U.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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