Finance News

PIRA Energy Market Recap April 16, 2018

Asia Continues to Expand Refinery Capacity to Meet Growing Demand

PIRA copyLarge crude stock draws expected for June through September will likely force steep backwardation for both WTI and Brent, setting the stage for $75 to $80/Bbl Brent this summer. S&P Global Platts Analytics expects Dated Brent prices to average ~$71/Bbl in 2018, up from $54/Bbl in 2017. Global oil demand is expected to grow by ~2.1 MMB/D in 2018, before easing to 1.7 MMB/D in 2019, and Asia will account on average for ~50% of global growth over the next two years. In response to robust regional demand growth, Asian refiners are expected to add CDU capacity by an annual average of 1.2 MMB/D over 2018-19. Overall, Asian refining fundamentals should continue to be moderately supportive this year, with Singapore cracking margins averaging ~$6.40/Bbl for 2018. The bunker spec change in 2020 will be very disruptive. Changes in operations and prices will accelerate in 2H19 with much wider clean-dirty product spreads and crude quality differentials.

platts logo copyLoad Growth in High Gear!

Spot on-peak energy prices in Eastern and ERCOT locations were mixed year-over-year with loads, gas prices and outages having mixed effects as spring starts. Raw loads increased by ~ 0.7% year-over-year in East and ERCOT. Estimated weather-adjusted loads also showed a 1% gain in March. With sixth straight month of weather adjusted load gains in East and ERCOT, load growth is certainly trending upwards. The higher load growth has price implications especially for ERCOT where summer margins are tight. Despite lingering cold conditions in the Eastern half of the U.S., the front of the natural gas futures curve remains stubbornly anchored at the lower end of the year-to-date trading range, with the May contract hovering around ~$2.65/MMBtu. Platts Analytics has revised summer HH prices upward by 10¢ to $2.90 /MMBtu to reflect limitations on production growth alongside demand competition.

EUA Prices Continue Upward Momentum; Covered Emissions Up YOY in 2017

EU ETS emissions rose in 2017 on industrial and aviation gains, while power generation emissions were flat. This was the first annual increase in seven years, though the impact on European Carbon Allowance (EUA) settlement prices on the release day was somewhat subdued.

EUA prices should move seasonally lower in the next few months, although compliance-related purchases could support prices during April. Prices may continue responding to the 2018 fundamentals situation with Market Stability Reserve implementation, as well as supportive coal-gas switching economics.

There are downside risks for 2018 EUA demand, with non-emitting hydro gen expected to see record highs this year. This could lead to a more substantive downward price correction. Continued EUA price gains this year could also mute otherwise expected gains when the MSR is actually operating.

Faster Inflation in U.S.; Soft Industrial Data in Europe; Solid March Vehicles Sales in China/India

U.S. core inflation growth became faster in March and approached the Fed’s target level. While prices for transportation services correlate with energy, recent oil price increases having major effects on future core inflation are seen as unlikely. In Europe, February industrial production data disappointed, while growth in weather-adjusted electricity demand decelerated. March vehicle sales data from China and India pointed to steady gains in economic activity. SUVs are becoming increasingly popular in both countries.

Propane Prices Rebound

Propane prices rebounded 11.4% last week, which is a higher percentage increase than crude price increases. Ethane prices rose 0.5% in response to higher exports, specifically the new tender Mexico’s Pemex issued last week for ethane shipments through 2020. Raw mix NGL production remained relatively flat last week and remained in the 4.0 million b/d neighborhood. U.S. propane inventories continue to draw, minus 417,000 barrels, as cold weather lingers into early spring. The EIA reported implied demand for propane at 1.5 million b/d. The EIA reported propane exports of 593,000 b/d last week, which once again was notably lower that Platts Analytics’ estimates based on ship tracking data. Platts Analytics expects propane exports to be 725,000 b/d for the week ending April 13. Steam cracker feedstock margins remain bearish last week with only ethane’s margin gaining week-on-week.

U.S. Reports Record Ethanol Exports in February

U.S. ethanol prices fell the week ending April 9 after a higher Chinese tariff rules out U.S. exports. Stocks fell to a 14-month low the week ending March 30. The spring maintenance season is beginning. RIN assessments fell sharply.

April 1 was the beginning of the 2018/2019 sugarcane crop season in the South-Central region of Brazil. European ethanol prices are near a multi-year lows. Manufacturing margins are negative.

Slow Start

Certainly a long week of waiting ahead for most U.S. farmers as those in the Upper Midwest and Northern Plains dig out from yet another spring snowstorm while others tap their thermometers and simultaneously check the calendar. There is however some light at the end of this cold and white tunnel later this week as temperatures finally break the 50F barrier for an extended period. By next Tuesday the 24th spring will finally have sprung for much of the Midwest, although ground with optimal soil temperatures of 50F+ to plant corn, slightly higher for soybeans, may be hard to find, never mind the amount of snow melt and subsequent drying out needed before the planters roll. While sections of central Illinois devoid of any snow cover appear to be still “on schedule” for planting later this week, Iowa and Minnesota will see very little movement until May in the estimation of Platts Analytics. Longer term precipitation forecasts look relatively dry from Ohio to Iowa until May 1st, suggesting that the “50% by May 15th” targeted planting pace for corn is still very much possible despite this slow start.

US Gas Weekly Report

The prompt May contract was in a tight trading range last week, oscillating within a 10-cent band ($2.62 to $2.72/MMBtu). Similarly, Henry Hub cash was flat at $2.74/MMBtu week-over-week, decreasing by just $0.002/MMBtu from the prior week. The national benchmark has trended 44 cents/MMBtu behind levels seen this time last year.

U.S. Commercial Stocks Show Significant Gain

Commercial oil inventories built almost 6 million barrels last week, the largest weekly build of the year, narrowing the year-on-year deficit to a still substantial 141 million barrels especially with adjusted year-over-year demand growth strong at nearly 1 MMB/D. Crude stocks built 3.3 million barrels, with Cushing inventories up 1.1 million barrels. Cushing crude stock builds should now be over with this week’s forecast showing a 1.3 million barrel inventory decline, while overall crude inventories are flat in good part because of crude runs declining roughly 450 MB/D on the week. Lower runs and a demand recovery, particularly in gasoline, causes substantial light product inventory declines in this week’s EIA report.

Credit Conditions Look Better

Financial stresses are still elevated, but it was a strong week for commodities and the reflation trade. VIX volatility fell back under 20 and the S&P 500 gained about 2%. Commodities gained 2.7%, with energy higher by 5.7%, and industrial metals did well too, with a monster gain in aluminum. The St. Louis financial stress indicator rose again and is at its highest level since late June ‘16, but the overall stress level remains low.

The Maintenance Season is beginning in the U.S.

U.S. ethanol production continued to decline the week ending March 30 as seasonal maintenance is beginning. Output fell 4 MB/D to 1,034 MB/D and is expected to fall further this week. Ethanol inventories dropped in all five PADDs. Stocks fell 579 thousand barrels to 21.8 million barrels, down 1.1 million barrels from this time last year. Ethanol-blended gasoline output decreased by 8 MB/D to 8,954 MB/D.

Heightened Price Risk Emerges Despite Lack of Demand Support

Firmer spot gas prices will remain in place despite the loss of seasonal gas demand. The urgent need to begin injections is not lost on Continental storage operators faced with an uphill task. Taking total storage levels anywhere near the five-year normal by the end of Sept. will be difficult no matter how early the process begins. In reality, storage levels well above average will be needed given the heightened levels of risk emerging.

Taiwanese Markets Spur Strong Gas Demand, But with Limited Upside for Now

Taiwan is the 5th biggest consumer of imported LNG in the world, but until major infrastructure is put in place, potential growth will be hamstrung. Firstly, the country does not have enough gas-fired power capacity and secondly there is not enough capacity to expand significantly without increased LNG import capacity. Finally, with limited import capacity, Taiwan is unable to sign much in the way of new supply contracts and is forced into the spot market to secure additional volumes when it is physically possible.

India Ups Natural Gas Price

India has raised its domestic natural gas price by 5.9% to $3.06/MMBtu for the six-month period beginning April 1. The hike will increase the cost of piped natural gas for cooking and compressed natural gas for transport, two key gas demand growth markets, supported by oil-to-gas fuel switching. It will also result in increased costs for urea and power production. The price rise is in line with expectations of higher global benchmark prices, including crude oil and Henry Hub, an index used to price the recently started LNG contract between US-based Cheniere Energy and Indian utility Gail. The latest price hike follows one in October 2017, when the government raised the gas price 16.5% to $2.89/MMBtu for October-March.

Tenders Support Renewable Growth Ahead but Coal Phase-Out Leaves Price Upside Risks

The publication last week of the (partial) 2017 verified emissions in the EU power sector has shown negligible change year-over-year, in a stark contrast with a declining trend seen in the recent past, with a 4.8% year-over-year decline in 2016, 0.8% decline in 2015 and 7.9% in 2014. In particular, emissions declined in Germany and the UK but increased in Poland, Italy, Spain, Netherlands and France among the largest emitters. Keep in mind that the exceptionally low hydro levels last year have been driving the emission increases in Italy, Spain, with France also seeing nuclear output at multi-year lows in 2017. While these special conditions need to be kept in mind, it’s interesting though that the markets where emissions continued to decline in 2017, Germany and the UK, are also the ones that have seen a more rapid expansion of renewables in the past few years. Renewable growth has been rather sluggish for the rest of Europe.

Seaborne Coal Prices Continue to Rebound

For the most part, seaborne coal prices continued to rebound last week, with a downturn in prompt FOB Newcastle prices representing the only decline across the major forward curves. Heightened geopolitical risks in the Middle East drove global oil and gas prices significantly higher last week, which likely provided a significant amount of the bullish pressure for coal pricing this week. On the flip side, slowing coal demand from China and elsewhere in Northern Asia has given the market greater confidence that the prompt premium for Pacific Basin coal is no longer necessary, partially explaining the downturn in nearby FOB Newcastle prices.

More Flexibility Proposed for Tight MA CO2 Cap and Trade

April 6th proposed regulatory amendments would enhance compliance flexibility in the MA power sector CO2 cap and trade program that just went into effect this year. Extreme weather has invited additional scrutiny of provisions for emergency deferral of compliance obligations. The amendments would delay full auctioning of allowances, enhance deferred compliance for emergencies and loosen banking restrictions. Outstanding auction design elements will be detailed in future documents and third parties are not allowed to participate in auctions. Platts Analytics’ modeling shows emissions below the caps further out, but with tight balances over the next few years – forcing in-state units to ramp down in favor of increased imports.

Japan Still Lower Demand, Product Stocks Higher, but Crude Draws

Runs edged higher by 15 MB/D, but imports fell sharply such that crude stocks drew 3.45 MMBbls. Finished product stocks, however, built 2.8 MMBbls as demand continued to decline seasonally. There were moderate builds in jet-kero, gasoil, and fuel oil. The implied refining margin moved lower as cracks weakened. Implied marketing margins remain above average, which is a bit of an offset to weaker refining profitability. Gasoline demand rose 105 MB/D to 885 MB/D, a bit better than expectations. Gasoil demand was lower by 57 MB/D, but beat expectations. Kerosene demand was again seasonally lower and underperformed. The stock build rate eased back as yield fell sharply.

Global Equity Markets Rebound

Global equities rebounded 1.6% on the week, while the U.S. gained about 2%. Among the domestic tracking indices, the growth indicator outperformed and was higher by +2.5%. Energy was the strongest performer and gained 6%, while tech and materials also outperformed. Housing and utilities declined about 2%. Internationally, Norway did the best, reflecting strong gains in the energy sector. China, Emerging Asia and Europe also outperformed.

NJ Clean Energy Legislation Increases PJM REC Demand

The NJ legislature on April 12th passed 3 bills related to expanding clean energy. The first increases Class I RPS requirements to 50% by 2030 and sets a 5.1% by 2021 solar requirement, mandating the transition to a successor solar program once that target is met. Another aims to revive a stalled offshore wind project. The third directs the NJ BPU to procure ZECs from at risk nuclear facilities for up to 40% of the state’s electricity production. The bills are expected to be signed into law by Gov. Murphy. The expanded Class I RPS requirements will raise demand for Class I RECs in the PJM region, putting upward pressure on REC pricing. However, ambitious plans for offshore wind (with implementation details forthcoming) will reduce effective Class I requirements. New cost containment provisions could prove binding as well, resulting in possible reductions to effective Class I targets. PJM Class I REC prices increased on the news, reversing losses associated with the cancellation of the IL spot REC procurements.

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

At mid-month, April looks to be warmer than normal (3%) in the three major OECD markets with a net effect on oil-heat demand to be -104 MB/D. On a 30-year-normal basis, the markets are 13% warmer.

Anchors Aweigh on Shipping GHG Emissions Reductions?

The International Maritime Organization (IMO) agreed to a preliminary strategy to address GHG emissions from shipping, with a final plan to be in place by 2023. However, any specific future program would not likely have a market impact until the early 2030s. The IMO’s strategy dovetails with action taken by the European Union, who recently enacted GHG monitoring regulations for shipping and have threatened unilateral coverage absent global action. Unlike the upcoming coverage of aviation emissions by ICAO, the IMO’s strategy could require sector-specific emissions reductions, rather than a reliance on inexpensive carbon offsets. Given expected long-term gains in global shipping emissions, the IMO’s absolute emissions targets will be difficult to meet, although its emissions intensity targets may be more realistic. Current fuel switching and ship speed trends suggest it will be difficult to reduce shipping emissions with current technologies, while newer fuels are either not commercially available or limited in their ability to impact emissions.

Fracking Policy Monitor

The Trump Administration continues attempts to roll back regulations, but has started to engage in more standard “notice and comment” rulemaking in order to avoid adverse outcomes of litigation. EPA has begun rulemaking to stay the implementation of, and eventually repeal, regulations addressing methane from new oil and gas wells. A WY federal court has stayed implementation of the rule only 6 weeks after a CA federal court reinstated the rule. BLM has also finalized its repeal of the fracking on federal lands rule, which never went into effect due to a June 2016 WY court ruling. On the state side, in PA, final general permit drafts have been submitted to include new recordkeeping and reporting requirements, as well as emissions caps for wells, processing facilities, and other infrastructure. In OK, the OCC has implemented new requirements for monitoring and responding to seismic activity. OK producers are facing new taxes (with prospects for more), to fund teachers and public education. Several municipalities in CO have taken independent action to regulate local drilling.

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. To read PIRA’s Market Recap first, subscribe to PIRA Perspectives here.

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