Brazil’s REPLAN Fire Dampens Refining Recovery Prospects in Latin America

Latin American refining was affected by Brazil’s REPLAN outage in addition to Mexican & Venezuelan persistent low runs. A fire on August 20 paralyzed Brazil’s REPLAN (385 MB/) refinery in Brazil. The refinery supplies over 20% of Brazil’s distillates. A partial restart may happen this week but the call on imports will be higher. Despite the REPLAN incident, Platts Analytics expects 3Q18 Brazilian runs to be 85 MB/D higher year-over-year. But overall Latin American crude runs are forecast to be 230 MB/D lower year-over-year in 3Q18. A weaker economic outlook in Latin America is hindering diesel demand growth: 3Q18 diesel demand forecast at 2785 MB/D, 55 MB/D lower year-over-year. Similarly for 3Q18, Latin American gasoline demand is estimated to be 70 MB/D lower. Latin American gasoline and distillate imports are set to remain strong amidst soft local refinery output. 3Q18 Latin American gasoline imports are projected 100 MB/D higher year-over-year and are set to increase by 85 MB/D year-over-year in 4Q18. Latin America distillate imports are forecast 190 MB/D higher year-over-year for both 3Q18 and 4Q18.

US Gas Short-Term Forecast - August

Platts Analytics has revised prices upward in response to the continuation of the massive shortfall in storage inventories. While current fundamentals skew bullish, mild conditions at the start of the heating season would accelerate downside price risks currently forecast for summer 2019, given expected gains in production in Q4.

China’s LNG growth prospects enhanced by new import capacity, pledge to environment: will higher costs preclude a robust gas strategy?

China is again forecast be the main driver of demand growth globally. Increased nuclear capacity utilization in both Japan and Korea is putting the two solidly on a down spiral for LNG, at least for the winter, with incremental losses for the latter two amounting to some 27- mmcm /d in the November to March period. However, three new regasification terminals in 2018 in China will enhance growth prospects there and help offset the declines elsewhere in the region.

Exports, Disciplined Production, and Low Stockpiles Point to Continued Price Support

With stockpiles reduced slightly this month, thermal coal exports continuing at very high levels, guidance from producers pointing to potential upside for export shipments and natural gas prices rebounding on inventory concerns, fundamentals continue to point to elevated price levels over the short term.

RGGI Prices Firm - Spec Interest, NJ/VA Linkage Remain Key Price Drivers

RGGI allowance prices moved upward in Jul following the bullish June auction. The August average is similar to July, but prices have fallen over the month. Strong speculative buying at the June auction jumpstarted the market. With nearly 14 MsT available at the upcoming Sep auction, a key wildcard will be whether there is continued heavy interest from speculators. Emissions are up year-over-year in 2018, and the finalizing NJ and VA program details could also contribute to positive pricing momentum this year. ECR triggers will develop into a key influence on RGGI prices going forward. Ongoing efforts by the DOE to delay coal and nuclear retirements remain an important uncertainty for RGGI balances, though no timeline for implementation has been announced yet.

Expect crude stocks to draw and distillates to build in U.S , due to high refinery runs

Total hydrocarbon inventories decreased by 2.5 MMB last week, which was aligned with our expectations. Reversing previous week’s surprising build, crude stocks dropped by 5.8 MMB, while aggregate clean products’ inventory built 4.17 MMB. As expected, crude stocks at Cushing increased by 0.8 MMB, rising to 24.2 MMB. This is the second consecutive build, after falling 12-straight weeks. This was partially driven by continued higher import volumes from Canada and the Rockies. Local refinery demand in PADD 2 increased slightly over the past week; moreover, a marginal drop in Canadian imports into PADD 2 earlier in the month will start showing up at Cushing. As a result, we expect inventories at Cushing to increase by 0.4 MMB this week.

U.S. economic growth not cooling down; global trade data show resilience

In the U.S., recent strong gains in consumer spending and investment are more than offsetting soft data in the residential sector. The Fed has taken note of the economy’s healthy performance, and is signaling a rate hike at the next meeting. But policymakers are also expressing concerns about the risk of a trade war. In the euro area, recent business confidence data were constructive, while the pace of wage growth picked up substantially. Second quarter data for the world trade volume showed resilience, and available trade data for July were encouraging.

Propane Prices Rebound

Front-month non-LST propane gained 7% ending the week at 101 cents/gal. Propane is priced at 62% of WTI, up from last week’s average of 60%. Friday’s price assessment was the first time USGC propane has priced above a dollar since last February. US propane/propylene stocks fell by 940,000 barrels during the week ended August 17, according to EIA data. Total stocks now stand at 68.8 million barrels, 5% below year-ago levels and 13% below the five-year average. The EIA reported exports of 1.198 million b/d, compared with Platts Analytics’ estimate of 1.07 million b/d based on ship tracking data. For the week ending August 24, exports are expected to be 1.04 million b/d. Spot arbitrage margins for US propane to Asia and Europe have largely been unfavorable since mid-July, which could dampen exports in September. Steam cracker feedstock margins remain weak and declined last week for all NGL feedstocks except ethane.”

U.S. ethanol prices were the lowest in Six Months

Ethanol stocks built for the third straight week. Manufacturing margins tumbled to the lowest since January as ethanol and co-product values decreased while average corn prices increased. Hydrous ethanol prices were less than 60% of gasoline in the South-Central region, making them the most competitive in about six years.

U.S. SPR: 11 MMBbl of October/November Deliveries Already Assumed in Our Balances

On August 20, the DOE issued a Notice of Sale for 11 MMBbl of SPR deliveries between October 1 and November 30, which will result in 180 MB/D hitting the market over these two months. The sales for Fiscal 2019 (October 2018-September 2019) were already mandated by Congress through two non-energy related bills passed between November 2015 and January 2016. On the surface, the sales appear conveniently timed to coincide with the official snapback of U.S. sanctions on Iran on November 5, as well as midterm elections on November 6. While containing pump prices for voters is likely a concern for the Trump administration, the DOE utilized an identical timetable last year. Specifically, 14 MMBbl were delivered in October and November 2017, as required in Fiscal 2018 by the same two bills. Therefore, our balances already assumed yesterday’s Fiscal 2019 announcement would take place in October/November 2018. More surprising would be a separate, price-related release by the Trump administration, which could total 30 MMBbl over two months to soften the blow of Iran sanctions. We do not currently assume this type of release, given softer prices in recent weeks and the ability of Core OPEC and Russia to raise production. But with Iran sanctions expected to bite hard by 4Q18, as well as unstable geopolitics overhanging production in Libya, Venezuela, and Nigeria, tighter balances and higher prices in the months ahead could cause a rethink.

North American Gas Regional Short-Term Forecast - August

Dominion South basis pricing this month is its strongest since the end of the winter, coming in at ($0.36)/MMBtu thus far in August. The monthly average is up more than 10 cents from July. The mismatch between Atlantic Sunrise’s 1.7 Bcf/d of stated capacity and the amount of incremental capacity to get out of the Northeast (0.6-0.7 Bcf/d) is part of the reason that Platts Analytics is significantly below the market view for Transco Zone 6 this winter.

High gas prices continue to limit gas for power demand, despite the rocketing carbon price

The rapid increase in the EUA price to over €20/tCO2 should be favoring gas generation as coal prices hang on to gains made earlier this year. However, the gas rally means that Continental Clean Spark Spreads remain negative with gas generation out of the money until Summer-19. This is indicative of how tight the gas market remains. Our view is in agreement that continental Europe can’t afford to see additional gas to power demand until S-19, and it will continue to price itself accordingly.

Producer Capacity Utilization is Disappointing this Summer, But is Being Compensated for to Some Extent

It’s nice to build liquefaction facilities, but it is even nicer to use them. What we’re discovering this summer is significantly lower than normal utilization of liquefaction terminals leading to tightness in the global LNG market. This low utilization is forcing Europe into a significant supplier this summer, as opposed to predominantly a consumer. If producers normalize their utilization rates, it would mean that top producers will still turn down from current levels by another 3%-4% of capacity by mid-October. With East Asia and Europe still looking to refill storage facilities, both conventional and LNG, this may go a long way to explaining why spot LNG prices remain so elevated.

Despite revision of nuclear availabilities, downside risk remains for Sep and 4Q French peak contracts

The heatwave that has caused a number of capacity reductions across the French nuclear fleet came to an end last week, but short-term outage revisions published by EDF on Aug 20 have stirred the market once again. By Aug 22, the increased risk added €3.8/MWh to the September contract and more than €2/MWh to the 4Q contract in France. The result is a relatively narrow 4Q vs. September spread, around €8/MWh, suggesting a fairly relaxed French market in September relative to 4Q. If we look at the Clean Spark Spread though, the market is pricing next month’s nuclear output, expected to exceed 40 GW based on current availability of 50 GW, similarly to the historic low levels of Sep-16 (36.7 GW). The low Belgian nuclear availability is certainly playing a role, but the overall risk for the CSS is more on the downside than upside. As for 4Q, risks around the Belgian nuclear fleet are much smaller than the expected year-over-year surplus in French nuclear output and, together with net year-over-year improvements in hydro stock across continental Europe, bearish risk remains also for the 4Q on-peak contract.

“ ReCO ” nciling differences: PJM re-proposes capacity market changes

PJM’s proposed capacity market changes are scheduled for a FERC hearing November 26, 2018, after FERC granted an extension. The proposed changes utilize “resource carve-out” (ReCO) as an option for resources unable to attain an exemption to MOPR.ReCO looks to have a bearish impact on the auction clearing price, however a decrease in price could be offset by a “repricing element” which remains an option from a previous proposal.

Cape Freight Rates Weakened Last Week but This Looks Like a Blip

The Dry bulk freight markets has remained strong over the past month, bolstered by record iron ore shipments out of Brazilian ports. However, there were signs of the market easing last week. The surprising strength of the Chinese steel market and further cuts in Chinese domestic iron ore production bodes well for Capes. Chinese mills still have sizeable profit margins (for the moment) and will be looking to pull out the stops ahead of winter production cuts. We expect Cape rates to rally again before the end of the year. The specter of a global trade war continues to grow and could start to damage economic growth and sap market strength.

August WCI Auction Consistent with Secondary Market; Future Vintage Sells Out

In the absence of Ontario, the August WCI current vintage auction cleared at $15.05 – higher than the previous auctions this year and just one cent below November 2017 (which had the highest auction clearing price to date). The auction was also in line with the comparable secondary market price on auction day, although prices had increased over the past week since the auction was held. The future vintage auction returned to full subscription, with the V-21s selling out at a price of $14.90. The number of registered bidders from CA increased vs. the other auctions this year, though QC declined. The auction results are consistent with allowance prices continuing to move up this year towards the 2019 auction floor price.

In Japan Typical Holiday Impacts Apparent, Margins Improving

Two weeks of data were reported coming off the August hiatus and Mountain Day holiday. Runs rose as expected and achieved our target of 3.3 MMB/D. Crude stocks did not rise as much as expected with imports remaining low. Finished product stocks built in the latest week due to a continuing build in kerosene, along with a big, but expected, gasoilbuild and depressed demand due to the holiday. Gasoline demand performed as expected due to holiday impacts. The implied refining margin has continued to improve. The implied marketing margin remains above statistical highs for both gasoline and gasoil /diesel.

Credit Conditions Improved, Stresses Remain Low

This was a very positive week, with the S&P 500 gaining almost 1% and hitting a new record high. Equity volatility (VIX) and oil volatility (OVX) moved notably lower. Credit metrics also performed well, as did commodity prices for energy, industrial metals, and precious metals. The U.S. dollar weakened by about 1%.

Inventories climbed to a record high

U.S. ethanol production inched higher last week, rising by 1 MB/D to 1,073 MB/D. Ethanol stocks built for the fourth consecutive week, rising by 242 thousand barrels to a five-month high 23.3 million barrels. Inventories in the Gulf Coast climbed to a record 5.4 million barrels. Ethanol-blended gasoline production slipped by 49 MB/D to 9,328 MB/D along with lower gasoline output.

US Gas Weekly Report

The NYMEX September Henry Hub futures contract traded in a 10 cent range last week, spending a majority of the time at in the $2.90-2.99/MMBtu area. Since the start of the month, the September contract, 2018-19 winter strip, and 2019 summer strip have all moved higher, rising by $0.20/MMBtu, $0.15/MMBtu and $0.10/MMBtu respectively. The next 30 days should prove to be volatile, as forecast calling for more above-normal temperatures should influence demand while storage capacity holders, particularly in downstream markets, are focused on lifting inventory ahead of winter.

Coal Pricing Mixed, High-CV FOB Newcastle Premium Persists

Seaborne coal pricing was mixed over the past week, with a sizeable decline in pricing on Monday largely winnowed away by steady gains over the balance of the week. Stronger oil and gas prices over this period were likely behind some of the strength in coal pricing last week. On balance, the entire FOB Newcastle forward curve declined week-over-week, while both CIF ARA and FOB Richards Bay pricing, particularly beyond 4Q18, moved slightly higher last week. Another bout of hot weather conditions in Europe saw coal burn increase both week-over-week and year-over-year, despite the strength in carbon pricing. While last week’s relative price movements closed the wide gap between FOB Newcastle and the rest of the market slightly, the spread remains unsustainably wide. Australia’s thermal coal exports totaled 18.0 MMmt in June, the highest monthly tally since July 2017, and 1.8 MMmt higher than prior-year levels. Now that demand has seasonally peaked, it will be a race to rebuild stockpiles ahead of the Northern Hemisphere winter, and Australian supply will be key to that race.

Fire at Brazil’s Largest Refinery Impacts Distillate Production, Boosts the Call on Imports

On August 20th, Petrobras’s REPLAN (385 MB/D per Platts Analytics World Refinery Database) refinery in Sao Paulo, the largest one in its local system suffered an explosion and subsequent fire. The incident damaged a fluid catalytic cracker (FCC) with a 53 MB/D capacity, a crude distillation unit (CDU) with a 193 MB/D throughput capacity in addition to ancillary equipment and pipelines. Since the event, the refinery has been shut in order to assess the damage and clean up. Recent reports indicate that repairs to the affected units could take several weeks but that the portion of the refinery that was not affected by the incident may resume operations as early as next week and restart procedures could begin by the end of the week.

Global Equities Post Solid Gains, a New Record High in U.S

Global equities posted a solid gain of 1.4%, with the U.S. S&P 500 setting a new record high. The strongest performing U.S. sector was energy (+2.6%), while housing, tech, and retail all outperformed. Internationally, those tracking indices performed even better than the U.S, with emerging markets, China, and emerging Asia all posting gains of about 2.6%, while Europe gained 2.3%.

China’s Key Product Exports to Decline in 2H18 vs 1H18 as Beijing Limits

Asian product markets have been pressured by a surge of Chinese key refined product exports (allowed by higher export quotas) over the last few years. China’s exports ofgasoil /diesel, kero/jet and gasoline for 1H18 surged again, up 31% year-on-year to ~1.06 MMB/D. There are concerns that outflows will continue on its current trajectory for 2H18, particularly with China’s slowing oil demand growth and MOFCOM’s history of issuing more quotas than it originally planned. However, Beijing may issue only another 3 million tons of quotas, taking the total to 46 million tons this year and we believe there are strong reasons to expect strict enforcement of quota limits and environmental/tax regulations. Overall, S&P Global Platts Analytics expects there will be an increase of 0.41 MMB/D year-on-year in refinery runs in 2H18, as compared to 0.58 MMB/D growth in 1H18 and gross exports of the three key products are expected to drop from 1.06 MMB/D in 1H18 to 0.92 MMB/D in 2H18, taking overall exports to ~1 MMB/D for 2018, up 12% year-on-year. On a year-on-year basis, key product exports are expected to change with an increase of ~31% in 1H18 to a decline of ~3% in 2H18.

Asian Oil Demand: Expected Re-ignition of Demand Growth Fails to Materialize

An expected rebound in demand growth failed to materialize due to China’s apparent demand remaining negative vs. year-ago. Major country demand growth was only 38 MB/D, against an expectation for growth of about 300 MB/D. Performance was essentially the same as seen in the July snapshot. Over the period February-April, growth had been upwards of 1 MMB/D, but that melted away in late 2Q and now into 3Q. According to our balances, Chinese apparent demand growth is expected to rebound in the September snapshot and average upwards of 600 MB/D through year-end. This is the critical assumption to overall Asian demand growth. Such an occurrence will boost Asian major product demand growth in the Sept-Nov snapshots to over 900 MB/D, with some modest slowing to about 775 MB/D in Dec ’18 -Jan ’19.

Complimentary Webinar, August 29, 1 pm EDT — Register for: The Texas Nexus: Demand Beyond the Border - Permian Basin and the US Gulf Coast: Connecting the Disconnect. . Part of S&P Global Platts Analytics Summer Webinar Series – 2018.

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