the overall fleet. While scrapping of these older vessels has already been underway, a potential acceleration of scrapping rates could provide significant upside for dry bulk freight rates.
Counter-Seasonal Buyers Pulling Back on LNG Demand, Weakening Global Balance in 2Q
Growth in domestic gas production is a fundamental issue rocking the foundations of three of the world’s pillars of counter seasonal LNG buying: Argentina, Brazil, and Egypt. The South American buyers are the pioneers of counter-seasonal FSRU buying, while Egypt posted the second largest growth rate in the world last year next to China. Advancements in domestic production in all three of these countries are reducing the need for incremental LNG in the second and third quarters and have all but eliminated imports in the off months in Argentina and Brazil this past year.
Low Unemployment and Subdued Wage Growth in Key Economies
The monthly report on the U.S. labor market conditions is typically the best source of information about how the economy is performing. March data release contained several major surprises, both positive and negative. But the assessment on the economy remained the same: it continues to expand at a solid pace, but is not yet exhibiting signs of overheating. In Germany and Japan, recent data on unemployment pointed to solid economic growth. However, as in the U.S., wage growth was subdued in both countries.
California Carbon Boosted by Auction Verdict
California carbon prices surged right after the Appellate Court decision validating the auctions - a final decision could come next year from the CA Supreme Court. The full compliance reconciliation next year requires significant additional allowance purchases (at auction) and only three auctions remain where the supply will be focused on V-17s. The price premium for V-17 vs. later vintage allowances grew in Mar and may see further upside. Inflation, which will determine the 2018 Auction Reserve Price, continues to creep up this year. The favorable auction decision and CP2 allowance demand should boost coverage ratios for upcoming auctions and may pave the way for unsold allowances to begin to be re-offered.
U.S. Ethanol Prices Advance Last Week
The U.S. price rally continued the week ending March 31 as the market prepares for the peak driving period which will boost ethanol consumption, coupled with the maintenance season that will limit output. Manufacturing margins improved, while RIN values fell. The 2017/2018 sugarcane harvest in South-Central Brazil officially began April 1, though almost 100 mills were operating in March. European ethanol prices edged lower.
Chinese LPG Imports Remain High
Chinese propane imports remain strong due to PDH demand. February imports were 1.45 MT (million tonnes), up by 372 from last year. Imports have remained strong due to PDH and gasoline blending demand. Growing petrochemical demand is the main reason for growth, however, the rollouts of “National VI” and “National V” policies are calling for increased gasoline/diesel quality in order to decrease emissions in metropolitan and rural areas, which is increasing demand for gasoline blending components such as butane.
More LNG and a Looser Atlantic Basin Proves Key to Stock
Thanks to extreme warmth, Europe averted a potentially disastrous storage situation on the books as recently as mid-February. However, the task of refilling over 60 BCM of gas will be a tall one, and PIRA is only forecasting around 91% of this volume to be reinjected into European storage facilities. LNG will play a major role in whether the final figures deviate from this forecast. Global LNG balances are loosening this quarter, which is providing Europe with ample opportunities to get an important head start for next winter. Asia has much less need for Mideast and Atlantic Basin LNG due to higher Australian output, and U.S. production is climbing rapidly.
U.S. Drought Improvements
While it is wet in many areas, and we do not want to downplay that factor as more bushels are lost to too much rain rather than too little, the weekly drought report showed that the percentage of acres currently affected by drought is down to 4% in corn and 3% in soybeans after being in the low teens just a few weeks ago. Affected winter wheat acreage has also seen a dramatic drop to “just” 10% after being as high as the low 20’s recently.
As German Clean Spark Spreads Widen, Gas-Fired Dispatch Slowly Picks Up
After having reached a bottom for the year, German peak Clean Spark Spreads (CSS) for May and June are slowly recovering. We looked closely at reported gas dispatching in Germany during on peak hours in the 15-month period between January 2016 and March 2017 and noticed a relative flatness of the gas dispatching, especially in the second quarter, where an increase in spark spread by €30/MWh (from €20/MWh to €10/MWh) raises gas dispatch by only 1.8 GW on average at on-peak hours.
U.S. Light Products Continue to See Narrowing Deficit
Overall commercial stocks were up just around one million barrels this past week, with crude inventory gaining nearly 1.6 million barrels, as products declined by 0.53 million barrels. Both gasoline and distillate experienced small declines of 0.6 and 0.5 million barrels respectively. Cushing crude inventory added over 1.4 million barrels for the past week. Crude runs increased by 200 MB/D for the week, as margins remain favorable and downtime continues to diminish.
Canada Oil Prices Strengthen on Mildred Lake Outage
The March 14 explosion and fire at Syncrude’s 350 MB/D Mildred Lake facility has resulted in a complete halt in synthetic crude production at the plant. PIRA does not expect full production to resume until early to mid-June, after repairs and planned maintenance have been completed. The loss of synthetic crude production has had the effect of also curtailing bitumen production at ConocoPhillips’s Surmont facility and Nexen’s Long Lake facility due to the loss of synthetic crude for blending into synbit. PIRA sees a potential 30 million barrel combined loss of synthetic and heavy crude production from the outage and planned maintenance.
Indian Gas Price Reduction Giving Producers a Headache
The new natural gas prices for producers in India are well below the average cost of production, rating agency Icra said on Monday. The government last week marginally cut the natural gas price paid to producers effective for six months from April 1. "With the latest marginal fall for the second half of 2016-17, the domestic price is now well below the average cost of production for many producers for a sustained period, leading to losses, which has forced the industry to seek a floor price," Icra said in a report.
Restoring the Historical Ratio of S&P to E&P Share Prices
The shares of exploration and development have failed to keep pace with the broader stock averages. The reason for this breakdown is clearly related to the collapse in oil prices in mid-2014. This paper explores which set of nearby and deferred (five year out) WTI prices can restore the S&P 500/XOP to its historical average.
Higher Energy Prices Improve Energy Credit
Firmer oil prices on the week helped support improved energy credit pricing for a host of tracked benchmarks. Financial equity performance has continued to consolidate as the yield curve has tended to flatten, particularly in U.S., Japan, and the U.K. Implied inflation trends have been consolidating the reflation trade of late, though in the UK, implied inflation has continued to edge higher. China liquidity as indicated by the Shanghai interbank offer rate has eased slightly after a period of increase. Overall financial stresses are still assessed as low.
Limbo Dancing…How Low Can Japanese Finished Stocks Go?
Japanese crude runs continued to ease on the week in line with our maintenance schedules, while crude imports remained exceedingly low. Crude stocks drew 2.1 million barrels, while finished product stocks also drew by 1.0 million barrels. Finished products stocks moved to yet another new low, with draws on all the major products, other than naphtha. Kerosene demand fell back, and stocks drew at a rate of 65 MB/D on lower yield, as end-of-season tank purging continues.
Supply Disruption from Cyclone Debbie Causes Coal Pricing Surge
The coal market was dominated by the impact of Cyclone Debbie on Australian supply, with the market surging by several dollars in response to the disruption of mostly coking coal production and exports. FOB Newcastle prices initially surged by over $6.00/mt this week, before giving back $2.00/mt. With several MMmt of high quality coking coal expected to be pulled off the market in April and May, there is a greater likelihood that more thermal coal will be used to replace PCI and semi soft coking coals.
U.S. Crude Oil Exports Surpass January 2017 Record
The latest U.S. Census data was released earlier this week and U.S. crude oil exporters did it again, exporting at a new all-time high of 1,116 MB/D in February 2017.
Ethanol Stocks Reach an All-time High
U.S. ethanol inventories increased by 448 thousand barrels the week ending March 31 to a record 23.7 million barrels. Domestic ethanol production fell 35 MB/D to an 18-week low 1,019 MB/D as some plants shut down for spring maintenance. Ethanol-blended gasoline manufacture increased to a 14-week high 9,105 MB/D, up 82 MB/D from 9,023 MB/D in preceding week.
Myanmar/China Crude Oil Pipeline is Ready to Start Operations
China’s access to crude through an alternate route via the China/Myanmar pipeline may soon become a reality as China’s CNPC and the new Myanmar government are now closer to a deal. An agreement would allow CNPC to pump oil through the pipeline to supply its new Anning 260 MB/D refinery in the land-locked province of Yunnan. Apart from revenue-sharing arrangements for the pipeline, Myanmar has the right to take up to 50 MB/D from the pipeline when it is operating at full capacity of 440 MB/D. This will help ease domestic supply constraints as the country's three refineries have been running at only about a third of their combined capacity of ~50 MB/D partly due to feedstock shortages.
Grain and oilseed markets will take a break from watching both North and South American weather Tuesday with the April WASDE release. With half the Marketing Year behind us for corn and soybeans, the larger than expected midyear Quarterly Stocks report should be reflected in the April WASDE. The other key in April will be the World Board’s reaction to the monster Brazilian production estimates put forth by local firms.
How Profitable is Russian Shale Oil?
Russian shale resources are one of the largest in the world and its main shale play (Bazhenov) is almost twice as large as the Permian. It also offers tax incentives for shale production. However, development is still primarily in the appraisal stage. Also, current sanctions on transfer of technology and ample lower-cost conventional resources are an obstacle to faster development. We forecast gradual improvement in breakeven costs as more horizontal wells get drilled and sanctions are eventually lifted. The potential to produce at high rates and in a short time period is there but hampered by the political uncertainties regarding fiscal terms, sanctions, and the fact that most oil concessions are controlled by state oil companies.
Global Equities Shifting Momentum, Energy Picks Up
The overall U.S. market was only modestly changed, but energy was the strongest performing domestic sector on the week, rising 0.7%. Retail, banking, and housing were the worst performers, each down about 1.5%. Internationally, China and emerging Asia posted solid gains. Global year-to-date performance is tightening up among the regions, with Asia and Europe easing slightly, but still outperforming, while America’s are still underperforming.
Aramco Pricing Adjustments: Discouraging U.S. Liftings, Asia and Europe Cuts Reflect Weak Structure
Saudi Arabia's formula prices for May were just released. Pricing for the U.S. was raised for all grades as Saudi discourages liftings, while choosing to remain competitive with market drivers in Asia and Europe. The cuts are not out of line with a wider Dubai contango that has been seen, or a wider discount in Urals pricing vs. Dated Brent.
Japanese Refiners Meeting March 31 METI Target
The Japanese regulatory authority (METI) established a 50% cracking ratio target for Japanese refiners as of March 31, 2017. This target is being met on a country-wide basis. With the impending merger of JX Nippon with Tonen General and the potential merger of Idemitsu Kosan with Showa Shell, METI is likely to await full implementation of these mergers before deciding upon whether to require further rationalization.
March Weather: U.S. and Japan Cold, Europe Warm
March weather for the three major OECD markets turned out 1% warmer than the 10-year normal, bringing the month’s oil-heat demand in these markets to a negative 118 MB/D versus normal. They were warmer than the 30-year normal by 8%.
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