Investor & Financials

PIRA Energy Market Recap for the Week Ending November 13, 2017

15PIRALogoU.S. Commercial Stocks Decline Again

Sharply rebounding product demand pulled the four week adjusted average 3.5%, or 700 MB/D, higher than last year and caused product stocks to fall 11.3 million barrels last week. The bulk of the product stock decline was in the three major light products while crude oil inventories showed a surprise build of 2.2 million barrels as crude exports collapsed to an inexplicably low figure of 870 MB/D. Cushing crude stocks built 0.7 million barrels last week and now that regional refineries are returning from maintenance, supply to inventory will be declining with this week expected to show a flat inventory profile. Gasoline and distillate both show another week of significant inventory decline in this week’s EIA data, further widening their year on year inventory deficits. Overall crude stocks are forecast to be flat this week.

Winter - Peak or Boo?

Spot on-peak energy prices in Northeastern locations were mostly higher y/y due to warmer weather driven loads and higher gas prices. Most PJM, Midwest and ERCOT prices were lower y/y. Eastern Interconnect average loads increased ~ 2% y/y in October, following four consecutive months of y/y raw load declines. Cooler revisions to November’s temperature outlook led to some bullish price action and Henry Hub cash prices moved higher averaging ~$3/MMBtu this week. While PIRA shares the market’s view on robust gas supply gains during the summer, strengthening demand will necessitate prices above $3.15/MMBtu to help guide inventories to a tenable end October figure.

California Carbon: Weak Emissions, Supply Coming at Auction

Benchmark contract prices for California carbon allowances were equivalent to September, but with sharply higher trading volumes and open interest at its highest level in a year and half. November pricing has dropped as the WCI auction nears, but is still well above the price floors, suggesting oversubscribed auctions and sending a market signal, given the high volumes offered. PIRA expects surplus balances along with the return of unsold allowances, to temper near term pricing momentum. CARB will make key decisions on Cap and Trade design, addressing “overallocation,” offsets limits and the price cap and intermediate pricing “speed bumps.” The weak emissions data released November 6th could lead to a more bullish policy response. A new draft Scoping Plan, to be finalized this year, suggests a larger role for Cap and Trade reductions. Linkage with Ontario is set for January and joint auctions could start as early as February. Election results are favorable for WA state carbon policy and possible WCI linkage.

What Can Get in the Way of U.S. Economic Momentum?

Recent U.S. activity data releases were solid, but they contained negative distortions from Hurricanes Harvey and Irma. Confidence surveys (which are immune from weather effects), in fact, suggest that the economy’s true strength has been understated by GDP-related indicators. While the near-term outlook for the U.S. is solid, there are potential stumbling blocks. A key concern is whether strong economic growth will eventually lead to shortages of workers. Global industrial production for the third quarter showed broad gains. Many of the economies that reported positive results, however, are capable of even faster growth.

Steam Cracker Feedstock Margins Rebound

Steam cracker feedstock margins received much needed support from a decline in ethane and propane prices coupled with an increase in ethylene and propylene prices. Ethane’s margin averaged 23.3 cents/lb ethylene last week after falling below 20 cents/lb the prior week. Butanes and natural gasoline prices rose last week with isobutane trading at a small discount to normal butane, which is normal for winter gasoline blending season upon us. NGL raw mix production was over 3.8 million b/d last week and grew by 27 Mb/d. However, raw mix production in PADD 3 decreased by 26 Mb/d. On the inventory front, propane stocks fell by 1.15 million barrels for the week ending November 3 with almost 90% of the draw in PADD 2 as expected. For the week ending November 3, U.S. propane exports fell to 832,000 b/d from over a million b/d the previous week. Propane exports are expected to rebound to about 950,000 b/d for the week ending November 10.

Japan Runs Rising Out of Turnaround, but Demands Ease on the Week

The key takeaway in the data last week was the dramatic return of capacity previously down for maintenance, with runs rising 223 MB/D. Even with the higher crude demand, crude stocks built 2.6 MMBbls. Finished product stocks drew slightly and driven by moderate draws on jet and naphtha. Gasoline demand eased by 54 MB/D, but was slightly better than expected. Gasoil demand fell by 105 MB/D and came in well under forecast. Aggregate major product demand broadly eased 259 MB/D on the week. Refining margins have eased, with a softening in gasoil cracks being the big driver. Fuel oil cracks are also modestly weaker. Still, refining margins are acceptable. The indicative marketing margin has again been easing as refining margins have been satisfactory. Both gasoline and gasoil/diesel marketing spreads remain below statistical norms, with gasoil/diesel spread still showing the larger variance.

Ethanol Prices Rise in the U.S., Brazil and Europe

The U.S. EPA sent the 2018 biofuel and 2019 biomass-based diesel to the OMB for review and approval. The standards are due by November 30. U.S. ethanol manufacturing margins rise. September exports drop to a five-month low. Brazil October ethanol exports more than doubled the volume shipped in the same month in 2016. U.S. biodiesel prices reached a five-week high.

Post-Sanctions: Where Did Increased Iranian Oil Exports Go?

PIRA estimates Iranian crude and condensate exports more than doubled to 2.5 MMB/D between 4Q15 and 3Q17, due to the lifting of oil export sanctions in January 2016. The majority of the growth can be attributed to the four largest Asian buyers (China, India, South Korea, and Japan), which continued to import Iranian oil during the sanctions regime, albeit at reduced volumes due to U.S. restrictions. Imports to the four countries grew from 900 MB/D in 4Q15, to 1.7 MMB/D in 3Q17. China remains the largest buyer of Iranian crude and condensate, importing 720 MB/D in the third quarter, followed by South Korea (430 MB/D), and India (370 MB/D). Export growth is nearly as impressive to the EU, which essentially stopped buying Iranian oil by July 2012 due to sanctions, but imported over 500 MB/D in each of the first three quarters of 2017.

U.S. Gas Weekly Report

Henry Hub cash reached $3.18/MMBtu —the highest mark since late-May 2017 as robust heating degree days engulfed the Northeast and Midwest. The national benchmark has averaged $2.95/MMBtu this week, an increase of 7% from the week-ended November 3rd. Long awaited heating demand and more supportive forecasts generally have played a role in lifting the bal-winter 2017/2018 strip, which is up 18 cents/MMBtu (6%) from last Friday’s close.

High Eastern European Stocks May Be Ukraine's Fault, Not Cold Winter Fears

Ukraine is still on its quest for non-Russian self-sufficiency after cutting itself off directly from Russian gas. Since the Gas Year has begun, it has slowly been demanding more and more gas from Central Europe through a combination of Slovakia, Hungary, and Poland. This Eastern European gas ecosystem is developing, but also has implications for our general views on storage sufficiency across Europe. PIRA entered the winter thinking unusually high Central European storage was a function of asset optimizers hoping for a repeat cold winter, but increasingly it seems to be caused by deal origination with Ukraine that helped spur high stocks.

Timing of Maintenance Supports Ultra High JKM: Coincidence or Calculated?

With JKM support running strong (Dec. front month up to $9.40/MMBtu), the demand side of the equation in India and China only goes half way to explaining the phenomena in a world where an average of 111-mmcm/d has been added to the supply rolls though October. On the supply side, two primary factors are in play: the rate of supply growth is slowing just as peak seasonal demand approaches, and timing of planned shutdowns remains a question mark.

Tightness in the Belgian System Re-Emerges with Low Nuclear Availability

While this week France has gone through another round of extensions to its nuclear reactor maintenance, spot prices reflect an already tight situation in NWE. Daily prices in Belgium have been settling at a premium over the French, Dutch, and German ones since the end of October, as the Belgium system shows signs of stress. The availability of the 5.9-GW nuclear fleet is down to 4.0 GW since mid-September following the outages at the two Tihange-1 reactors and Doel-3, making the balancing of the system heavily reliant on interconnectors.

Coal Pricing Mixed Despite Strong Gains in Oil and Gas

Despite a significant strengthening in global oil and gas prices, coal pricing was mixed over the past week, with slight gains in the CIF ARA and FOB Richards Bay forward curves, while FOB Newcastle forwards dipped modestly. News that unionized rail workers in Australia have suspended industrial actions (at least temporarily) took some of the steam out of FOB Newcastle prices. Despite the fact that coal demand is rising to the seasonal peak, buying activity seems to be taking a breather, highlighted by weaker Chinese imports. However, PIRA believes that expectations of a significant decline in price is premature at this point, although we acknowledge that some of the bullish supply risks have been trimmed in Australia.

Agreement on EU ETS Reform; Focus Moves to Brexit

Agreement was reached on post-2020 EU ETS reforms at the Nov 8th Trialogue meeting, though EU Carbon (EUA) prices fell on that day as market participants “bought the rumor and sold the fact.” Agreed-to efforts to strengthen the Market Stability Reserve will not be enough to bring market oversupply to its targeted range. The market now has two proposals regarding Brexit and the ETS. Brussels’ approach could create two EUA instruments for the next year. The U.K. proposal could require them to enforce an EU obligation a week before Brexit. Both proposals present new market uncertainties absent broader resolution to post-Brexit ETS participation by the U.K. Near-term EUA prices remain driven by the impact of the French nuclear situation. However, PIRA expects nuclear gen to increase in Dec, along with winter power demand. In terms of supply, auction volumes remain high in 2018, also suggesting downward pressure on EUA prices in the coming months.

U.S. Energy Trade: Making an Increasing Difference

The U.S. energy industry has become an economic juggernaut with regards its contribution to the U.S. macro trade picture. Its contributions include reduced oil imports, increased oil exports (both product and crude), increased natural gas and LNG exports, and increased NGL exports. The U.S. enjoys a competitive advantage in many facets of the global picture, both from a cost standpoint and security of supply to the market. Those advantages are not likely to wane anytime soon, with their contribution expected to grow in the medium term. Lastly these advantages in energy are fed through to trade in downstream industries, such as chemicals in plastics.

Some Evidence of Weaker Credit Conditions

While credit conditions remain constructive, there was evidence of pullback this past week. The S&P 500 began to test the 2,600 level on Tues/Wednes, but then fell back. Credit indicators showed steeper pullbacks, principally high yield and emerging market debt. Investment grade and investment grade energy, held up nicely. The dollar was slightly lower, while energy performed well on the week. The St. Louis financial stress indicator moved to a new cyclical low.

U.S. Ethanol Output Rose for the Fourth Consecutive Week

U.S. ethanol output rose for the fourth consecutive week, increasing by 1 MB/D to a near-record 1,057 MB/D. Total inventories declined by 129 thousand barrels to 21.3 million barrels, led by a large draw on the East Coast. Approximately 35 MB/D (10.3 million gallons) of imports from Brazil were received in California. Ethanol-blended gasoline production dropped 71 MB/D to a six-week low 9,114 MB/D.

Fracking Policy: Push to Loosen Federal Rules, State Developments Still in Flux

Momentum to overturn Obama-era methane regulations stalled in recent months, although Trump administration efforts to delay or repeal them will continue through the courts and traditional (lengthier) rulemaking. EPA attempts to delay implementation of methane rules from new oil and gas sources hit a judicial roadblock, as did BLM efforts to delay methane rules on federal lands, while, the Republican-controlled Congress failed to overturn the methane rules on federal lands. At the state level, efforts to reign emissions associated with fracking are resulting in lower emissions intensity and often lower actual emissions, despite more drilling. A bi-partisan effort to institute a severance tax in PA passed the Senate but stalled in the House. The scope of local authority to regulate fracking in CO is being re-tested. A lawsuit settlement in OK regarding blame for induced earthquakes still leaves the broader issue unresolved. Internationally, the IEA’s upcoming World Energy Outlook release will focus on Natural Gas, including assessment of the emissions associated with the supply chain.

U.S. Crude Exports Soar to China and Other Long Haul Destinations, Pushing Up In-Transit Inventories

U.S crude exports are surging and PIRA believes this will continue over the next few months as high inland stocks (hurricane Harvey legacy) continue to be drained.

Global Equities Testing New Milestones, but Ease

Global equity markets continue to set more broad based records, but fell back at end-week. The U.S. S&P 500 attempted to breach the 2,600 level, but was unsuccessful and eased modestly on the week. Consumer staples (+2.1%) and energy (+1.4%), posted solid gains, while banking fell -4.3%. Internationally, China posted a solid gain of 2.1%, while there was broader weakness in European indices, along with those in Latin America.

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PIRA Energy Market Recap for the Week Ending November 6, 2017

15PIRALogoGlobal Oil Surplus is Mostly Gone

Booming world economic growth to stay strong and durable with credit conditions remaining constructive. Upward oil demand revisions continue. This demand growth together with the OPEC/non-OPEC cuts have substantially reduced surplus stocks in 2017. OPEC’s surplus stock estimate is way too high for it ignores required stocks for both new infrastructure and for increased U.S. crude and product exports. Hence, OPEC is likely to keep the cuts longer than necessary with a resulting positive benefit to prices. 2017’s 1 MMB/D flow deficit together with strong demand growth keep stocks declining in 2018 despite overall supply exceeding demand growth. Crude oil prices are revised up again. The upside risk to prices remains supply interruptions with many countries looking vulnerable while the downside risk is U.S. rig count resuming its upward trend. The call on refining is very strong and will continue to support relatively robust margins, even in the least sophisticated capacity. Gasoline cracks stay healthy while diesel cracks increase further assuming normal weather. WTI-Brent strengthens but stays wide enough to allow U.S. exports. Brent-Dubai generally will have to be weak enough to keep the arb open from the Atlantic Basin to Asia.

U.S. and Europe Ethanol Prices Bottom in October

U.S. manufacturing margins decline. RIN prices jump. Brazil ethanol output in the South-Central region drops in the first half of October as the harvest winds down. U.S. biodiesel output of 149 million gallons in August equals a record high.

Liftoff Delayed – Not Cancelled

More than a few physical traders have commented that this month’s bid-week felt more like a lackluster injection month, rather than the kick-off to the heating season. When considering the direction of winter prices, it is critical to understand that the sub-$3 futures settlements for November are sending a strong message about supply concerns. Yet, we see the market messaging evolving as the industry begins to clear excess supply. Indeed, it bears mentioning that Henry Hub cash prices last December averaged $1 over November, with the arrival of more seasonal temperatures. Should cold weather arrive early, it is easy to imagine a step-change in cash prices unfolding next month.

Fall Maintenance/Summer Heat

The return of extreme temperatures to Southern California in late October coincided with seasonal outages of generation (including Palo Verde 1) and transmission (including the PDCI) along with limitations on gas imports to the region. Prices at Southwest hubs spiked lifting October monthly averages well above projected levels. National gas price forecasts have been revised down, but low storage and pipeline constraints could support renewed upside volatility at the SoCal citygate under colder than normal conditions this winter. Columbia River basin precipitation has begun the new water year slightly above normal. The return of La Niña conditions this winter could result in increased heating demand and a larger, later runoff.

Winter Risks Remain at the Forefront

Seaborne coal prices were again on the rise over the past month, on low stockpiles in China and India, and underwhelming supply. PIRA continues to assert that the risks remain to the upside over the short-term, as seasonal demand has not yet reached peak levels. However, the pricing risks shift to the downside in 2Q18 and beyond as Chinese imports fade and LNG prices become more competitive with coal in the global market.

PJM REC Balances to Tighten in 2018

Prices for PJM tri-qualified (PA, MD and NJ) Tier 1 RECs continued to fall this year, reflecting oversupply. Secondary market trading volumes were strong in the first part of 2017, dropping off after the end of the compliance year; current OI represents about 1/3 of the annual RPS obligation. The REC bank will grow again in 2017, but balances narrow in 2018. Large spot REC procurement needs to satisfy the IL RPS represent a major wildcard. PA legislation limiting out-of-state solar affects supply for that market. Increases in REC requirements taper off after 2020, and a transmission line project could deliver significant renewable energy supply to the region. However, the phase-out of federal tax incentives puts upward pressure on long term REC prices, and PIRA expects extensions to state RPS targets.

Crude Rises as Global Surplus Shrinks; WTI Discount Widens

WTI prices are now over $57/Bbl, as the global oil surplus continues to shrink and geopolitical risks to supply grow. The spread between Cushing and Gulf Coast crudes widened, as PADD III crude stocks fell sharply in October, while Cushing stocks rose 1 MMB. Once local refining maintenance concludes this month, Cushing stocks will fall rapidly, with WTI moving into backwardation, as the wide spreads will incentivize shipments south out of Cushing, while new pipelines in the Permian Basin will take barrels away from Cushing and move them to the coast. Additionally, the Diamond pipeline will begin shipping Cushing crude to Memphis in a few weeks. The increasing volumes of crude reaching the Gulf Coast will both go to satisfy refinery demand and to sustain crude exports at record levels, as the export arb stays wide open through at least year-end. Midland grades have begun to strengthen with the new pipeline additions, and Midland Sweet will likely trade at a premium through the first half of 2018. New oil sands projects starting up in Alberta will cause light grades to weaken from current strong levels, while heavy differentials weaken further and move toward Gulf Coast rail parity.

Rebounding U.S. Jobs, Synchronized Grobal Growth, and Continuing Constructive Credit Conditions

Hurricanes Harvey and Irma caused great destruction during August and September, and created distortions in key U.S. economic data. Distortions remain in recent data, but the dust is starting to settle, and the emerging picture is of an economy picking up steam. Specifically, employment data for October were constructive, and confidence indicators sent encouraging signals. But an increasing tightness in the labor market is not yet resulting in sharply higher wage growth. Meanwhile, Europe, emerging Asia, and commodity-intensive emerging economies are also showing strength – indications are that the positive momentum is spreading globally through trade and other channels.

Mild Fall Weather Leads to a Boost in Propane Inventories

U.S. propane/propylene inventories increased by 726,000 bbl for the week ending October 27 according to the EIA. While propane exports remain strong, domestic res/com demand has been soft due to mild fall weather. In response, propane prices ran counter to crude and gas prices last week with propane prices falling 1.5% to 96.9 cents/gal. In contrast, ethane prices rose 4.4% to 27.25 cents/gal. Ethane is the most economical U.S. steam cracker feedstock but due to rising ethane prices coupled with an 8.6% decline in ethylene prices, ethane’s steam cracker margin fell 11.9% last week to 18.2 cents/lb of ethylene, which is the first time since 30 December 2016 that the ethane steam cracker margin has been under 20 cents/lb of ethylene. Propane exports beat expectations and topped 1.0 million b/d for the week ending October 27. Platts Analytics expects propane exports to drop to about 800,000 b/d for the week ending November 3 based on lower ship activity at Gulf Coast LPG terminals. U.S. LPG cargoes to Asia have been supported by the extension of the October propane Saudi CP of $575/mt into November pricing, which makes landed U.S. propane in Asia cheaper than landed Middle East barrels.

WASDE Week

The November WASDE splits this trading week with its midday release on Thursday. Looking over the CFTC Commitment of Trader’s report, positioning appears to be in line with the general consensus that corn yields will be raised while much uncertainty still looms over the size of the soybean crop. The week is also expected to bring improving soil moisture conditions to the main soybean growing areas in Brazil, which should be the market driver late in the trading week after the WASDE release.

Venezuelan Default Saga Evolves

On November 2, Venezuelan President Nicolas Maduro stated intentions to restructure or refinance all future debt obligations, but only after making a final $1.12 billion PDVSA principal payment on November 3. Payments on principal and interest became increasingly delinquent throughout October, indicating a notably higher risk of default in 2018 (when the government and PDVSA owe a combined ~$9 billion). A default could disrupt Venezuelan exports because of potential creditor claims on its cargoes, but with most Venezuelan oil sold FOB this risk appears limited. However, concerns on the part of Western buyers could cause even more crude to head to Asia. PIRA understands 850 MB/D of October’s export program of 1.6 MMB/D went to Chinese, Russian, and Indian buyers, with only 500 MB/D headed to the U.S. Meanwhile, CITGO’s status as an “insulated subsidiary” makes it unlikely to be dragged into PDVSA bankruptcy proceedings, and apparently has only been importing 80 MB/D of Venezuelan crude. Regardless, oil investment is likely to be squeezed, raising downside production risk to PIRA’s forecast. We currently assume 90 MB/D of crude declines between 4Q17 and 4Q18, to 1.8 MMB/D.

Storage is Well Prepared for Short-Term Cold, Less So Seasonally

Optimizing seasonal storage has not been one of the market’s most profitable jobs for some time. One of the main problems has been the low summer/winter spreads that still plague the market – even in the wake of the Rough storage closure. Seasonal spreads have been recently trading at 7.3 p/th on the NBP compared to more than double that for summer’12 /winter’12. With storage entering the month 4-BCM higher than normal and 2-BCM short of record levels, one would think that most storage facilities would be brimming and ready to withdraw. When digging into the numbers, one can see how the market is shifting towards more flexible storage with more cycling ability and away from facilities with longer emptying periods. This coincides well with gas’ future as a more flexible source of supply, as the market moves more towards a balancing role for renewables.

Has India’s Power to Move the Market Been Underestimated?

As JKM takes another giant leap forward this week despite even more bearish fundamental indicators (Wheatstone loads a first cargo for Japan just as Japan demand continues to plunge), our attention turns from China to India. The consensus among traders has been that a series of winter spot tenders for China has tightened up the spot market considerably. Yet as shortages in coal stockpiles at power plants around India register close to historic lows, it may be that India is driving this unexpected price surge, at least in part.

As Wind Blows, Coal-to-Gas Switching Remains a Limited Feature in Germany

The high price volatility observed in recent weeks in Germany is the result of large swings in wind output. Last year the hourly dispatching profiles for coal and gas tracked each other across most of the wind spectrum, suggesting that the two technologies were responding in similar fashion to variations in wind output. By contrast, this year the two profiles overlap only when wind is low, but overall the gas profile is flatter than the coal one. In particular, gas plants do not seem to ramp down as much as coal, most likely the result of already low average dispatching levels for gas.

Reports of Chinese Port Constraints Limits Coal Pricing Upside

Coal prices continued to move higher in the first half of the week, on tight market conditions heading into the winter peak season, although prices shifted lower on news of import constraints at Southern Chinese ports and lowered nuclear generation risks in France. While fundamental pricing risks remain to the upside in our view if Chinese imports are constrained by policy/quotas, FOB Newcastle prices could move closer to $90/mt than $100/mt over the next 90 days.

U.S. Another Stock Decline

Overall U.S. commercial oil inventories declined again last week by 5.8 million barrels as crude oil inventories uncharacteristically declined by 2.4 million barrels, bucking the historical trend, while product stocks drew 3.4 million barrels led by a sharp decline (-4.0 million barrels) in gasoline. Commercial U.S. inventories are now down 75 million barrels versus last year, a testament to global oil market rebalancing and the success of the OPEC/non-OPEC cuts. Demand has been especially weak, except for gasoline and jet, but is forecast to pick up in the weeks ahead. Cushing crude stocks built 0.09 million barrels this past week and probably have one more week to build with a 0.8 million barrel stock build forecast for next week’s EIA report. In sharp contrast, overall crude inventories drop 5.7 million barrels this week as runs increase and imports fall, another counter-seasonal stock decline. All three of the major light products show significant stock decline in this week’s EIA report, rounding out another week of bullish data.

Credit Indicators Perform Well, Amid More Record Highs

Credit conditions remain highly constructive, with the S&P 500 continuing to set new records. Volatility declined about -7.9%. Energy was particularly strong and this spilled over into certain credit indicators. Overall investment grade credit gained about 0.7%, while investment grade energy and high yield energy credit were up about 1%. Overall high yield (HYG), was lower by -0.6%, while emerging market debt was down -0.3%. The dollar was little changed on a DXY basis. The St. Louis financial stress indicator ticked higher on the week.

U.S. Ethanol Output Increases again the Week Ending October 27

U.S. ethanol production rose sharply for the third consecutive week, increasing from 967 MB/D to a near-record 1,056 MB/D over that time. Total inventories built by 440 thousand barrels last week to 21.5 million barrels, nearly erasing the 446 thousand barrel draw during the preceding week. Ethanol-blended gasoline production rose for the fifth time in six weeks, increasing by 3 MB/D to 9,185 MB/D.

The Blame Game

Too often the blame for low grain prices gets set squarely on the shoulders of the Non-Commercials. Fund traders are always wrong when they’re heavily short, like now, but rarely mentioned when they’re long. Too often we hear, “the shorts will get squeezed soon” or “they’ll have to get out at some point” by those dissatisfied with price, which is obviously the farming community that we monitor quite closely. U.S. producers are on the record as saying they will not sell at current prices, in essence trying to squeeze the Non-Commercial shorts in corn, but will a time come when they don’t have a choice?

U.S. Gas Weekly Report

Thus far this week, Henry Hub cash prices have averaged ~$2.75/MMBtu — a slight decline from the prior week’s average of ~$2.85/MMBtu. From the standpoint of total U.S. supply and demand, such declines conflict with balances tightening W/W by ~7 Bcf/d. Yet, beyond ongoing worries about subpar heating demand, bearish sentiment is also being stoked by robust U.S. production. In particular, onshore production averaged a record ~72 Bcf/d, ~0.5 Bcf/d more than the prior week.

Japan Runs Ready to Rise, with Higher Demands Absorbing Supply

The key takeaway in the data last week was a solid demand performance, which drew finished product stocks. If demand continues to perform well, it will readily absorb the increasing refinery output resulting from reduced maintenance. Runs were unchanged, with lower crude imports, which drew crude stocks 2.35 MMBbls. Gasoline demand rose again, last week by 47 MB/D, and beat expectations. Stocks drew on lower refinery output and slightly higher exports. Gasoil demand also rose again and stocks drew 0.44 MMBbls (63 MB/D), similar to the previous week and close to yearly lows. Kerosene demand also again rose, last week by a strong 108 MB/D. Stocks saw an accelerating draw rate of 85 MB/D, with the 4-week build rate easing to 37 MB/D. The deficit position vs. year-ago remained about 1 MMBbls. Refining margins remain strong and supportive of the run rise that will be forthcoming. The indicative marketing margin has again been easing as refining margins have held firm. Both gasoline and gasoil/diesel are below statistical norms, with gasoil/diesel showing the larger variance.

Global Equities Setting More Record Highs, but Some Rotation Noted

Global equity markets continue to set more broad based records in a host of countries and across a host of market indices, but some sectorial rotation was noted. In the U.S., the S&P 500 was again modestly higher on the week, but set new records. The best performing sectors were energy (+1.9%), and technology (+1.65), while housing (-1.9%) and banking (-1.1%) were the laggards. Internationally, tracking indices generally performed better than those in the U.S. Japan was higher by +1.3%, emerging Asia higher by +1.1%, while world, ex-U.S., gained +0.8%. Latin America fell -3.6% and driven by weakness in Brazil and Mexican markets.

U.S. August 2017 DOE Monthly Revisions: Demand and Stocks

EIA just released their monthly August 2017 (PSM) U.S. oil supply/demand data. August 2017 demand came in at 20.161 MMB/D, which is 33 MB/D lower than PIRA had assumed, and 772 MB/D lower than the weeklies had indicated. Total product demand growth slowed and turned modestly negative, -114 MB/D or -0.6% versus year-ago. Even so, the negative performance was concentrated in “other” product demand, a decline of 373 MB/D or -8%. All the major products showed demand gains and outperformed. Middle of the barrel demands continued to post strong growth, with distillate demand higher by 112 MB/D or 2.9%, and kero-jet higher by 47 MB/D or 2.7%. End-August total commercial stocks stood at 1,307.4 MMBbls, which were 6.6 MMBbls lower than PIRA had assumed. Crude came in 5.6 MMBbls lower and products were 1.0 MMBbls lower. Compared to the preliminary weeklies, total commercial stocks were revised down 2.0 MMBbls, with crude lowered 2.4 MMBbls, and product raised modestly. Compared to August 2016 PSA data, total commercial stocks are now lower than year-ago by 63.9 MMBbls vs. 52.4 MMBbls at end-July.

U.S. Production in August Declines on Hurricane Harvey

U.S. crude and condensate actuals for August 2017 came in at 9,220 MB/D, down 32 MB/D month-on-month, up 440 MB/D year-on-year. The drop is concentrated in Texas and the Gulf of Mexico due to Hurricane Harvey. PIRA’s Reference Case outlook calls for U.S. crude and condensate production to grow 420 MB/D in 2017 and 730 MB/D in 2018.

October Weather: U.S. and Europe Warm, Japan Cold

October weather for the three major OECD markets turned out to be 4% warmer than the 10-year normal and the resulting oil-heat demand impacts were 222 MB/D below normal. On a 30-year-normal basis, the markets were 15% warmer.

Aramco Pricing Adjustments: Fundamentally Justified Tightening of Terms

Saudi Arabia's formula prices for December were just released. Prices were tightened on most crudes in the key refining centers. The adjustments were justified by changes in the market drivers that Saudi focuses on when setting prices. Volume is clearly not being pushed, while refiner demand remains high and increasing. Global runs rise 1.8 MMB/D in November vs. October, and then an additional 1.4 MMB/D in December. The adjustments to Asia were in keeping with the change in Dubai market structure, while European pricing was tightened in line with a reduced discount on Urals vs. Dated Brent.

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.

PIRA Energy Market Recap for the Week Ending October 30, 2017

15PIRALogoRefinery Margins Remain Strong

Brent prices approach, and probably exceed, $60/Bbl in 4Q17 but that strength is not sustainable for 2018. WTI – Brent relatively weak but will firm somewhat when Cushing stocks draw. Refining margins will remain strong through 2018 with regional demand growth and poor refinery operations in Latin America pulling on Atlantic Basin product supply. Sophisticated regional refinery capacity layers are essentially full leaving only less economic options which drive up margins and runs in simpler capacity layers (hydroskimming in Europe) to cover demand/import requirements. Product stocks tighten, pushing prices into backwardation and cracks higher to marginal supply economics. Atlantic Basin gasoline stocks/coverage recover in 4Q from Hurricane Harvey but stay in historical range. Diesel stocks now in the lower half of “normal” range, lowest in over two years. Gasoline cracks seasonally weaker but stay healthy, no deep discounts. Diesel cracks will continue to gradually strengthen assuming a normal winter. Residual fuel oil cracks will remain firm.

In Developed Economies, Synchronized Growth but Unsynchronized Policy Response

U.S. GDP for the third quarter was solid, and September durable goods orders suggested a strengthening in the economy’s momentum. Given the healthy outlook for U.S., the Federal Reserve is expected to stay on the path of gradual policy normalization. The European Central Bank was expected to chart a path for tapering of quantitative easing this week, but it decided not to follow the Fed’s playbook – the ECB announced a scaling down of asset purchases for next year, but it also continued to make the QE program open-ended. In Japan, activity data have been encouraging, but the Bank of Japan is not yet in position to present a roadmap for monetary policy normalization.

Iraqi Kurdistan: Battle for Fishkabur May Be Imminent

Clashes between Iranian-backed Shia militias and Kurdish forces broke out this week 25 miles south of the Kurdish town of Fishkabur, where the pivotal oil pipeline border crossing to Turkey is located. PIRA understands Iranian-backed militias still hope to take the strategic pipeline hub, and thus physical control of all northern Iraqi pipeline exports (over 500 MB/D before the recent turmoil in Kirkuk). This makes a near-term battle more likely than not. The operation appears to be orchestrated by influential Iranian general Qassem Suleimani, indicating Tehran’s growing influence within the post-ISIS vacuum. Notably, the Shia militias have not yet agreed to a ceasefire announced by the KRG and Iraqi government forces on October 27. A battle for the pipeline crossing could place all northern pipeline exports at risk, while Iran’s desire to solidify control in both Iraq and Syria portends greater regional instability.

Supply is Coming…Is Winter?

As discussed at the 38th PIRA Annual Client Seminar, seasonal price recovery this year is dependent on more normal heating demand taking hold in the U.S., in contrast to a year ago. Indeed, the relatively comfortable level of pre-winter inventories (especially in the Midwest and East), coupled with a healthy well inventory, necessitate that the arrival of cold weather occur early rather than later in the season. In order to expand the Y/Y storage deficit in December, the de-stocking would have to approach year-ago levels. Therefore, while PIRA maintains its constructive stance relative to the current forward curve, we downwardly revised prices for the winter by an average of 5¢. Our constructive stance on price is predicated on the expansion of the inventory deficit as the season unfolds. While the impressive call on supply from new structural and export demand growth could reach 3 BCF/D, higher prices still necessitate a return of normal weather.

Back-End of the Curve Upside

Warmer weather helped make the French nuclear shortfall more manageable during October, but the outlook remains highly uncertain. With the extension of the Tricastin outage through the end of November, Y/Y gains for French nuclear appear now unlikely. Sustained exports toward its Southern neighbors, together with ongoing risk of delays in the restart of the reactors, are overall constructive for French prices, and we have revised upward our forecasts for November and December.

In addition to shrinking thermal capacities, a fluid policy framework offers upside for the back-end of the curve. The agreement on the introduction of a carbon floor of €18/MT in the Netherlands should translate into an increase by €1-1.4/MWh on German prices, driven by increased exports to Netherlands. While we’re still far from the formation of a new government in Germany, the resiliency of German C02 emissions is now coming more prominently to the fore, especially as the Greens are part of the coalition talks. Our price forecasts are already above the curve, without factoring in so far any policy change, other than the Dutch carbon floor.

August Coal Stockpiles Draw Less Than Normal on Mild Weather, Stalled Gas Price Rally

The EIA reported end-August electric power sector coal stockpiles of 144.2 MMst on October 24, a decline of 3.9 MMst M/M. That was 1.4 MMst short of the five-year average stock draw for August and less than half of the stock draw during August 2016. Mild August 2017 temperatures, which were centered over the coal-dominated Midwest, lowered coal burn during the month. In addition, coal burn was impacted by Henry Hub spot gas prices that averaged $2.90/MMBtu in August, just $0.08/MMBtu higher than the August average last year.

U.S. Commercial Stocks Drop Slightly

Overall U.S. commercial stocks saw the largest decline in several months, falling by 12.2 million barrels for the latest week led by sharp declines in gasoline and distillate inventory. The pace of decline is outpacing last year, leading to a widening of the storage deficit to 59.8 million barrels. Gasoline stocks fell by 5.5 million barrels, one of the largest weekly declines of the year-to-date placing storage 9.1 million barrels below last year. For the next week inventory continues to draw falling by 1.1 million barrels. Similarly distillate inventory fell by around 5.2 million barrels, placing the deficit to last year at 23.1 million barrels. Distillate continues to decline sharply next week by 2.7 million barrels. Refinery runs bounced back from the impact of Hurricane Nate to reach just over 16 MMB/D, up 590 MB/D for the week. Runs are expected to reach 16.2 MMB/D for the next week, as the peak of the turnaround season has passed. Crude storage added nearly 0.9 million barrels, while Cushing stocks drew by 0.2 million barrels. Crude stocks are expected to draw by over 2.2 million barrels for the next week, while Cushing storage builds by 0.3 million barrels.

Bearish Storage Comes With Higher Upside Risk from LNG and the Power Sector

Warm weather reduced gas demand by over 2.24-BCM across Europe, the second biggest October total in the last 10 years. In addition, wind speeds in Northwest Europe were up 33% Y/Y, leading to higher German wind output of 127% Y/Y or 9.2-GW. Historically speaking, realized wind speeds were relatively normal and upwards of 18% below October highs of the last 10 years pointing to problematic gas consumption for the Octobers to come. Unfortunately, gas is still very much tied to coal pricing, which has been fundamentally buoyed by low stocks and high demand in Asia. PIRA doesn’t see these forces abating till next year.

Cape Freight Rates Stay High but Chinese Cutbacks Loom

Capesize dry bulk freight rates have held on to recent gains, with the five-route rate holding near $22,000/day. However, Chinese demand for dry bulk commodities is set to contract over the winter months due to mandatory cutbacks in several industries, particularly steel and aluminum. PIRA expects Cape freight rates to fall steadily through 4Q17 and 1Q18, underperforming current FFA rates before picking up later in the year.

2016 California Emissions: Lower PowerGen Counters Gains in Transport

The once-a-year release of annual cap-and-trade covered emissions data can be a market-moving event. Even in oversupplied markets, it offers an opportunity to calibrate and quantify the surplus. Similar to previous years, data for the 2016 compliance year in the California emissions market will be available on November 6th at 12pm Pacific Time. PIRA expects overall California 2016 covered emissions to be down vs. 2015 levels, as declining emissions across the power sector (in-state generation, cogeneration, power imports) negate rising emissions from transportation. While prior California data releases did not have a short-term impact on California Carbon Allowance (CCA) prices, the magnitude of the decline expected this year could provide downward price pressure.

Japan Max Turnarounds, Demand Slowly Picking Up

The data this week came in much as expected. Runs were little changed, crude stocks were higher, along with a broad based finished product inventory draw and higher product demands. The impact of typhoon Lan does not appear to have entered this past week’s data, but next week will be another story, along with impacts from tropical storm Saola. Gasoline stocks were little change, while gasoil stocks drew due to higher exports. Kerosene demand remained strong as pre-heating season fill programs continued. Kero stocks resumed drawing at a rate of 60 MB/D, with the 4-week build rate easing to 46 MB/D. Refining margins again eased slightly on the week, but remain acceptable. Indicative marketing margin had improved for the last month, but eased this past week. For both gasoline and gasoil/diesel are below statistical norms, with gasoil/diesel showing the larger variance.

NGL Purity Product Prices Rebound

NGL purity product prices recorded gains last week following increases in crude prices. Propane’s price strengthened relative to crude prices and closed the week at 73% the WTI crude price. Divergent moves in oil and natural gas prices will further pressure high LPG prices into November, while ethane prices should soften with natural gas prices. The strength in propane prices is due to a perception of tight supplies because of relatively low inventories. Propane stocks fell by 1.2 million barrels for the week ending October 20. Propane inventories trail the five-year average by 8.5% and are 23% lower than at this time last year. Propane exports declined 7.8% to 905,000 b/d for the week ending October 20. Propane exports are expected to remain in the neighborhood of 900,000 b/d for the week ending October 27. U.S. raw mix NGL production increased 35,000 b/d for the week. NGL production returned to normal last week after disruptions caused by Hurricane Nate.

Ethanol Prices Slide in U.S. and Europe

U.S. ethanol prices slid the week ending October 20. Manufacturing margins were stable as corn cost also declined. The EPA stated it is not likely to reduce the mandates for 2018 from those proposed earlier this year. RIN values jumped on the announcement. European ethanol prices also declined as beet-ethanol hit the market. U.S. biodiesel prices rose to a three-week high.

Seasonal Rally Underway in Crude Trades but Product Tanker Rates Weaker

After spending a prolonged period near or below cash break-even levels, crude tanker markets registered a strong seasonal recovery on near-record Chinese crude imports in September and earlier than normal delays in the Turkish Straits. In contrast, MR product tanker rates in the Atlantic Basin collapsed as U.S. refineries shut down by Hurricane Harvey resumed operations creating less need for imports while exports were still restrained by fall maintenance.

Kurdish Deal with Baghdad Lowers Risks to Northern Oil Flows

The KRG has reportedly struck a deal for joint control with Baghdad of the border crossings including Fishkahbur. Iraq will monitor oil flows from the KRG, revenues will go to Baghdad, and Baghdad will pay KRG salaries (including Peshmerga) but will do it through the Governorates, not the KRG bureaucracy. This is apparently a preliminary agreement, with the details to be sorted out over the next couple of weeks. The risk of a confrontation over Fishkabur has therefore been substantially reduced.

Credit Markets Remain Constructive

Credit conditions remain highly constructive, with the S&P 500 continuing to set new records, though volatility again gained slightly on the week. Many of the credit indices, such as high yield debt (HYG), emerging market debt (EMB), along with some of the other credit indicators in the energy space lost ground slightly. Total commodities gained despite a strong move higher in the U.S. dollar. Energy was particularly strong and outperformed. The St. Louis financial stress indicator continued its downward trend.

No Pain No Gain for Canadian Producers Challenged by ‘Congestion Pricing’

The routing of Canadian price markers has continued this month. Despite the ongoing development of capacity enhancement projects, commercial behavior and capacity restrictions have pushed AECO-C differentials to marked lows not observed for the last 15 years. With pipeline maintenance weighing more heavily than ever on the long-dated contracts, the market is seemingly putting very little stock in early forecasts of a return to ‘normal’ winter. Yet, continued infrastructure expansions coupled with advantageous contracting on TransCanada’s Mainline should provide basis relief beginning next month.

What do JKM Prices Say about Spot Demand in a World Where Contract Volumes Growth Dominates?

The 40% surge in JKM spot prices over the past month belies the fact that the demand surge in Asia over the past year has been almost entirely (91%) underpinned by long term, take-or-pay oil indexed contracts. While oil-indexed prices too have gotten some support in recent weeks on political risk factors and a move towards rebalancing in 4Q, the 8% increase in JCC prices over Sept. bears little relationship to the current spot market jump. The fact is that the spot market in Asia is comparatively small and fairly illiquid and such volatility is to be expected when there is an unexpected turn in buying behavior, either following an outage of a nuclear plant or a temperature spike, regardless of how small that call on actual cargos may be.

Ukranian Industrials to Receive Price Rise

NJSC Naftogaz of Ukraine from November 1, 2017 will raise the price of natural gas for industrial consumers and other economic entities. This has been reported by the company’s press service. “The prices will be raised by 7.5% in November, comparing with the prices in October of the current year,” reads the report. The proposed prices for natural gas from the company's resource have been differentiated depending on the volume of purchases, terms of payment and the state of previous settlements with Naftogaz, the company reported.

Coal Market Strength Persists, Winter Risks Skewed to the Upside

Despite easing for most of the week, seaborne coal prices finished the week higher W/W, amid a rally in the overall energy complex. Over the next 90 days, the pricing risks remain to the upside in PIRA’s view, with low stockpiles in key markets, upcoming seasonal demand, and underperforming coal supply. However, after the winter peak season passes, the risks become more balanced to bearish, which should see prices fade precipitously over 2Q/3Q.

Fire at Tehran’s Refinery

At this point the fire has reportedly been contained but the magnitude of damages are not yet known. Apparently the fire was caused by an oil leakage in a yet to be identified unit that was undergoing maintenance. According to PIRA’s World Refinery Database, the facility runs mostly medium sour grades, yielding 22% gasoline (50 MB/D), 41% gasoil (85 MB/D), 7% jet-kero (15 MB/D), 13% fuel oil (25 MB/D) and around 3% naphtha (5 MB/D).

Global Equities Setting More Record Highs

Global equity markets continue to set more broad based records in a host of countries and across a host of market indices. In the U.S., the S&P 500 was modestly higher on the week, and again set records. Technology, consumer discretionary, and banking were the best performers, while retail was the laggard. Energy was down slightly. Internationally, Japan performed the best, +1.6%, while Latin America lost a similar amount of ground.

U.S. Ethanol Production rose to Six-Week High

U.S. ethanol production rose by 20 MB/D to a six-week high 1,039 MB/D last week, as nearly all plants have resumed normal operations following seasonal maintenance. The 72 MB/D gain over the past fourteen days was the largest two-week increase ever reported. Total inventories dropped by 446 thousand barrels last week to 21.0 million barrels, led by a huge draw in the Gulf Coast region. Ethanol-blended gasoline production rose for the fourth time in five weeks, increasing by 51 MB/D to 9,182 MB/D.

Mild Weather & Congestion Compresses Supply Hubs — Alongside Henry

While yesterday’s EIA release of 64 BCF is generally in line with the mid-60’s consensus, the re-stocking landed well below both the year-ago and five-year average builds. Furthermore, the growing concerns of a repeat of last season’s mild weather and more pronounced production appreciation this year continue to weigh heavily on the November contract. Indeed, the nearby contract has declined more than 10¢ since entering the month, with the heating season average not far off, down by ~7¢ thus far. Wrapping up October, the HH cash price is on track to end the month 7¢ below September’s level — with broad weaknesses observed across the cohort of supply regions in both the East and West.

Brazil’s Refining Sector Hopes to Welcome Private Investment

Earlier this week the head of Petrobras’s refining branch stated that by the end of the year the company will likely approve the strategy to sell stakes in its domestic refining system.

Saudi Arabia: Foreign Exchange Reserve Draw Tempered in September

Saudi’s foreign exchange (fx) reserves for end-September were just released. They declined -$2.4 billion, a noted improvement from the -$6.9 billion draw posted in August, and the -$6.2 billion draw seen in July. Saudi still needs prices higher than the current Dubai price of $57 ($55.40 Oct mtd), to stabilize reserves. PIRA’s expectation is for an extension of OPEC’s production agreement beyond March 2018, which should favor a continuing improvement in Saudi financials.

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.

PIRA Energy Market Recap for the Week Ending October 23, 2017

17PIRALogoChina’s Refining Landscape is Changing as Independents Take on Expansion Strategy to Fight for Survival

PIRA expects crude prices to move towards $60/Bbl by year-end, but we do not believe prices that high are sustainable with shale growth and high financial net length entering 2018 which will weigh on next year’s prices. The East of Suez condensate market has been tightening since 2015, but it is expected to ease slightly next year as splitter additions take a breather in the region. China’s landscape for the refining sector is changing as state-owned refiners hold back from adding CDU capacity while independent refiners take on an expansion strategy to stay competitive amid many challenges. Australia’s oil demand growth is expected to moderate next year which could lead to some reduction in its net product imports. Asian refining margins will get some support from lower Chinese product exports and as oil demand in India improves.

Strength in Chinese Manufacturing Stands Out in Latest Data

Third-quarter Chinese GDP increased at a slightly slower pace compared to the first half of 2017 (and at a slightly faster place compared to last year). While the headline GDP figure suggested a stable condition, there were dynamic developments in other data. First, based on producer prices, ethylene production, and other data, manufacturing appears to be kicking into a higher gear. Second, a tighter credit condition is resulting in slower investment, particularly in real estate and manufacturing facilities. Third, retail sales and other information suggested healthy gains in consumer spending.

Propane Exports Remain Robust

Propane exports for the week ending October 13th totaled 982,000 b/d, which is in line with the September weekly average. For the week ending October 20th, propane exports are expected to remain in the one million b/d neighborhood based on cFlow data. U.S. propane/propylene inventories had a small draw of 93,000 barrels over the week ending October 13th, according to EIA data. Total propane inventories stand at 78.8 million barrels, which is 8% below the five-year average. The propane inventory draw occurred primarily in PADD 3 due to exports, while propane stocks built in PADD 1 and PADD 2 by 540,000 barrels and 400,000 barrels respectively, which puts stocks in both PADDs 1 and 2 at roughly the five-year average. U.S. raw mix production rebounded by 146,000 b/d last week as Louisiana offshore production was brought back online after being shut in prior to Hurricane Nate’s landfall. PADD 3 raw mix production regained 133,000 b/d or 91% of the total U.S. increase. All the above factors had a dampening effect on NGL prices with ethane, propane and butanes prices falling last week, and only natural gasoline prices increasing.

Ethanol Product Skyrockets

U.S. ethanol production soared by 52 MB/D to 1,019 MB/D the week ending October 13, representing the sharpest weekly spike since 2010 as more plants resumed normal operations following seasonal maintenance. Total inventories remained relatively flat for the third consecutive week, dropping by a mere 43 thousand barrels to 21.5 million barrels. Ethanol-blended gasoline production fell for the first time in four weeks, sinking to 9,131 MB/D, following overall gasoline output lower.

Curious Corn

The curious case of the Non-Commercial corn short is commanding some attention after last week’s Commitment of Traders showed a net short of 203K contracts, which has widened to 225K according to some estimates due to late week weakness. The addition of almost 13K net shorts for the reporting week, which ended last Tuesday the 17th and included the WASDE release, is hardly noteworthy but the cumulative position at 76.5% of “max” might be. IF the “current” 225K contract estimate is correct, that would be 84% of “max”. Also of note is the almost 330K contracts in net length held by the Indexers, also 76.5% of “max”.

Kirkuk Oil Fields: At Least 280 MB/D Remains At Risk

Following an October 15 assault on Kirkuk, the Iraqi military and Shia militias have gained physical control of 280 MB/D of production capacity from the Bai Hasan and Avana fields from the Kurds. The fields remain offline, and Kurdish pipeline flows to Ceyhan have fallen by an equal amount to around 200 MB/D. Reports indicate production and exports should return to normal by Sunday, October 22, pending the arrival of crucial equipment and Baghdad-affiliated engineers. However, PIRA believes the market should anticipate a longer outage. Even more notable than the unresolved technical issue is the fact that a deal must be reached between the Kurds and Baghdad, as the KRG controls the only northern export pipeline. This will take time.

U.S. Draws Keep Coming

U.S. commercial stocks declined sharply by 8.7 million barrels this past week led by a 5.7 million barrel decline in crude oil, reflecting Gulf of Mexico production losses (-1.1 MMB/D) from Hurricane Nate. The overall stock decline outpaced last year’s decline for the same week, widening the year on year stock deficit to 56 million barrels, or 4.2%. The two major light products both showed modest stock builds last week but should see significant stock declines in next week’s data with gasoline inventories drawing 2.8 million barrels and distillate, 2.2 million barrels, as demand rebounds. Cushing crude stocks built just 0.2 million barrels last week and are forecast to decline 0.6 million barrels in next week’s report. Overall crude stocks build 1.8 million barrels next week for the first build in five weeks.

October was Hot, Not Mild — and that Distinction Matters

Yesterday, the EIA reported a 51 BCF increase in inventories for the week ended October 13. While the report was within industry expectations, the November NYMEX futures contract still managed to tumble to an intra-day calendar-year low. Though the contract has since managed to convalesce closer to Monday’s opening print, the lackluster recovery suggests traders are still preoccupied by the possibility that continued warm weather will forestall the structural tightness we see ahead. Yet, despite the fact that the weather this month will likely rank as the second warmest since the 1950s (falling just shy of last year’s record), the build in inventories will fall short of year-ago levels as well as the 5-year average.

N.W. European Storage Stock Levels are Causing High Price Dislocations

Europe overall has quite healthy stocks, however the more Northwest you look, the more problematic the storage situation appears to be. Clearly, the U.K. is the focal point of storage deficits at the moment with the retirement of the Rough storage facility. If anything, Rough now moves to the supply side of the ledger, as it continues its decommissioning process with the removal of its remaining supplies. We expect these flows to be price insensitive as it dwindles – so far this Gas Year, it has been relatively stable at between 10- and 12-mcmm/d. Centrica should keep these flows relatively stable, as adding stress on the facility by ramping up and down on its production could increase the risk of physical disruption.

Déjà vu All over Again for Winter JKM

Supply shortfalls in Asia are once again supportive of winter JKM, even as Asian supply additions have surged. JKM strength also has roots in the Atlantic Basin where rising coal prices and steeper Southern European demand have offered strong competition with Asia for incremental volumes in a still supply short Asian market.

Shift in Supply Stack and Pull from France Bullish for German November Prices

After a first half of the month characterized by stronger wind output averaging more than 18 GW, a drop to a mere 2 GW pushed German hourly prices to €83/MWh during the evening of Oct. 18, the first time €80/MWh was breached since February, coupling it with France, Belgium, and the Netherlands and placing it almost €5/MWh above the Swiss price. Hourly prices also hit €80/MWh last year in October, but in combination with reported thermal dispatching of about 5 GW higher, which is to say that the supply curve has shifted by about 5 GW since then, bringing forward the steepest section of the curve. This change is supportive of German prices and is largely due to the closure of or move into the reserve portion of thermal plants.

Exports Remain in the Driver’s Seat

The pace of U.S. thermal coal exports accelerated in August, rising 2.2 MMst higher year-on-year and keeping U.S. coal prices elevated. Over the last month, virtually every prompt quarter and prompt month OTC coal contract in the U.S. markets has ticked up, despite the fact that demand has entered the shoulder season and coal burn declined in September and appears to have fallen further in October.

California Carbon Surplus to Build

California Carbon allowances traded higher in September, while October trades moved higher still. Stronger inflation indicators suggest a 2018 auction floor well below current pricing (final inflation will be released next month). The coming weeks will see Nov auction results, release of bearish CA emissions data and the partial 2016 compliance surrender. PIRA continues to believe that growing surpluses, helped by the return of large quantities of unsold state-owned allowances, will help contain pricing upside. ON sources are joining the program with some free allocations and supply from ON-only auctions and a deferred compliance requirement – limiting incremental secondary market demand. The CA/QC CP2 reconciliation in Nov 2018 will require the surrender of record quantities of compliance instruments and could affect spreads of CP2-valid vintages vs. later vintages. A Scoping Plan Update is to be completed by end-2017.

Japan Refinery Maintenance Continues, Demand Pickup Slow to Develop

Fall maintenance continues, but a pickup in seasonal demand has been slow to develop. As such, finished stocks have increased a bit. The product stock build this week was fairly broad based across all the major products. Crude imports fell back as expected and stocks drew 2 MMBbls, despite lower runs. Kerosene demand rose 71 MB/D and appeared to reflect a pickup in tertiary and secondary inventory pulling on primary inventory as pre-season fill programs finish up. The stock build rate eased back from 178 MB/D to 114 MB/D, while the 4-week build rate rose further from 60 MB/D to 77 MB/D. The deficit position vs. year-ago narrowed to 0.73 MMBbls. Refining margins again eased slightly on the week, but remain good and supportive of a high level of runs, though demand performance is lagging. The indicative marketing margin has begun to improve. For gasoline, it is above statistical norms, but remains below norms for gasoil/diesel.

Credit Conditions Remain Highly Constructive

The S&P 500 continued to set new records, though volatility gained on the week. High yield credit (HYG) moved higher, as did most other debt pricing indicators, other than emerging market debt. (EMB). The commodity space moved lower as the dollar strengthened, but energy bucked the trend and posted a gain. The St. Louis financial stress indicator resumed its downward trend.

Margins for Manufacturing U.S. Ethanol Declines

The cash margin for manufacturing ethanol in the U.S. declined the week ending October 13. RIN prices were stable. Ethanol production in Brazil’s South-Central region jumps. European ethanol prices and manufacturing margin deceases, U.S. biodiesel prices reach a two-week high but manufacturing margins fall for the fourth straight week.

Bean Yields

From 80 bpa in Mississippi to 25 bpa in Pratt County, Kansas, harvest reports this week continue to be variable, but the trend is definitely down after the initial filings as expected. Whether it’s 3,000 acres in northern Illinois at 55 bpa vs. 73 bpa last year, yields that are half of last year in SE Iowa, or southern Minnesota reports with a 4 handle in areas that produced 65-75 bpa beans last year, as harvest moves north at a fast pace in front of this weekend’s rains relative disappointment is starting to set in. To be fair, PIRA has seen some 80+ numbers out of select counties in Indiana, but also numbers in the mid 40’s for other parts of the Hoosier state, confirming the variability. While some are still at/near their APH (Actual Production History) yields, those willing to share a year over year comparison numbered 7:1 lower than last year in this week’s reports. These numbers seemingly confirm Crop Tour findings of lower year over year pod counts in states that we surveyed.

U.S. and Nigeria Lead Flourishing Asian Trade that is Not Sustainable

The long-term sustainability of LNG flows from the Atlantic Basin into Asia will come down to a matter of how much buyers value diversity and how much sellers are willing to discount in order to place the volumes. In the short term, however, Atlantic Basin flows to Asia have thrived due to the wider JKM/Henry Hub spread. Overall volumes are up by 56% this year to 16.2-BCM through September.

Prompt Coal Prices Gain Again, Deferred Market Weaker

Coal pricing was mixed this week, with prompt CIF ARA and FOB Newcastle prices rising modestly while deferred prices moved lower, widening already considerable backwardation in the forward markets. The bullish momentum on the front of the curve was not much of a surprise in light of the announcement of the Pacific National railroad strike and risks to the upside for winter demand. However, the market has seemingly become more pessimistic for deferred pricing, perhaps on weaker than expected thermal generation out of China.

EUA Prices Move to Mid-€7 Range, But Where To Now?

European Carbon (EUA) prices have moved to a mid-€7/tonne range following gains in September and early October arising from French nuclear uncertainty and the expectation of a final agreement in negotiations over post-2020 EU ETS market reforms. Although a final agreement in negotiations between the EU Council and Parliament was not reached at an Oct 12th meeting, one is still expected by year-end and possibly as soon as early Nov. However, there may be limited potential for continued price gains this year, as further reductions in French nuclear generation may prove challenging, and given that a positive outcome over a reform package may already be built into the market. Looking ahead to 2018, EUA prices could average slightly higher year-on-year. While continued high auction supply volumes provide downward price pressure to EUAs ahead of Market Stability Reserve implementation in 2019, the ongoing proposal to secure the EU ETS from Brexit may also add some upward EUA price risk.

Asian Oil Demand: Growth Falls Back Again, as Expected, with Further Slowing Likely in 4Q

Our snapshot of Asian oil demand growth continues to show further slowing, as expected. Further easing is likely in 4Q, but then accelerating growth will take shape in 1Q18. Growth in our October snapshot was 852 MB/D, an incremental fallback of -104 MB/D from last month. The key drivers were again slower growth in China and Korea, while India’s growth improved almost 150 MB/D, and Australia/New Zealand growth improved 22 MB/D. Performance generally came in along PIRA’s expectation. At this point, there will be further deceleration in growth in 4Q to about 635 MB/D. Then, improvement is expected in 1Q18 with growth rising to 975 MB/D. Data actuals cover the three month period July-September for China and India, while Japan, Taiwan, and Korea cover data June-August.

Global Equities Setting More Record Highs

Global equity markets continue to set more broad based records in a host of countries and across a host of market indices. In the U.S., the S&P 500 gained almost 1%, with the growth indicator outperforming a largely neutral defensive indicator. Banking and housing were the best performers, while consumer staples was the weakest, and energy fell back -0.5%. Internationally, there appears to have been rotation out of many of those tracking indices and into the U.S. The biggest fallback was in Latin America, -1.4%, though many of the other tracking indices also posted declines.

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.

PIRA Energy Market Recap for the Week Ending October 16, 2017

16PIRALogoJapan More Refinery Maintenance, While Gasoline Demand Improves

Japanese fall maintenance continues to gear up and will reach a peak over the next two weeks. Crude imports rose an incremental 286 MB/D, which combined with the lower runs, built crude stocks 4.3 million barrels. Finished products built 1.6 million barrels, largely from higher jet-kero stocks. Gasoline demand kicked up 169 MB/D, as the Health-Sports Day holiday provided uplift. Gasoil demand was surprisingly strong, despite the holiday. Exports, however, plunged from record levels and stocks built. Kerosene demand fell back sharply and was more in keeping with underlying demand. Refining margins eased slightly on the week, but remain good.

U.S. Inflation Remains Benign, and Fed Is Trying to Understand Why

U.S. inflation has stayed benign, as consumer inflation data for September came in on the soft side of expectations. For now, U.S. central bankers appear wedded to the established historical method of conducting monetary policy, so another rate hike in December remains the base case. But the minutes for the September Fed meeting, released this week, showed policymakers stepping outside of traditional economic theories in search of answers for the low inflation puzzle. Meanwhile, activity data released by major economies were encouraging. Specifically, U.S. retail sales rose solidly, European industrial production expanded at its best pace in years, and growth in Chinese trade continued.

Propane Inventories Build on Warm Fall Weather

After three weeks of propane stock draws, inventories rose 925,000 barrels last week. The propane stock level is 78.9 million barrels, which is 8% below the five-year average. Propane exports dropped to 886,000 b/d for the week ending October 6th but are expected to return to the one million barrel level for the week ending October 13th based on heavy ship activity at USGC ports. US raw mix production dipped to just under 3.8 million b/d as Hurricane Nate forced a brief shut-in of all US Gulf Coast production facilities, which caused a 140,000 b/d or 4% reduction in raw mix production. NGL prices rose last week but did not keep pace with the increase in WTI/Brent crude prices. The combination of increasing inventories and reduced exports suppressed NGL prices last week, but NGL fundamentals remain strong and are price supportive going forward.

Ethanol Prices Nosedive in the U.S. and Europe

Margins for manufacturing ethanol in the U.S. and Europe worsened the week ending October 6. The EPA noted that it is considering reducing mandates for advanced biofuels and biomass-based diesel in 2018 and 2019. After declining temporarily, RIN values gained as fears over lower mandates subsided due to strong opposition. U.S. biodiesel prices and manufacturing margins declined for the third straight week. In Brazil a greater percentage of the sugarcane is being devoted to ethanol manufacture. In Western Europe the expiration of sugar quotas will mean more ethanol on the market.

Fuel Subsidy Reform Slowed by Higher Oil Prices

Momentum for fuel pricing reform slowed over the past twelve months, as higher oil prices reduced the urgency for the world’s largest oil exporters to lower their subsidy bills. The trend supports PIRA’s view that the threat to future oil demand from subsidy removal is overstated. The vast majority of oil consumption is concentrated in countries that price fuel at or above market levels, while political constraints and stronger oil markets will cause oil exporters to implement subsidy reforms at a deliberate pace. Separately, currency appreciation versus the U.S. dollar had a marginally supportive impact on oil demand in the past year, but not nearly enough to offset the headwinds from widespread depreciation when oil prices collapsed between summer 2014 and January 2016.

France: Low R&C Demand is Hiding Serious Looming Risks

French nuclear output has been dominating energy headlines this year - most recently with an EDF announcement of “significant” earthquake risk at 29 reactors just as winter is set to begin. Certainly this is not an ideal time to bring up this issue in France adding to balancing risks in not only the power sector, but with real knock on effects to gas markets. Major looming risks in France at the moment include low storage heading into winter, higher power demand, and LNG supplies that are average-to-low. For gas and power, France is very important for balancing its Mediterranean neighbors, which have also been the cornerstone for higher LNG imports in 2017. Any regional spikes tied to global LNG levels will be a significant risk across the whole winter.

Panama Canal Transits Tally Up, Adding to Concerns about Access

With an average of some 20 LNG transits per month to date this year according the Panama Canal Authority data, the complaints, concerns and downright fears on the part of some LNG buyers, sellers, shippers and traders vis a vis Panama Canal access is mounting.

Credit Conditions Remain Highly Constructive

Credit conditions again remained highly constructive, with the S&P 500 continuing to set new records and volatility falling back on the week. High yield credit (HYG) was fractionally lower, but investment grade debt, emerging market debt, and the energy debt indictors all posted gains of 0.36-0.63%. The commodity space was strongly higher while the dollar weakened -0.8%. The St. Louis financial stress indicator was fractionally changed after five straight weeks of lessening stress.

U.S. Ethanol Production and Stocks Increase

U.S. ethanol production rebounded the week ending October 6, increasing by 14 MB/D to 1,010 MB/D as some plants resumed normal operations following scheduled maintenance. Total inventories rose by 805 thousand barrels to 21.5 million barrels, with East Coast stocks experiencing the largest weekly build ever reported, 933 thousand barrels. Ethanol-blended gasoline production continued to rebound from a six-month low, rising 177 MB/D to 9,231 MB/D as overall gasoline output increased.

Kirkuk Developments Highlight Northern Iraqi Production Risks

On October 15, the Iraqi military launched an assault on disputed Kirkuk, which Kurdish Peshmerga forces have effectively controlled since dislodging ISIS in 2014. In addition to taking control of the city with little Kurdish resistance, the Iraqi army also claimed to take over the Baba Gurgur oil field (from which current production of ~100 MB/D is already allocated to NOC). A larger concern is the fate of ~280 MB/D from the disputed Bai Hasan and Avana fields, of which the Kurds gained physical control in 2014. At the time of writing, reports indicate the Kurdish government shut operations at the two fields, amid threats from Iraqi forces to target them next. The Kurds also refine up to 60 MB/D of NOC oil under recent agreements, raising PIRA’s estimated near-term disruption risk to at least 340 MB/D. The situation is fluid, but PIRA expects imminent negotiations and any near-term outage to be short-lived. But longer term, deep-rooted tensions over the status of Kirkuk will persist.

First Signs of Tightness Emerging in France but Greater Risks for the Italian System

First signs of tightness have been emerging in the French market. Although RTE data shows that temperatures were in line with those typical for the period at the beginning of the week, spot prices reached an hourly peak of €75/MWh on Oct. 9, the highest value since mid-February, at a time when demand was only 55.8 GW, or 0.7 GW below the average demand during October on-peak periods since 2012. Poor nuclear output is the main driver of these high settlements, with the average month-to-date being 37.9 GW, lower than the 40.1 GW average of September and even below the level recorded in the same period of October 2016, when the steam generator probe was being implemented.

Seaborne Coal Pricing Continues to Rise on Heightened Chinese Imports

Seaborne coal prices largely moved higher this week, with CIF ARA and FOB Richards Bay forward prices leading the way, rising between $2.00-$5.00/mt W/W. Additionally, the back of the forward curves moved higher than prompt pricing, flattening out the prevailing backwardation in market forwards. The prevailing tightness in the coal market is looking like it will persist well into 2018, particularly if market bulls’ expectation of a colder-than-normal winter in Asia comes to fruition.

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 a modest 0.2%, but pushed further into record territory. The best performers were consumer staples +1.4%, utilities +1.4%, the defensive indicator +1.1%. Retail and banking were the weakest performers and lost ground. Internationally, all the tracking indices outperformed the U.S, with emerging markets, emerging Asia, and Japan doing the best.

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.

PIRA Energy Market Recap for the Week Ending October 2, 2017

16PIRALogoU.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.

Russia’s Gazprom Topples U.S.’ ExxonMobil for 1st Place: S&P Global Platts Top 250 Global Energy Company Rankings®

13Top250Header newThe results of the 2017 S&P Global Platts Top 250 Global Energy Company Rankings® , now in its 16th year, show a two-pronged changing of the guard, the most profound in the Rankings history. First, Russia’s Gazprom snagged the number 1 spot, ending U.S. oil and gas giant ExxonMobil’s 12-year reign at the top of the list (ExxonMobil holding within the lead ten at 9th place).

And, second, integrated oil and gas (IOG) companies are not the biggest movers up, even as they continue to make a strong showing as they have since the Rankings were first published in 2002. Rather, utilities and pipeline companies were among the biggest gainers. In the coveted top 10, Asia-Pacific and Europe, Middle East and Africa (EMEA) tied, both with 4 representations each, while the Americas has only two of the elite spots.

The annual Top 250, published by S&P Global Platts, ranks companies based on financial performance using four key metrics: asset worth, revenues, profits, and return on invested capital. All companies on the list have assets greater than $5.5 billion.

“European utilities and North American pipeline operators got a boost from sticking to what they know best and shying away from more risky enterprises and territories,” said Harry Weber, senior natural gas writer of S&P Global Platts, the leading independent provider of information and benchmark prices for the commodities and energy markets. “Regulated utilities, in particular, have an advantage because their revenues are largely defined and consistent, and are not as susceptible to swings in oil and gas prices.”

Among this year’s biggest movers: Germany’s E.ON climbed 112 places to 2nd place from 114th. British utility Centrica is now 15th, up from 156th. Japan's JXTG Holdings landed just outside the top 25, at 26th, an advance of more than 100 ranks. Brazil’s Centrais Eletricas Brasileiras, known as Eletrobras, made the lead 50, at 47th, up from 193rd. And Houston-based CenterPoint Energy surged to 105 from the prior year’s rank of 220.

There were familiar names rounding out the top 10, behind Gazprom and E.ON, such as 4th-ranked South Korea’s Korea Electric Power, which debuted in the top 10 just last year; China Petroleum & Chemical at 5th place; Russia’s PJSC Lukoil at 6th; Indian Oil Corp. at 7th place, and U.S. refiner Valero Energy at number 8.

But it was India’s Reliance Industries rising to 3rd place from last year’s 8th and France’s Total rising two slots to 10th from 12th -- returning to the top 10 after a two-year absence -- that showed the strength of pipelines as the other sector that was among those that surged up this time around. Both have been making investments in the U.S. that benefit from increasing supplies of natural gas and the new pipeline infrastructure that is being built to carry those resources to the Gulf Coast for regional use and for exports to overseas hubs.

ASIA-PACIFIC

Energy entities of the Asia-Pacific make a strong showing in the 2017 Rankings, holding 88 of the 250 slots. Of the top 5 globally ranked companies, 3 are from Asia Pacific Rim (#3 Reliance Industries Ltd.; #4 Korea Electric Power Corp.; #5 China Petroleum & Chemical Corp.). The two leading revenue-generating companies are from Asia Pacific (China Petroleum & Chemical Corp. and PetroChina Co. Ltd.), ahead of Royal Dutch Shell, ExxonMobil and BP. The region also hosts 20 of the 50 fastest growing companies, twice that of the EMEA region and matching that of the Americas.

As for decliners, coal interests were hit especially hard in the latest rankings, as more countries push for increases in renewable energy and cleaner burning fuel. But this is not without exception. China Shenhua Energy rose to 13th place from 25th, as the price of coal in China rose sharply following government output cuts. Overall, thanks to the new entrants buoyed by utilities and pipelines, revenues of the Top 10 global energy companies surged more than 30% to $1.1 trillion from $830.2 billion in the 2016 rankings.

Collectively, the world's top 10 companies posted combined profits of $63.7 billion last year, 14% lower than the $74.3 billion posted the year before. The Top 250 profit figures are adjusted for preferred dividends and exclude discontinued operations and extraordinary operations.

TOP 10 OF 2017 S&P GLOBAL PLATTS
TOP 250 GLOBAL ENERGY COMPANY RANKINGS

2017 RankCompany Name2016 Rank
1 PJSC Gazprom (Russia) 3
2 E.ON SE (Germany) 114
3 Reliance Industries Ltd. (India) 8
4 Korea Electric Power Corp. (South Korea) 2
5 China Petroleum & Chemical Corp. (China) 13
6 PJSC LUKOIL (Russia) 6
7 Indian Oil Corp. Ltd. (India) 14
8 Valero Energy Corp. (Texas) 5
9 ExxonMobil Corp. (Texas) 1
10 TOTAL SA (France) 12

FASTEST GROWING

Compound growth rates analyzed in the latest rankings showed again the strength of utilities and pipelines. Latin America is home to three of the 5 fastest growing companies.

Colombia’s Interconexión Eléctrica posted the top three-year compound growth rate (CGR) at 49.9%, followed by Brazil’s Eletrobras at 36.6%. Crude oil transportation and logistics provider National Shipping Co. of Saudi Arabia, or Bahri, was the third fastest growing, with a three-year CGR of 33.6%.

Hong Kong’s Kunlun Energy posted a three-year CGR of 23.5%, ranking it number 10 in the fastest growing segment. The storage and transportation company owes that growth in part to its expansion in the natural gas pipeline arena.

On a regional basis, see top 10 Asia Pacific, top 10 EMEA, and top 10 Americas and other associated lists by region, industry sector, biggest movers, fastest growers and more, click here.

Access an in-depth analysis of this year’s Rankings, “S&P Global Platts Top 250: Changing of the Guard,” by S&P Global Platts’ Harry Weber.

Financial data for the Platts Top 250 Global Energy Companies Rankings® was provided by S&P Global Market Intelligence, which, like Platts, is a division of S&P Global.

WROV Activity to Increase in Line with Improvements in Project Sanctioning

The work-class ROV (WROV) market is driven by drill-support, field construction and IRM activities offshore. The results from the latest analysis by Westwood Global Energy shows that the market is starting to emerge from a cyclical downturn that has seen activity fall 36% and expenditure nearly halved.

Intense competition amid lower activity levels has depressed pricing, however, 2016 appears to have marked the bottom of the market and some recovery is now evident. Renewed project-sanctioning activity such as Cheviot in the UK and Mad Dog Phase 2 in the USA points to a more positive future for WROV demand. Coupled with the large global installed base of infrastructure, which will ensure that WROV’s for IMR activity remain essential, the ROV market is now expected to see a positive trajectory, highlighted in the World ROV Operations Market Forecast 2018-2022 released September 26, 2017.

15Global ROV Expenditure and Days by Region 2013 2022Global ROV Expenditure and Days by Region 2013-2022

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Key Conclusions

  • ROV Expenditure will total over $10bn with a 4% CAGR expected as operators begin to sanction more projects.
  • In total, there will be demand of 1,030,659 days for WROV’s, averaging over 200,000 a year and growing at a 1% CAGR.

Cautious Optimism Returns to North Sea – Deloitte

Reacting to the latest Oil and Gas UK Economic Report, that was published on Wednesday September 6, Graham Hollis, Senior Partner for Deloitte in Aberdeen, said:

15Deloitte Graham HollisGraham Hollis, Senior Partner, Deloitte

“A cautious optimism has returned to the industry, as it weathers the storm of the past three years. The latest economic report from Oil and Gas UK demonstrates just how much progress the UKCS has made on reducing operational costs, and the encouraging level to which confidence is returning to the basin – most notably through a significant uptick in M&A activity across the sector. Assets are finding their way into the right hands and a new cohort of private equity-backed businesses is breathing new life into the basin.

“Nevertheless, challenges still remain for the North Sea and its recovery needs to be carefully fostered. The report shows there are a potential £40 billion worth of developments in companies’ business plans – it’s up to all of those involved in the industry to help these come to fruition, requiring a collaborative approach between government, the business community, the supply chain, and wider stakeholders.

“The UKCS is vitally important to our economy and still supports more than 300,000 jobs. To ensure its future, we need to set about anchoring that talent pool in Aberdeen and the surrounding areas. While it will mean keeping the skills we already have, it will also mean ensuring we continue to attract a new generation of talent, which can carve out a new path for the industry in the years ahead.”

PIRA Energy Market Recap for the Week Ending September 18, 2017

16PIRALogoRefinery Margins Remain Strong

Brent prices are effectively range-bound but are forecast to average over $50/Bbl for next few months. We see a relatively firmer near-term price for Brent, weaker for WTI. The U.S. stays in export parity. Narrow crude quality differentials to persist. Hurricane Harvey will cut U.S. crude runs by cumulative 60-70 million barrels resulting in strong refinery margins which will boost European runs. Product stocks will tighten for the next couple of months. Harvey pushed light product cracks higher similar to previous storms (e.g., Katrina) with high a sharp peak that eases in days/weeks. But some lingering strength will remain, particularly for diesel due in part to import pull by Latin America.

U.S. Data Surprise in Various Ways; Chinese Data About as Expected

In the U.S., the latest consumer price data showed a faster-than-expected increase for the first time in six months. The recent behavior of the so-called “sticky” CPI suggests a fading in the disinflationary pressure for the coming periods. Consumer spending disappointed in August. Industrial production also came in below expectations, but this was essentially due to distortions from Hurricanes Harvey and Irma. In China, manufacturing output has remained resilient, while growth in investment has increasingly become slower. Data on vehicle sales and credit were supportive of the growth outlook.

NGL Purity Product Prices Strengthen

Propane prices remain robust at 74% of the crude price. Natural gasoline, butane and ethane prices also had healthy gains last week. Propane storage volumes have grown by over eight million barrels the past two weeks to bring propane stocks in line with the five-year average. NGL raw mix production continues to rebound from the effects of Hurricane Harvey in PADD 3, and total US raw mix production set a new all-time record at 3.9 MMB/D. Gulf Coast petrochemical plants continue making progress in returning to normality, and all but two plants are expected to be back in operation by the end of this week with one of the two plants remaining down scheduled for planned maintenance.

U.S. Ethanol Values Higher the Week Ending September 8

Manufacturing margins in the U.S. rose. D6 RIN prices fell. U.S ethanol exports rose in July. Brazil remained a net exporter of ethanol in September. European ethanol prices bottomed. U.S. biodiesel prices reached a six-month high. Biodiesel manufacturing margins improve for the eight straight week.

Soybeans Remain THE Story

In addition to a strong Real, Brazilian soybean producers might be holding onto last year’s supplies as a sort of insurance policy against continuing dryness in the states of Parana, Goias, and slightly less so Mato Grosso. While both Uruguay to the south and Argentina to the southwest have more than adequate moisture, central Brazil is still waiting for “normal” mid-September rains which have failed to materialize so far and show little sign of arriving anytime during the month of September according to 2-week forecasts.

The Iranian Nuclear Deal Can Survive a Trump Decertification

The Trump administration issued oil sanctions waivers for Iran, as expected, despite President Trump’s clear displeasure with the agreement. But whether Trump will certify Iranian compliance with the JCPOA to Congress in mid-October (required by U.S. law every 90 days) remains the bigger question. Judging from his recent comments, a decertification looks likely. However, this alone would not end the nuclear deal. It would simply give Congress the option to reimpose sanctions, during which time Trump could continue to issue waivers. At this point, we do not believe either Trump or Congress will breach the JCPOA by reinstating nuclear sanctions, given IAEA verification of Iranian compliance and widespread international support for the agreement. But medium-term risks to the JCPOA (and Iranian oil sales) would rise if the U.S. attempts to renegotiate deal terms.

Robust Southeast Asian Oil Demand to Support Regional Market

The product deficits of Indonesia and the Philippines will provide a much needed outlet for surplus refined products in the Asia-Pacific region well into next year, but product imports into Vietnam should be lower in the latter half of 2018 with the start-up of the Nghi Son refinery. In Taiwan, key product exports eased in 1H17, but should increase with ramp up at CPC’s Talin refinery. Global kero/jet demand growth is forecast to remain robust in 2018, and Asia will account for half of the increase. Asia-Pacific net regional exports of gasoline, jet fuel and gasoil/diesel are expected to ease over 2017-18 after a surge last year. Regional refining margins should remain healthy through 2018.

2Q17 U.S. Producer Survey: Supply Recovery Takes Shape…Slowly

Domestic production continued to trend upwards in the second quarter, albeit at a decidedly muted pace relative to strengthening drilling activity during the period. Although production finally eclipsed the year-ago volumes in June, year-over-year comparisons remained negative for the quarter. Still, the surveyed operators grew production by ~0.6 BCF/D during the period, the largest Q/Q gain for the group since 1Q16. It appears that, for now, producers have cleared any residual hurdles to bringing their byproduct to market, as gas production essentially kept pace with oil growth during the quarter. With both Appalachian and associated gas production growth taking shape in the second quarter, further — and greater — gains may soon take hold in the latter half of 2017.

Influence of the Global Gas Revolution on Pricing: Suppliers vs. India Round 2

The revolution of LNG buyers against the historic status quo is heating up on a triumvirate of fronts this summer: commercial, regulatory and political. Nowhere is the carnage as great as on the commercial front, of which pricing is a critical component.

Petronet/Exxon Deal Shows Just How Tough It is for Europe to Land Volumes

Exxon recently renegotiated its LNG supply deal with Petronet, an Indian LNG Importer. The deal not only involved a price cut, but added an extra 1 million tons per year to 2.5 million tons. The price cut seems to put India in a strong buying position relative to the rest of Asia as measured by DES LNG deliveries as a percentage of Brent oil (a common price benchmark for LNG). This is especially true as it has been released that incremental volumes will be sold at 12.5% of Brent. There is a twofold issue here for European markets – a step towards more balanced global markets and a show of how even with price cuts, Asian buyers still have a significantly higher price tolerance. Placing extra volumes in Asia through price cuts will bring regional markets ever closer together, as it represents a reaction to growing oversupply that will further compresses global spreads. Some sellers are more concerned with securing market share than protecting traditional premiums in Asia, as releasing too much unsold volume into the spot market is considered a graver threat to LNG markets in the years to come.

China to Reduce Industrial Gas Prices

China’s National Development and Reform Commission (NDRC) announced that effective September 1 non-residential gas prices will be lowered by CNY100/Mcm ($0.42/MMBtu). The price has been justified by lower pipeline transportation costs as well as a change in VAT calculations for natural gas. The price reduction is around 5% which still leaves prices high by international standards – most city prices are $8+/MMBtu.

Japan Demand Takes a Holiday, before the Holiday

Aggregate product demand plunged 244 MB/D, with sizeable declines in gasoline and gasoil demand. Runs eased modestly, while a surge in crude imports, which was expected, built crude stocks 5.8 million barrels. Finished products built 0.75 million barrels on the weaker demand. Kerosene demand surprised to the upside and yield fell sharply to only 3.8%. Stocks posted a first contra-seasonal draw of 0.2 million barrels (27 MB/D), while the 4-week build rate eased slightly to 73 MB/D. Refining margins were slightly softer, but remain good.

Financial Stresses Very Low, Credit Constructive

Credit conditions remained highly constructive on the week, with the S&P 500 moving to a new record at the 2,500 level. Volatility (VIX) declined and high yield credit prices rose. High yield energy credit did particularly well and driven by a solid gain in the energy commodity space. The dollar generally strengthened. The St Louis financial stress indicator again moved lower after four straight minor weekly increases.

China and Vietnam’s Ambitious Plans for Ethanol Use are Likely to Fall Short of Targets

The Chinese government plans to expand the use of biofuels, requiring that all gasoline contain 10% ethanol (E10) by 2020, though it has yet to announce a formal policy. China’s neighbor Vietnam previously announced its intent to replace RON 92 gasoline with E5 next year and with E10 in 2019. If achieved, these goals would displace billions of liters of hydrocarbon fuel. PIRA believes, however, that these attempts to adopt E10 by 2019 (Vietnam) and 2020 (China) will fall short of their targets. Nevertheless, ethanol consumption will increase in these countries, but not as rapidly as desired.

Spanish Market Bullish on Increased Volatility in French Prices

Despite a relatively wet August and normal rainfall month-to-date, Spanish hydro reservoir levels continue to decline, adding further upside risks ahead for Spanish prices. With Spanish nuclear set to move down in October, Spain will need to import from France in the next month. While we have France still pricing below Spain in October, risks of a further deterioration in French nuclear availability cannot be ruled out.

EDF press release of Sep. 14 is bearish for prices. Despite a large number of new irregularities, EDF has confirmed that all the affected components can be used safely, a statement that will have to be confirmed by ASN, before receiving official clearance. This is the only unclear factor at this point, or to what extent, the operation of the plants could be affected by these additional anomalies.

Loads Washed Out!

Spot on-peak energy prices in Eastern-Grid and ERCOT were unanimously lower year-over-year. Eastern Interconnect average raw loads declined 8.1% year-over-year in August as cooling demand fell from the warmer than normal prior year. Despite declines in raw loads during the last few days in August due to Hurricane Harvey, total ERCOT raw loads in August were about flat year-over-year. The earlier than expected transition into the shoulder season has helped color deteriorating cash prices – with suppressed seasonal demand keeping Henry Hub pricing below the $3.0/MMBtu mark. The return to normal weather during the fourth quarter this year would likely usher in dramatically tighter fuel supply/demand balances. PIRA’s power price forecast though mostly lower than last month, is still above market, driven by higher (than market) gas price forecasts.

Domestic Demand Falls on August Weather, But Exports Remain High

Domestic U.S. coal demand fell on August weather and mild September temperatures signal another fall in coal burn, but elevated exports are keeping prices supported for now. However, slipping seaborne coal prices will hit Appalachian and ILB markets by year end.

EUA Prices Soar Amid Nuke Outages, Trialogue, and Brexit

European carbon (EUA) prices soared in early September on French nuclear uncertainty (impacting the wider European energy complex as well) and progress with post-2020 market reform talks. However, these drivers may not continue to sustain EUA price gains. With no immediate safety concerns, a new regulatory consultation may not lead to new delays/outages to French nuclear gen. Recent substantive developments in market reform talks may limit the upside potential of a final agreement, expected later this year. Parliament’s proposal to protect the EU ETS from Brexit has introduced new market uncertainty. Ultimately, EUA prices may have recalibrated above €6, but with lower potential for gains later this year.

U.S. Industry on the Road to Recovery

Crude runs fell almost 400 MB/D this past week to 14.1 MMB/D which should be the low from Hurricane Harvey as refiners come back online. Next week, runs are set to increase, reducing the extent of light product draws and the crude inventory build. This past week both gasoline and distillate inventories fell sharply for a combined 11.6 million barrel stock decline. Crude stocks built 5.9 million barrels and Cushing crude stocks built 1.0 million barrels this past week. Both are forecast to increase again in next week’s EIA data as flows continue to back up, waiting on the full return of Gulf Coast refining.

NYMEX Weathers Storms, but U.S. Balances Still Hit

The breakout this week might signal a willingness on behalf of the market to put the injection season in the rear-view mirror and focus once again on emerging structural tightness ahead. At a minimum, net increases in price this week appear at odds with the gas demand destruction that has unfolded in September — first, driven by Hurricane Harvey losses in Texas and Louisiana and more recently in Florida, with power outages related to Hurricane Irma. Overall, the storm-related losses have inflated our end-season projection to 3.751 TCF, a notable increase from last month’s 3.695 TCF guidance. For now, our October balances, which assumes 10-year normal temperatures return this year, support upwards of 2.5 BCF/D in year-over-year demand gains in the R/C and industrial sectors. The higher inventory levels likely to be in hand by end-September, however, leave less room for October to underperform, particularly with respect to heating loads next month. With this in mind, we have tempered our Reference Case price forecast for the heating season from ~$3.75 to $3.65/MMBtu.

Coal Market Continues to Ride High

The bullish run in the coal market that has prevailed since early July continued this week, with Atlantic Basin forward prices rising by the largest extent. The demand side continues to support coal balances and pricing, with colder temperatures in Europe and ongoing concerns regarding nuclear and hydro generation pushing CIF ARA higher. Low stockpiles in both China and India have kept Asian coal buying activity relatively strong of late. Despite the fact that coal demand has faded from the summer peak, concerns regarding supply adequacy in the upcoming winter are no doubt at the forefront of buyers’ minds. Forecasts of a colder European winter than last year, following such a strong summer for global coal demand, will prevent sizeable price declines over the very short-term. However, PIRA continues to assume that China’s thermal coal import demand will contract notably over the balance of the year, which should set the table for considerable price weakness throughout 2018.

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 closed right at 2,500 for the first time. The best performers were banking, retail, and energy (+2.3%), while utilities was the lone decliner. Internationally, the best performing tracking indices were China, Latin America, and emerging Asia.

U.S. Ethanol Production Lower the Week Ending September 8

U.S. ethanol output declined by 13 MB/D to 1,047 MB/D last week as some manufacturers reduced production during the extended Labor Day weekend. Total inventories increased by 16 thousand barrels to 21.1 million barrels despite a large decline on the Gulf Coast. The West Coast received approximately 10.6 million gallons of imports. Ethanol-blended gasoline production plummeted for the second consecutive week, dropping to a 27-week low 8,932 MB/D from 9,132 MB/D in the preceding week.

U.S. Refinery Turnarounds: September 2017 – June 2018

Hurricane Harvey brought a number of refinery operations to a standstill, much as occurred in years past such as due to Hurricanes Katrina and Rita. The overall extent of the drop in crude runs ranks with previous events in 2005 and 2008 when overall U.S. downtime exceeded 3 MMB/D during September of those years – average outage of 3.35 MMB/D for the U.S. Hurricane Harvey is expected to lead to a similar average adverse impact on overall U.S refinery operations of around 3.37 MMB/D, with 2.33 MB/D of that in PADD III.

Asian Oil Demand: Growth Falling Back as Expected, with Further Slowing Likely

Our snapshot of Asian oil demand growth has begun to slow as expected, with further easing likely through year-end. Growth in our September snapshot was 956 MB/D, an incremental fallback of -257 MB/D from last month. The key drivers were slower growth in China and India, though better performance was noted in Korea, Taiwan, and Australia/New Zealand, along with a lesser decline in Japan. At this point, we expect further deceleration in the October snapshot.

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.