Rising Prominence of the Asia-Pacific Region as a Global Refining Center
Oil markets are rebalancing. PIRA expects that with the ongoing OPEC output cuts likely to be extended and strong demand growth, it is just a matter of time before it shows up in reported onshore stock declines. Asian refiners are likely to keep buying more barrels from the Atlantic Basin as the Brent-Dubai price spread will stay narrow. Asia’s oil demand growth will outpace incremental refinery runs, and net exports of key products are expected to stabilize over 2017-18. Asian refineries are getting larger and more sophisticated, helping them to be more competitive in a volatile and challenging refining environment.
Byproduct Gas Picks Up Steam, But Obstacles Persists
The market has given back some of last week’s gains as uncertainty over relative supply/demand tightness resurfaces with the foreseeable pick-up in inventory restocking. Among other factors, the seemingly inevitable shale oil renaissance in Texas and Oklahoma — and its subsequent impact on byproduct gas volumes — weighs heavily on market sentiment. Yet, some recent producer earnings calls may help ease concerns about a fast-approaching deluge of associated dry gas production growth in the region, at least in the immediate term. Producers in the region have been guiding towards relatively muted Y/Y gas growth in comparison to their oil targets, citing ongoing price, pipe, and processing issues — the resulting risk to byproduct gas production during the injection season may help alleviate fears of oversupply.
Egypt LNG Cargo Deferments Suggest Diminishing Role in Balancing the Global LNG Market
As quickly as it swept into the LNG market in mid-2015, Egypt appears to be preparing for an almost equally sudden exit by end-2018. Moreover, the sudden loss of Egypt as a key demand center will be amplified by how quickly it will build on the resumption of its LNG exports since mid-2016.
Appointment of Energy Minister Moves the Back of the French Curve
The recently elected French president, Emmanuel Macron, appears to confirm his commitment to the French energy transition. On May 17, Nicolas Hulot was appointed as the minister responsible for energy in the new government. Considered an environmentalist in favor of renewable energy, Hulot had been arguing earlier during the electoral campaign that EDF needs to re-align its strategy to the French energy transition, supporting the idea that nuclear’s share within the mix must be reduced. The markets have been quick to react to the news, with the back of the French curve moving up substantially.
Prices Slip in Shoulder, But Upside Factors Mount
Coal-fired generation fell seasonally in April, but with natural gas prices ~60% higher Y/Y, coal burn was up 14% Y/Y. Though U.S. coal prices have slipped over the last month on shoulder season demand, an upward revision to PIRA’s injection season natural gas price forecast and other factors point to higher PRB and ILB coal prices this summer.
U.S. Internals of Data Constructive
Overall commercial stocks built 4.3 million barrels this past week as crude oil stocks fell 1.8 million barrels, the four major product inventories drew 2.2 million barrels and all other products built by 8.2 million barrels, the majority of which was NGLs. Adjusted product demand was up 3.3%, 630 MB/D, over last year in the latest four weeks. Crude runs surged 360 MB/D this past week to 17.12 MMB/D, supported by strong refining margins.
Broad-Based World Industrial Turnaround Becoming More Evident
Global industrial production and trade activity slowed throughout 2015, but it began to stage a comeback last year. Recent country-level manufacturing data were mixed. But in PIRA’s judgment, positive readings far outweighed disappointing ones – the current global manufacturing turnaround, therefore, is expected to gather further strength and become more broad-based. A sharp strengthening in U.S. manufacturing output during April was particularly encouraging.
Propane Stocks Just Above Five-Year Lows for This Time of Year
Propane inventories increased last week by 580 MB, but the total propane inventory of 42.2 MMB is close to the five-year average low for this time of the year. The EIA reported that propane exports soared last week to 1.25 million barrels per day. This is contrary to the number of propane cargo cancellations reported. A source states that the cancelled cargoes were picked up at a discount and routed to build Asian inventories. PADD II inventories grew, PADD III inventories were unchanged, and PADD I inventories declined.
U.S. Ethanol Prices Rally
Ethanol reached an eight-month low Wednesday May 10, but rebounded later in the week. Manufacturing margins were sharply lower. The EPA sent the proposed biofuel requirements for 2018 and biomass-based diesel to the OMB for approval. D6 RIN prices rebounded. Kinder-Morgan redirected ethanol from its Argo, Illinois terminal. The harvest in to the South-Central region of Brazil got off to a slow start to the 2017/2018 season.
47 degrees Fahrenheit with a cold and steady rain greeted us Saturday at our first stop in northern Illinois, about an hour west of Chicago’s city limits. Our producer-friend, who farms on the border of DeKalb and Kane counties, said “not much to see around here” as we climbed into his pickup truck. No, there was not much to see, but there was plenty to talk about.
A Weaker U.S. Dollar Propels the Coal Market to a Considerable Rebound
Coal pricing rebounded notably last week, with front end CIF ARA forward prices in particular rebounding to levels not seen since the aftermath of Cyclone Debbie on an over $4.00/mt W/W increase. A weaker USD, largely in response to political turmoil in the U.S. was a driving force behind the strength in pricing this week. The release of Chinese energy data was a confirmation of PIRA’s reference case; strength on the demand side will continue for the time being, although a continuation in the recovery in domestic coal production will be a harbinger of weaker balances and prices for 2H17.
Stresses Low, Commodities Rebound
In general, financial stresses remain extremely low, though there was increased drama this past week. The S&P 500 managed to climb above and hold the 2,400 level, but then hit an air pocket, from which it tried to climb back. With that air pocket, the noted divergence between bank equity performance (higher) and a flatter yield curve, began to come back into better alignment, though the divergence remains. Commodities had a positive week, and energy outperformed. The dollar was particularly weak, down 2% on the week.
Japan Returning to Norms, Post-Holiday
Following the Golden Week holidays most of the S/D data reflected a return to more normal patterns. That means gasoline demand ebbed from holiday hyped levels and gasoil demand began to rebound. Runs continued to reflect increased maintenance. Crude oil stocks posted a 5.4 million barrels draw, while finished products built 1.6 million barrels. The weekly stock build rate remained about 32 MB/D, like the previous week.
U.S. Ethanol Inventories Build for the First Time in Three Weeks
Ethanol-blended gasoline manufacture soared last week, rising to a 40-week high 9,408 MB/D from 9,161 MB/D in the preceding week. Domestic ethanol production rose 21 MB/D to 1,027 MB/D as more plants came back on line following seasonal maintenance. Inventories built by 359 thousand barrels to 23.4 million barrels, up 2.3 million barrels (11.0%) from this time last year.
Storage Spreads are Not Building in Inherent Risks
Given low stocks across Europe, the biggest seasonal storage facility in the U.K. out of commission, and the biggest seasonal storage facility in Benelux experiencing operating issues, you’d expect some interesting storage spreads to start developing – particularly for Germany. These opportunities are not leaping out just yet despite the country’s key position. Looking at historical costs of capacity from the capacity trading platform PRISMA, in combination with forward gas pricing in Germany vs. Britain, an overwhelming reason to max out injections at the moment for peak winter withdrawals does not yet seem to exist as of yet. However, TTF is already being priced to be an important supply source for NBP in the peak cold months of December ’17 to February ’18 at 1Q’18 TTF-NBP spread of -€1.63/MWh.
U.S. Refiners’ RIN Costs down Year-on-Year; April RIN Generation Little Changed
Approximately 5.93 billion RINs were generated in the first four months of 2017, up from 5.89 billion over the comparable period in 2016. D6 RIN generation was up only 0.2% over that period, while D4 and D5 RINs were up 2.4% and 30.6%, respectively. Several public companies with large RIN expenditures over the past few years had a lighter burden in the first quarter of 2017 due to lower RIN prices, profitable trading, and/or the granting of a small refinery exemption for one or more of their facilities. In some cases, companies that have historically suffered large costs due to hefty RIN requirements experienced a net gain last quarter.
Global Equities Still Setting Record Highs
Many of the benchmark equity indices continue to set record highs. After doing so, the U.S. market hit a bit of a downdraft, but then began to recover. Consumer staples, utilities, and energy performed the best on the week, while retail was the clear laggard. International indices outperformed the U.S, with Europe, emerging Asia, China, and Japan doing the best. A significant retrenchment in Brazil’s equity market led to a drop in Latin American performance.
Asian Oil Demand: Temporary Fallback in Demand Growth
Our snapshot of Asian oil demand growth shows a slowdown, which is viewed as temporary and driven by a drop in growth of Chinese apparent demand. PIRA's update of major country Asian product demand indicates that year-on-year growth slowed to 210 MB/D, vs. 740 MB/D in our April snapshot. Reacceleration is expected May-July, with demand growth currently forecast to push 1 MMB/D by mid-summer.
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.