U.S. Overall Stocks Flat
Weaker product demand and higher runs pushed product inventories up 1.8 million barrels last week, offsetting a crude stock decline and leaving overall inventories flat. Cushing crude stocks drew 1.8 million barrels last week, one of the larger draws this year, as regional refiners continue to return from maintenance and supplies were substantially reduced by the Keystone Pipeline outage. With the pipeline outage continuing at least another week, and perhaps well into December, Cushing is forecast to show its largest stock decline of the year in this week’s EIA data, falling 2.7 million barrels. Weaker product demand because of the Thanksgiving Holiday and higher runs lead to both gasoline and distillate inventories increasing 2.3 to 2.8 million barrels this week. Higher crude runs support an overall 2.8 million barrel crude stock decline.
Is China Ready for its Asia Balancing Act?
China could displace Europe as the perceived global LNG balancer, should it wean itself off contract only buying. Unlike 2017, China’s contract volume increases in 2018 will make up only a small fraction of global incremental supply. Demand for gas, however, will need to be backed by strong policy initiatives.
RGGI Prices Boosted by Elections; December Auction Nears
RGGI carbon allowance prices moved down in Oct/early Nov but were boosted by election results in VA/NJ and the release of the VA proposal to join RGGI. Still, the Dec auction could clear below Sep. Trading volumes remain low. Prices should continue to rise next year, with the final Model Rule, the full compliance surrender for CP3 in March and higher YOY emissions. Even with tighter caps after 2020, PIRA does not expect Emissions Containment Reserve tons will be needed right away for compliance; however sources may wish to buy these at the lower starting trigger prices.
More Records, Stress Indicators Ultra-low
The S&P 500 closed above the 2,600 level for the first time, and another new record, with lower volatility. Most of the credit indicators, including energy credit, posted gains on the week. Commodities were modestly higher and the dollar lower by -0.9%. The St. Louis financial stress indicator showed a slight uptick in stress, but from a cyclical low.
U.S. Propane Prices Weaken Relative to WTI Crude Prices
Propane prices weakened relative to crude prices over the holiday shortened week and closed the week up a meager 0.1% at 100.0 cents/gal, while WTI crude prices rose 2.5%. Propane stocks drew about 1.0 million barrels for the week ending November 17 according to EIA data. Propane stocks totaled 73.7 million barrels. Propane exports jumped 18.8% for the week ending November 17 and totaled 1.04 million b/d. Propane exports are expected to average 950,000 b/d through the winter months. Average U.S. raw mix production was basically unchanged from the previous week. A developing story is the possibility that Mexico will begin importing U.S. ethane in December, according to statements made by Grupo IDESA CEO Jose Uriegas. Mexico has four steam crackers designed to crack ethane exclusively, but PEMEX has declining ethane production and has been unable to supply sufficient volumes of ethane to fully supply the ethane demand for these steam crackers. Imports of U.S. ethane can rectify this ethane supply problem.
U.S. Ethanol Prices Bottom the week ending November 17
U.S. ethanol manufacturing margins flat as corn costs decline. October D6 RIN generation rises, and prices decline as companies rebalance. Brazilian ethanol prices higher and exports soar. UK-based manufacturer Vivergo to shut down at the end of November as margins vanish. U.S. biodiesel prices rebound and manufacturing margins improve.
Dent in Soybean’s Armor
With a half month of trading days until the December WASDE, and many seemingly more focused on Bitcoin’s approach to the $10,000 level and buying holiday gifts this Cyber Monday, there continues to be little in the form of inputs for price movement in grains and oilseeds. Weather in Brazil remains fairly benign with moisture expected over the next 5 days in all but the southern-most reaches of the corn and soybean areas, while Friday’s holiday-delayed Export Sales announcement showed continued slowing in demand for U.S. supplies to the point where “everyone” is starting to raise the red flag as far as achieving the USDA’s full-year expectation. Yet beans remain the darling of the complex for bulls, outperforming both corn and wheat for the past month if you exclude the overnight roll to March which “added” 12.5 and 19 cents respectively to the now front month contracts.
Japan Still Higher Runs, Crude and Product Stocks Build
The key takeaways are that runs continue to rise and supply growth is rising ahead of demand, such that finished product stocks built on the week. Gasoline demand is coming in near forecast, while gasoil is somewhat lower than forecast. Kero demand took a big hit last week on a pullback in downstream stock building, which backed up into primary stocks. Retail price increases continue, which could threaten demand performance. Despite the rise in runs, crude stocks built almost 3 MMBbls, but are basically bouncing around and trendless. Kerosene demand fell back sharply by 170 MB/D, as downstream restocking ebbed sharply and stocks posted one last big build. Degree days are running ahead of ahead of last year and ahead of norms. Implied refining margins moved up on the week and remain decent. Retail prices continue to rise and that “push through” accelerated last week, with the indicative marketing margin taking a jump higher.
What Price Could Have Just Been Reached Between Poland and U.S. LNG?
Recently, PGNiG of Poland signed a contract to import 9 cargoes into Polskie LNG in Northwest Poland. PIRA has been regularly stating that Europe is not a good region for contracting with the U.S. because price levels generally are not interesting enough to encourage contract-type price levels from Sabine Pass. Enter Ukraine. The combination of a steep price ascent across Europe and the added premium for Ukraine has created a window of opportunity for U.S. medium term supplies – not just spot. While we don’t see this as a long-term potential phenomenon, it does show how there are still niche pockets of temporary demand that can emerge where LNG supply doesn’t just have to be spot or long-term.
Price Spikes Highlight Structural Tightness in the German Market
A lift from prices in neighbor markets have certainly contributed to recent hourly price spikes in Germany. However, while higher versus Germany, French maximum prices so far this quarter have settled well below year ago levels (€195/MWh vs. €874/MWh in 2016), and French average prices over the quarter are €4/MWh lower this year. This is to say that the tightening of the German market is more structural, and is not necessarily the result of the French supply shortfall. This is confirmed by the occurrence of scarcity prices, which now seem to be emerging at relatively higher temperatures and/or wind output levels.
Coal Prices Rebound; Winter Risks Preventing Downside…For Now
Seaborne coal prices rose notably this week on stronger oil and gas prices, and perhaps reflecting the market’s unease about the pace of price declines over the previous two weeks. CIF ARA and FOB Richards Bay prices increased by a larger extent than FOB Newcastle, although FOB Newcastle prices maintained a narrow premium over FOB Richards Bay prices. While shortage concerns have faded since late-October, coal demand has not yet reached its seasonal peak, and the potential for weather-related supply disruptions in 4Q/1Q have heightened due to intensifying la Niña conditions. In 2018 and beyond, however, coal supply and demand fundamentals will be considerably less supportive to pricing. Over the next several weeks, PIRA believes that coal prices will continue to oscillate between these two sentiments.
Solid WCI Carbon Auction as Unsold Allowances Return
As expected, the November WCI current and future vintage carbon auctions maintained full subscription and both posted record-high clearing prices. The current vintage auction cleared within 1% of the comparable secondary market price on auction day, which historically indicates a solid result. The current vintage volumes were elevated by the return to auction of previously unsold CA and QC state-owned allowances. Compliance entities dominated the buying.
Global Equities Set More Records
Global equity markets set more records this week, with the S&P 500 closing above 2,600 for the first time, and gaining about 1%. The strongest domestic sectorial performers were technology (+1.8%), housing (+1.6%), and industrials (+1.3%). Retail eased -0.5%. Internationally, all the tracking indices gained, with all but Latin America, outperforming the U.S. There were solid gains posted from China, emerging Asia, Europe, and Japan.
U.S. Ethanol Manufacture Reaches a New High
U.S. ethanol production soared to a record 1,074 MB/D last week, eclipsing the previous record of 1,061 MB/D established during the final week of January. Output was up 20 MB/D from the preceding week, with all of the gain occurring in the Midwest. Total inventories built by 400 thousand barrels to an 18-week high 21.9 million barrels. Ethanol-blended gasoline production increased by 11 MB/D to 9,111 MB/D, following higher total gasoline output.
Cape Freight Rates Stay Firm Despite Chinese Steel Cuts
Chinese steel output has peaked ahead of mandatory cuts to control pollution, although high profit margins have incentivized Chinese steel mills to build iron ore inventories. This has severed to keep Australian and Brazilian iron ore exports steady. As a result, the five-route capesize average rose to over $23,500/day recently. PIRA has a bearish outlook on short-term Cape freight rates and worries over the long-term market implications arising from the recent spurt in new ship ordering.
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.
