Rig Count to Slow Further as Brent Falls Below $50/Bbl
Crude prices fell again in June, with Dated Brent dropping below $50/Bbl. With weaker prices in recent months, the growth in working rigs in the U.S. has slowed, and will likely slow further and level off in the second half of the year. Western Canadian production is slowly returning to normal following the March Syncrude fire, and U.S. Midcontinent production has now turned positive on a year-on-year basis. Cushing crude stocks declined 4 million barrels in June, and 10 million barrels in the second quarter – part of a 35 million barrel U.S. crude stock draw. Further stock draws are expected in the third quarter, although stocks will likely rebuild in Western Canada. Stocks will also climb in West Texas, in advance of a year-end surge in pipeline capacity, as Permian Basin production increases rapidly.
Inventories Drop the Week Ending June 30
U.S. ethanol inventories declined for the third consecutive week, falling by 267 thousand barrels to 21.6 million barrels, the lowest since January. Domestic ethanol production was relatively flat, dropping 1 MB/D to 1,014 MB/D. Ethanol-blended gasoline production fell to 9,387 MB/D from a record 9,529 MB/D during the preceding week. Brazil shipped 20 MB/D (24.6 million gallons) of ethanol to the U.S. in June. August ethanol futures fell 1.1¢ to $1.505 per gallon today as of 11:48 A.M. CT, following corn prices lower.
EIA Reports Little Growth in April; Subsequent Flows Tell Different Story
Following the long holiday weekend, the prompt NYMEX contract fell to a new seasonal low, ~$2.83/MMBTU, as weather and production gains negatively colored sentiment. With limited heat on the horizon in key regions, the window for sustained weather induced tightness is fast approaching. Moreover, production over the weekend reached YTD highs, fueling concerns over loosening balances. Until recently, supply gains have been slow in the making; the recently published EIA Monthly Crude Oil and Natural Gas Production (914) report — updated through April 2017 — affirmed an anemic pace of sequential supply growth in March and April. However, the lackluster EIA/state production numbers mask the substantially increased drilling activity that has occurred, and that even with fracking/completion delays, producers are in a good position to accelerate volumes in 2H17. Increasing signs of production recovery have already occurred, with flow data indicating substantial gains in Appalachia in recent weeks.
Big Week Ahead
If you’re on a July holiday, warm and dry are words you hope to hear from your meteorologist. Not so much if you’re a farmer waiting for your corn to pollinate west of the Mississippi River. The weather forecasts this week are critical for the market because for those who forecast pollination dates strictly off the NASS emergence data, the first “major” state to get past 50% pollination will be Illinois this Wednesday the 12th, followed by a vast majority of the other “majors” between the 18th and the 22nd.
U.S. Huge Stock Declines as Demand Performs
Commercial oil inventories declined 13.4 million barrels last week, the largest of the year, as reported product demand soared to 22.2 MMB/D, a new record. The largest individual product draw was not surprisingly in gasoline (3.7 million barrels), reflecting the July 4th holiday driving. Crude inventories declined 6.3 million barrels as runs increased and imports decreased. Cushing crude stocks fell 1.3 million barrels. Crude stocks are expected to continue to decline next week. Gasoline demand strength to continue to pull gasoline stocks lower. Middle distillate stocks modestly build next week, as demand eases during the holiday week.
U.S. Job Growth Is Solid; Central Bank Balance Sheet Issues Are Center Stage
The takeaways from the labor data release were straightforward: an underlying pace of U.S. economic growth remains constructive, based on solid job gains; and the tightness in the labor market is yet to generate substantial wage pressure. In the comings months, the Fed and the European Central Bank are expected to announce changes to balance sheet policy. Policy shifts are not necessarily negative developments for the outlook – after all, central banks are considering actions because of an encouraging growth backdrop; furthermore, changes to balance sheets will only occur gradually. But there are uncertainties about when and how the changes will be carried out, and it appears to be affecting the market’s mood.
Ukraine is Tightening Central European Balances – Making Russia Ever More Key
This summer has been characterized by very high pipeline flows from the two big stalwarts of European gas supply – Russia and Norway. Norwegian deliveries are up by 42-mmcm/d or 15.8% versus normal and Russia flows are up by 22% or 67-mmcm/d vs normal. These two pipeline sources far outweigh the 22-mmcm/d increase in LNG imports versus the last 5 years. These high flows are evidence of the continued price competitiveness of contract pricing that has aligned itself quite well with hub pricing. Then again, the high demand needs from storage this summer in some ways assures cost competitiveness on the part of contracts because it becomes an easy arbitrage for supply contract holders – ramp down on contracts and up on hub gas.
Korea Continues Gas Charge with Short and Long Term Implications for LNG
Taking on a telenova-like aspect, Korea is rapidly advancing a series of new measures designed to enhance the role of natural gas in the power generation fuel mix, which to date is dominated by coal and nuclear. In so doing, the trade relationship between Korea, as the world’s second largest importer of LNG, and the U.S., on target to be the world’s third largest exporter of LNG by the end of the decade, is on track to become that much stronger, benefiting both U.S. export prospects as well as LNG trade prospects in general .
French Climate Plan: Very Ambitious Targets, Very Little Details
While lacking key details and leaving many questions unanswered, the “Climate Plan” unveiled by the French energy minister this week nevertheless provides some additional clues to the government’s energy policy, with the French curve extending the gains seen at least since mid-May.
Japan Runs Rising Back Up
Japanese runs rose 136 MB/D on the week, as turnarounds continue to lessen. Crude imports rebounded to 3.77 MMB/D from extremely low levels and crude stocks built 5.6 million barrels from record lows. Finished product stocks fell modestly, with a good draw on naphtha, a lesser draw on fuel oil and gasoline, which were mostly offset by a rise in middle distillates. Aggregate demand fell 99 MB/D, but the 4-week average trend in demand has begun to move seasonally higher. Refining margins were higher on the week and have continued to improve.
Stresses Low, but Debt Pricing Shows Movement
In general, financial stresses remain fairly low. The S&P 500 and volatility (VIX) were little changed, but debt pricing took center stage. There was a noted pickup in yield, with lower pricing, on emerging market debt (EMB) and high yield debt (HYG). The deflationary trade, we had been seeing, appeared to reverse a bit. Commodities had negative week, particularly energy and precious metals.
Short Covering and Strong Demand Cause Coal Pricing Surge
Coal prices moved considerably higher this week, with FOB Richards Bay prices rising by the greatest extent. For 3Q17, FOB Richards Bay prices surged by over $7.00/mt W/W, while CIF ARA and FOB Newcastle prices increased by $5.00/mt and $4.40/mt, respectively. Short covering, the disruption in coal traffic to Richards Bay Coal Terminal, and the loss of hydro generation in China all contributed to the rise in prices this week. These factors built on the prevailing tightness that has been present in the market over the past several months, stemming from supply disruptions in Australia and Indonesia.
EPA Proposes Little Change in Biofuels Requirements for 2018
The EPA issued its proposed renewable fuel standards for 2018 and bio-mass diesel for 2019 on July 5. The Agency proposed requirements similar to this year’s mandates, which are substantially lower than originally set forth in the Renewable Standard (RFS2). The total requirement proposed for 2018 was 19.24 billion gallons including 4.24 billion gallons. The implication is that the proposed mandate for conventional biofuels, largely grain-based ethanol was 15 billion gallons.
Global Equities Show Little Change on the Week
There was very little change in the global aggregate performance. The U.S. market was little changed, but banking posted a good gain, while retail and energy performed the poorest. Internationally, only Latin America was able to outperform and post a modest gain.
Aramco Pricing Adjustments: No Reversal of Strategy
Saudi Arabia's formula prices for August were released. Last month, PIRA indicated that the pricing adjustments clearly discouraged liftings, while pricing for August barrels is not reversing that stance to any significant degree. Cuts were made for Asia, but they were basically in line with market expectations. European pricing was raised in line with a narrower discount on Urals. U.S. pricing was left unchanged on all but Arab Extra Light, after having been raised significantly for July barrels and reflected a clear willingness to let liftings fall. Pricing for September barrels will be closely watched for signals of a greater willingness to push barrels into the market or let the market work through what is typically a shoulder month, before rising 4Q demand establishes a firmer floor.
Saudi Arabia: Financial Drain of FX Reserves Lessens in May
Saudi’s foreign exchange reserves for May were released and indicate a much reduced draw for May. May reserves fell only $1.23 billion USD, with the 3-month drain rate easing to only $5.02 billion USD, the slowest call on FX reserves since May 2016.
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.