PIRA Energy Market Recap for the Week Ending May 15, 2017

14PIRALogoU.S. Inventory Deficits to Last Year Likely to Widen

U.S. product demand was very strong this past week, pulling up the four week average adjusted demand growth to 4.1%, or almost 800 MB/D over last year. Total commercial stocks drew 3.6 million barrels this past week led by a 5.2 million barrel crude stock draw, the largest weekly decline this year. Cushing crude stocks surprisingly drew 0.4 million barrels last week and another stock decline of 0.3 million barrels is forecast for this week’s data. Inventories of the two major light products are forecast to decline next week, along with another significant crude inventory decline.

Peak Restocking Month Set to Disappoint

After faltering early in the week, NYMEX futures quickly regained lost ground and have now tested the calendar highs set back in early April. Helping to feed the bulls was yesterday’s EIA weekly storage report showing an unexpectedly low build that took the market by surprise — widening the year-over-year storage deficit to 372 BCF. Indeed, it appears that the aggregate storage refill will fall 100 BCF short of the 5-year average — roughly in line with last year’s anemic levels. Yet, while the net monthly build will likely be similar to last May, such a comparison belies the notably different year-over-year trends at work — particularly on the demand side of the U.S. balances, but also in the case of supply given signs a turnaround is finally unfolding.

NBP is Pricing Out U.S. LNG – Should Henry Hub be Concerned?

Current deliveries to N.W. Europe vs. the balance of the Continent highlights a vulnerability to LNG producers and a challenge to marketers, in particular American ones (given the proximity) during shoulder months. In the previous weeks, we highlighted this issue for global LNG markets, but it also is true for Europe on its own. Pipeline producers will try to lock in utilities into high minimum takes to block LNG deliveries in these shoulder months, but there will be an increasing desire for companies to gain ever more flexibility in order to take advantage of LNG length in these vulnerable periods. This pattern has certainly been evident in portions of Southern and Eastern Europe, where the legacy of oil indexation in gas pricing has made it relatively vulnerable to immediate competition from attractively priced spot LNG.

Japan Power Generation Growth Surge Still Threatened by Nuclear Capacity Increases

Japan did an impressive job by stepping up to keep its new LNG contract commitments early this year. But the increased imports may have been temporary – caused by lower LNG prices, colder weather patterns, higher oil prices and in the future, the lingering issue of nuclear restarts could further threaten LNG consumption. The restart of the two Takahama nuclear reactors in Fukui Prefecture (total of 1.7 GW) appears imminent, with Kansai planning to restart unit 4 on May 19. This will have a potentially large downside impact on LNG consumption as opposed to oil going forward.

Back to a Weather Watch

With the May WASDE behind us, the markets will focus on weather and planting progress for the next 6-7 weeks until the end of June and the Acreage report. However, planting progress numbers can be a bit misleading moving forward as they do not take into consideration the number of acres that will need to be replanted.

Malaysia Approves New Ammonia Plant

Malaysia’s Union Cabinet has approved the signing of a Memorandum of Understanding (MoU) for the development of a US$2.1 billion ammonia and urea manufacturing plant in Malaysia. The plant’s capacity is expected to total 1.35 million tpy of ammonia and 2.4 million tpy of urea. Supply will be focused on the Indian market. "The Union Cabinet today gave its ex-post-facto approval to the signing of MoU with Malaysia on the development of a urea and ammonia manufacturing plant in Malaysia," an official release said.

Ethanol Stocks Slightly Lower

U.S. ethanol production rose 20 MB/D last week to 1,006 MB/D. East Coast stocks jumped to a five-year high 8.6 million barrels, though total inventories fell a relatively small 158 thousand barrels to 23.1 million barrels. For the first time in nine months, imports were reported, all of which were received in PADD V. Ethanol-blended gasoline manufacture dipped to 9,161 MB/D from 9,203 MB/D in the preceding week. June ethanol futures were up 0.1¢ to $1.45 per gallon today as of 11:55 A.M. CT.

Propane Inventories Begin to Build

Propane stocks registered a 2 million barrel build, which is the first significant build of the injection season. Total inventories rose to 41.6 MMB, which is 31.5 MMB below last year’s levels. Propane inventories increased in all PADDs. Exports will curb within the upcoming month based on reported cancellations and will most likely remain relatively low through the summer. Declines in exports may not be noticeable in the next several weeks, although should begin by mid-May.

Slower Debt Growth in China Not Yet Hitting Economic Activity

In April, the amount of credit in the Chinese economy continued to increase, but at a slower pace compared to earlier. The Chinese government is likely to maintain its restrictive stance on credit creation, as worries about the debt-to-GDP ratio continue to loom. While credit growth has been a leading indicator of economic activity in China, a slowing in the economy’s momentum has not yet materialized. In the U.S., retail sales for April pointed to a rebound in consumer spending. A reading on core inflation stayed soft, but this is not expected to influence the Fed’s deliberations on policy.

Lower Renewables Firm German Prices. Signs of Flexibility of Wind to Negative Prices Emerge

German day ahead prices have been quite firm so far in May, with reported solar output down by over 2.7 GW year-over-year and wind 0.3 GW year-over-year. However, the German power system has actually seen another period of negative prices, between April 30 and May 1. Coal, lignite, gas, and even nuclear plants have ramped down during the period of negative prices, while German exports have reached a peak for the year at 12.2 GW on April 30. Unlike thermal plants, renewable plants have been typically sheltered by their remuneration structure, but large negative prices are also unveiling some degree of flexibility.

Shoulder Season Slumber; Focus on Capacity Markets

Spot power prices increased year-over-year in April in most Eastern markets driven by rising gas prices, higher cooling loads across the South, and nuclear outages. Henry Hub spot prices continued to hover around the $3 mark in April reflecting a 60% year-over-year increase. PIRA is neutral to near term gas market forwards but remains bullish during heating season 2017-18. Year-over-year power price increases continue through the forecast period but generally fail to keep pace with gas prices as the call on gas-fired generation continues to weaken while efficient CCGT capacity grows. Implied heat rates fell in nearly every market, led by a 36% average drop at PJM-W which is fast becoming the poster child for the dangers of overbuilding.

Japan Holiday Impacts, Pluses and Minuses

Two weeks of data were reported due to the Golden Week holidays. Runs declined, on balance, as further maintenance kicked in. Crude imports ran particularly high and then plunged, which ballooned crude stocks at month-end April, but then corrected lower as we entered May. Finished product stocks fell in the latest week but generally continue their seasonal rise. Demand trends remain largely seasonal and have held up well. Gasoline demand was hyped by the holidays in the latest week with demand besting 1 MMB/D. Gasoil demand fell both weeks as the holiday reduced industrial and commercial activity. Stocks built both weeks by an almost cumulative 1 MMBbls, and 2.28 MMBbls over the last five consecutive weeks. Refining margins have looked increasingly sloppy. The implied marketing margin has improved the past three weeks, which has helped to partially offset the developing weakness in refining.

Coal Prices Continue to Shift Lower, Chinese Demand Fundamentals Strong... For Now

Coal prices continued to shift lower last week despite a notable rebound in the oil market. FOB Newcastle prices declined by the greatest extent, with the entire curve losing more than $2.50/mt compared to the end of last week. The coal market in general continues to search for a new short-term equilibrium following pricing surges both last year and last month. Clear signals out of the Chinese market remain elusive, as imports have remained strong, although domestic production continues to rebound.

European Carbon Prices Stay Low, Trialogue Talks Coming Up

Breaking the trend from prior years, European carbon (EUA) prices failed to rise during the April compliance period, suggesting existing market positions were adequate for compliance. Prices have moved lower in May, with a price rise not expected until August (when auction volumes are lower). “Trialogue” talks on post-2020 market reforms remain the major market wildcard, with EUA price swings possible both ahead of and following the upcoming May 30th meeting. At the same time, the widening EUA delivery spread for 2019 suggests that EUA prices increasingly reflect an ambitious reform package – as well as continuing poor fundamentals in the balance of 2017 and 2018.

Credit Conditions Remain Positive With Low Stress

Financial stresses remain extremely low. The S&P 500 is still trying climb over and hold the 2,400 level. There still remains noted divergence between bank equity performance (higher) and a flatter yield curve. This is still occurring in the major regions (U.S., Europe, and Japan). Commodities remain soft, but energy perked up this week, and we had noted that cash energy had been acting weaker than energy credit would have suggested. Price trends in non-energy-high yield debt still look positive.

U.S. Ethanol Prices Mostly Lower

U.S. ethanol prices declined most of the week ending May 5, but there was some rebound Friday. Manufacturing margins tumbled. 2017-D6 RINS decreased to 41.0 cents. Brazil returned to an export position in April. The vote on imposing a tariff on U.S. ethanol imports was postponed until June. European ethanol values increased to a six-week high.

Long Term Models Remain Wet

The recently concluded California drought began on December 27, 2011 but it wasn't until August 13, 2013 when the category "extreme drought" made its debut in the southwestern part of the state. In 2014, 2015, and 2016, major portions of the so-called Golden State were covered by both extreme and exceptional drought. With this past winter's heavy rains, just over 5 years of drought ended with an official gubernatorial declaration on April 4, 2017. Unless you're a vegetable/fruit producer or consumer, that stretch of intense drought probably didn't mean much. However, given the predominant west to east pattern flow, we started to wonder aloud a few months ago what the impact of a non-drought stricken California would have on Midwest weather this summer.

Tighter Seasonal NOx Limits Begin in the East as Other Rules are Targeted

A number of rules finalized under the Obama EPA are being targeted under the Trump administration. The tighter CSAPR Update rule NOx limits associated with 2008 Ozone NAAQS attainment have managed to survive and are in effect as of May 1st for units across much of the Eastern half of the country. Seasonal NOx allowance prices have risen in response. With court challenges outstanding, questions remain over whether EPA will defend the CSAPR Update rule. EPA has delayed litigation on the stricter 2015 Ozone NAAQS. Pressure to reduce cross-state emissions continues to come from petitions under the “good neighbor” provisions of the Clean Air Act.

B.C. Voters Decide - Almost

Last week, British Columbia voters went to the polls but the outcome remains uncertain. Prior to the inclusion of absentee ballots and the likely call for a recount in some tight ridings, the Liberals have captured 43 seats, the NDP 41 and the Greens, holding the balance of power, with 3 seats. Several ridings had very slim margins of victory and still await absentee ballots and possible calls for recounts leaving the final outcome in doubt between a slight Liberal majority or a minority government decided by Green Party support. The closest vote was in the riding of Courtenay-Comox where the NDP hold a nine-vote lead in a riding with a large military base that should have many absentee ballots from soldiers stationed out of the province. The Liberal candidate in the riding is the former base commander which suggests this riding could swing to the Liberals and produce a Liberal majority.

Global Equities Remain at or Near Record Highs

The broad U.S. market flirted at or set new record highs but was lower week-on-week. Technology and energy were the best performing sectors, while retailing was the weakest. Internationally, many of the emerging market sectors posted strong gains. World equity capitalization moved to a new record high this past week, something that had eluded it since the mid-July 2015 peak.

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.