U.S. While Commercial Stocks Build Crude Deficit Reaches New High

Overall commercial stocks built 4.4 million barrels for a rare narrowing of the year on year inventory deficit by roughly 3 million barrels to 139 million barrels (10.3%). Adjusted demand growth weakened to 2.8%, or 560 MB/D, but should strengthen this week. Crude inventories built 1.9 million barrels, the second consecutive weekly build, as the refinery maintenance season begins to take hold, though the build was less than normal and 12 million barrels less than last year’s increase for the same week. For this week’s data, S&P Global Platts Analytics sees a sizable 5.8 million barrel crude stock build as runs come off 560 MB/D. Cushing crude stocks continue to draw this week, falling 2.4 million barrels, for the eighth consecutive weekly decline and a decline of 13 of the last 14 weeks, totaling an astounding 28.3 million barrels (44%). Gasoline inventories continue to build this week, up 1.6 million barrels after last week’s 3.4 million barrel increase, while distillate reverses last week’s 3.9 million barrel stock increase to show a very slight decline.

After Financial Market Volatility, Has Anything Changed for the U.S. Growth Outlook?

There were no major economic releases in the U.S. this week, but financial markets continued to experience volatility. Volatility in markets is often a warning signal, and must be taken seriously. But this time around, it does not appear to threaten the solid outlook for U.S. economic growth. Specifically, 1) interest rates are higher partly reflecting greater economic uncertainty, but are not high enough to damage growth; 2) worries about uncertainty have had contagious effects in equity markets, but equity prices have not fallen far enough to flash red signals; 3) meanwhile, other measures of economic confidence are at elevated levels, pointing to solid growth – healthy economic data should eventually help to stabilize sentiments in financial markets.

NGL Prices Slide Lower Following Crude Declines

Propane and ethane prices fell 1.8% and 2.0% respectively. Raw mix NGL production fell slightly below 4.0 million b/d, with most of the decline in PADD 3. Propane production increased to 1.9 million b/d, which helped to hold propane inventory draws to 4.1 million b/d for the week ended February 2. The EIA reported LPG exports of 696,000 b/d, which Platts Analytics believes is unstated based on evaluation of cFlow data. Exports of 980,000 b/d are expected for the week ended February 9. The LPG market has lengthened as winter demand came in below expectations. Steam cracker feedstock margins were mixed last week with gains in normal butane and pentanes-plus margins and losses in ethane and propane margins.

Weather Market

With less than expected rains this past weekend in Argentina, and a five-day forecast that is expected to provide absolutely no relief, soybeans are in a bonafide weather market. As with all Argy-centric concerns, the impact is being played out in soymeal, where the 2-year hurdle of $350 in prompt month futures was disposed of in rapid fashion on the opening Sunday night. While prompt meal futures are trading at their highest level since the summer of 2016, prompt beans still have the January 1004.75 high and December’s 1015.00 to overcome. This lag is being caused by the size of the Brazilian crop as almost of all the rains in South America have stayed to the north of Argentina.

U.S. Gas Weekly Report

Henry Hub spot prices averaged $2.84/MMBtu for the week-ended February 8, a ~15% decline week-on-week. Interestingly, price action weakened despite colder conditions —with population-weighted U.S. temperatures cooling week-on-week by 9%. Softer pricing —despite higher demand —could be partially traced back to more limited injecting (buying spot gas) into salt facilities in the South Central. Indeed, after two weeks of net-injections, the salt sample is back to a net-withdrawal of 7.4 Bcf for the current week. Injection season prices continued to erode last week, with the NYMEX summer strip trading below ~$2.80/MMBtu.

Japan Product Stocks Draw Again, with Higher Demand and Lower Runs

Runs again fell back for the third straight week. Crude imports also fell back, and stocks were marginally higher. Finished product stocks drew 2.31 MMBbls, which is along seasonal trends but a bit more aggressive than typically seen. The draw was driven by solid pulls of jet-kero and gasoil. Balances remain very constructive to cracks. Gasoline demand jumped 91 MB/D and was a bit better than expectations. Gasoil demand performed strongly on the week by gaining 121 MB/D. Gasoil stocks drew -1.55 MMBbls (222 MB/D) and remain tight, having digested about 80% of the bulge in stocks that occurred at year-end due to the holiday impacts. Kerosene demand was sharply higher as weather remains very much colder-than-normal. The stock draw rate accelerated further and is running faster than seasonal norms with stocks increasingly in deficit. Implied refining margins remain acceptable and gained again on the week. Both the margin on gasoline and gasoil/diesel remains above norms, though the ability to push through higher costs to retail appears to be possibly peaking.

U.S. Ethanol Prices Surge

U.S. prices rallied last week as the market tightened. Production and stocks fell while the output of ethanol-blended gasoline increased. Export demand strengthened as Brazil’s South-Central region is in its inter-harvest period and the arbitrage for shipping to several Asian countries is open. A draft of RenovaBio, a Brazil’s new national policy to boost the use of renewable fuels, is scheduled to be released this month. U.S. biodiesel prices fell last week, but are expected to rise if the $1 federal biomass-based diesel blending credit is extended, which now seems likely.

The Cresting of Season Gas Demand and the Lingering Demise of Gas in Power Returns

Prices really downplayed the jump in demand last week, which strongly suggests that the market sees considerably less price risk for the balance of the winter. With stocks above normal, Russia volumes surging, and the French power market growing by the day in length, most of the price risk is coming from the downside. Warmer than normal weather by midweek will be revealing in terms of how much lower prices will go in the short term. The outlook for 2Q continues to deteriorate.

Chinese New Year Comes with Tight Balances and Limited Capacity to Balance

China is approaching its New Year’s holiday with quite a bit of fear regarding its energy balances. Most recently, flows along the Central Asian China Pipeline from Turkmenistan into Northwest China were cut by 42%. With more slack capacity in the coal system than the gas system, we believe that these events would have a very limited potential impact on global LNG balances, other than the natural inclination to add length when alternative supplies are compromised. Longer-term, the issue of limited LNG import capacity and breakdowns in pipeline imports emphasizes China’s reliance on foreign energy. Chinese domestic production has risen to 404-Mcm/d last year, up 8.5% year-on-year, however that still didn’t hold it back from importing 145-Mcm/d of LNG and 115-Mcm/d of pipeline gas.

Weak Fuel Prices and Hydro Bearish for French (and Continental) Power, but Upside Left in 2Q

A cold spell this week failed to translate into a major price surge in France, with considerably higher hydro generation and lower gas prices contributing to keep a lid on power prices. Although the March contract has been holding up quite well, in line with our forecast in the latest monthly Outlook, the 2Q contract is trading at levels that are overly bearish from a fundamental point of view.

Coal Prices Shift Lower on China Policy Moves, Weaker Oil Pricing

Seaborne coal prices shifted significantly lower for the second consecutive week, amid a wave of bearish sentiment in equity and commodity markets. Once again, CIF ARA prices declined by the greatest extent, due to prevailing weakness in European coal demand fundamentals, as well as a downshift if dry bulk freight rates. 2Q18 CIF ARA prices have now dipped below $80/mt, a level that should discourage imports of both low-sulfur (CAPP) and high-sulfur (NAPP) coals from the U.S. FOB Newcastle forwards declined considerably as well, with virtually the entire forward curve shifting $5.00/mt or more lower week-on-week. With China’s NDRC and the Qinhuangdao Port Authority taking measures to boost coal production and cap coal pricing, the Pacific Basin market naturally turned bearish, particularly with the Chinese New Year (and the related slowdown in demand) fast approaching. With stockpiles in China still extremely low, S&P Global Platts Analytics urges caution regarding the speed at which prices have declined over the past two weeks, although we reaffirm our standing view that seaborne coal fundamentals remain bearish for pricing over 2018 as a whole.

Crude Tanker Markets off to a Poor Start in 2018 due to Excess Supply

Crude tanker markets got off to a poor start in 2018 as OPEC cuts and excess supply weighed on rates in all size groups with the Suezmax sector especially weak. Higher bunker costs are putting added pressure on tanker margins with most trades near or below cash-breakeven levels. Product tanker rates in the Atlantic were the exception on continued strong exports from the U.S.

Financial Stresses Continue to Rise

The S&P 500 was down about -5.2% on the week, with the overall decline from the highs now about -8.8%. Obviously, volatility has blown out, while “Skew/VIX” remains at an extreme and could be suggesting that much of the uncertainty has now been priced in, at least in regard to the options market. Most importantly, many of the divergences we had been seeing in some key charts are beginning to resolve themselves, which is a very good thing. The U.S. dollar rallied 1.45%, and was even stronger against the Russian ruble. The total commodity index fell back -3.9%, with energy falling back -9.01%. The St. Louis financial stress indicator again moved notably higher as a confirmation of increasing stress.

Weekly Ethanol Supply Report

U.S. ethanol stocks rebounded last week, building by 444 thousand barrels to 23.5 million barrels, the third-highest ever reported. PADD II inventories are the most since March 2017. Domestic ethanol production jumped 17 MB/D to 1,057 MB/D. Ethanol-blended gasoline output increased to 8,634 MB/D from 8,511 MB/D in the preceding week, but was down 0.6% year-on-year.

February WASDE

In short, U.S. corn demand was increased via exports, while U.S. soybean demand was slashed in the very same category. Globally, the World Board continues playing their zero sum game with the soybean balance sheet while tightening excess corn supplies, which is the correct course of action for corn in our opinion. What was not the correct action was leaving Brazilian corn production at 95M MT, unchanged from January, especially after CONAB lowered their estimate to 88M MT just Thursday morning. It’s almost 5,000 miles from New York to Sao Paulo but even we could see a necessary cut from that far away. In case the USDA doesn’t have it, 011-61-3312-6000 is CONAB’s phone number. Next time, pick up the phone and compared notes.

Asian Product Markets: Recap of 2017 Demand and Trade Trends; Outlook for 2018

Asian oil demand increased on average by ~1.2 MMB/D per annum between 2015 and 2017, driven by the “Big Four” consuming countries (China, India, Japan and South Korea), which together accounted for some 80% of regional growth over the same period. Despite the robust demand over the last three years, Asia’s “Big Four” have been exporting increasing volumes of key refined products such as gasoline, kero/jet and gasoil/diesel due to higher refinery runs. However, total net exports of these products (including imports of blending components) moderated last year, with an increase of just 3% (after rising ~10% in 2016). For 2018, Asian crude runs are expected to increase by ~1.2 MMB/D, more than double the growth of last year, driven by China and India. China’s runs are expected to rise by 0.8 MMB/D this year as the near term imposition of a consumption tax will severely cut blending component imports and that will likely be backfilled to some extent by higher refinery crude runs. However, oil demand will remain robust in the region. The Asia-Pacific region as a whole is expected to see its net exports of key products (including blending components) at ~0.78 MMB/D this year, marginally higher than levels last year. Overall, Asian product markets look reasonably constructive in 2018 as regional net exports of key products are expected to remain fairly steady (only marginally higher inclusive of blend component trade), withstanding the ripple effects of China’s tax change.

Equity Markets Continue to Retrench

Global equity markets continued their broad decline and fell -6.4% on a weighted basis. In the U.S., the decline on the S&P 500 was about -5%, with all the tracking indices moving lower. Retail held up the best and declined -1.7%, while energy was the weakest, falling -8%. All the international tracking indices also declined, with China posting the biggest decline -8.3%.

Status of Canadian Oil Pipelines

Each of Enbridge’s Line 3 replacement, Trans Mountain expansion and Keystone XL have general commercial support but are awaiting final regulatory approvals and will likely face protests and potentially civil disobedience when they proceed to full construction phase on portions of their planned routes. Canadian crude oil prices will continue to be depressed until sufficient pipeline takeaway capacity is in place and, therefore, they will be hostage to political developments.

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.