Upward Momentum in Prices Runs into Refinery Maintenance

Commodities are in sweet spot of global economic cycle; strong growth with easy money. Upward crude price momentum temporarily interrupted by refinery maintenance. Oil surplus is gone and crude stocks are relatively low. Seasonal stock build will be less than normal. U.S. shale will substantially grow but the market can easily accommodate; the dye is pretty much cast for 2018 given lead times. 2019 global balances look generally supportive of crude prices, especially with the upcoming 2020 IMO low sulfur bunker requirement. There are many geopolitical risks to supply and with relatively tight inventories, an unexpected supply outage would jolt oil markets higher. High utilization rates in swing refineries will continue to be required to balance product markets, supporting relatively strong margins. Expect a healthy gasoline season and a stronger than last year diesel market. WTI discount to Brent will stay fairly narrow as Cushing stocks continue to drain.

U.S. Ethanol Prices Rebound

Ethanol prices began the year on a bearish note pressured by record stocks and lower-blended gasoline production. The market rebounded later in the month on the back of rising crude oil prices. A total of 19.32 billion RINs were generated in 2017, down 0.8% from 2016, despite a slightly higher total renewable fuel mandate. Brazil’s ethanol exports were down 20.4% year-on-year. Today, the EU Commission initiated an anti-subsidy investigation against Argentinean biodiesel exports. U.S. biodiesel prices a 13-month high in January.

Unseasonable Warmth and Precipitation Drive Prices Down, as Risks Remain on Horizon

The warmest January on record has seen prompt European gas prices fall at similar rate to which they rose on cold and pipeline issues in December. The curve has started to follow as gas inventories gain comfort and power markets soften on rising hydro reservoir levels. Further bearishness could be found in the recent court decision forcing Ukraine to start taking gas directly from Russia for the first time since 2015, but we note that this should at least partly be offset by lower Russian flows to Northwest Europe. We see potential price upside in the near term on the risk of cold weather returning in February and March, as continued strength in global LNG and Oil mean European hub prices would have to rise significantly to attract further supply, or at the very least dissuade continued strong reloads. While we expect LNG markets to loosen in Q2-18, the backlash from further Dutch earthquakes will almost certainly lead to further Groningen permit cuts, and with a more populist Dutch government now in power, these could be significant.

“One Swallow Doesn't a Spring Make”

With January the warmest month in memory and plenty of water and wind, the French system was comfortable from a demand-supply point of view, shifting the market focus away from the ASN review of the reactors’ manufacturing files, which is still ongoing and expected to last until the end of the year. We expect that once weather conditions normalize, nuclear availability will once again regain a central role in the French price formation, even if hydro levels appear more adequate. We assume nuclear output to be about 1.1 GW above last year in 2Q and 0.4 GW in 3Q, but the market might be expecting nuclear generation more in line with 2015, an optimistic expectation given the ongoing ASN review. We therefore still see upside risks ahead for French prices. Our bullish forecast has implications for Italy and Spain, as both countries are relying on the availability of cheaper French power to meet their domestic demand.

Northwest Ramps up Exports as Runoff Projections Rise

Western on-peak spot prices were down at most of the region’s hubs led by a $7 drop in SP15 as SoCal citygate gas prices fell sharply. Mid-Columbia was not far behind, falling by over $4/MWh. Weaker than normal heating loads and rising hydro production left the Northwest flush with energy, filling outbound interties and displacing local thermal generation. While Eastern gas markets experienced frigid weather and volatility reminiscent of the 2014 polar vortex, Western gas markets were flat to down. Low storage in the East and rising Permian basin production with limited eastern outlets will likely sustain weakness in Western basis differentials going forward. Columbia River basin runoff projections (Apr-Sep) climbed to 107% of normal in late January as Upper Columbia precipitation increased in the last week of the month. One bullish note was a reduction in B.C. net exports at spot prices above Q2 levels. This suggests that B.C. runoff is expected to be weak and/or that more energy will be diverted to the now higher-priced Alberta market.

Cushing Crude Stocks Plunge to Three-Year Low

Cushing crude stocks plunged 13 million barrels in January, falling to near 35 million barrels - the lowest level in more than three years. WTI prices climbed above $65, and backwardation increased, with WTI backwardation now averaging $0.50/Bbl per month for the rest of 2018. Canadian differentials weakened further, as Western Canadian crude stocks remained at very high levels due to increasing oil sands supply and the ongoing impact of last year’s Keystone pipeline leak and shutdown. The deep discounts for Cushing WTI relative to Gulf Coast grades that had persisted since last August’s Hurricane Harvey are now gone. But the deep discounts were still in place when February was being traded, and will result in one more month (February) of high pipeline volumes moving from Cushing to the Gulf Coast. These high volumes add to the impact of the new Diamond pipeline from Cushing to Memphis in causing the Cushing inventory decline. Midland differentials strengthened in January, but are now weakening along with Houston differentials. Midland prices should get a boost in the second quarter from Enterprise’s Midland-to-Sealy line reaching full capacity.

Coal Prices Diverge; Pacific Basin Market Soars While Atlantic Basin Falls

Coal pricing diverged over the past month, with Pacific Basin prices surging on cold weather in key Asian markets, while CIF ARA prices faded on extremely mild weather. The fast approaching Chinese New Year and the end of the winter demand peak will alleviate concerns regarding supply adequacy, and prices are expected to fade considerably over 2018.

Confident U.S. Economic Data Lead to Interest Rate Spike

January updates of job growth and the ISM index indicated that the U.S. economy’s momentum stayed solid in early 2018. Average hourly earnings rose faster than expected last month. But given the difficulty in determining the underlying pace of wage growth, it is too early to judge whether this observation portends much faster growth in worker pay. Long-term interest rates rose sharply this week, creating jitters in financial markets. Given that higher rates apparently reflected constructive expectations about the future, it appears unlikely that markets will continue to be very volatile and throw cold water on animal spirits.

Propane Prices Up 3%

Propane prices closed 3% higher last week with the widening of the Asian arbitrage window with Asian propane prices being supported by petrochemical demand. U.S. raw mix NGL production increased to over 4 million b/d last week. The propane stock draw last week was 0.93 million barrels, which was less than expected due to the waning of the widespread cold snap. With cold weather returning in February, propane demand is expected to average over 1.6 million b/d in coming weeks. Propane stocks in PADD I grew by 165 thousand barrels from imports supplied by two waterborne cargoes and are further supported with the arrival of a third waterborne cargo this weekend. Propane exports were subdued by Gulf Coast terminal outages last week and are expected to return to 1 million b/d this week. Petrochemical feedstock margins fell sharply last week following declines in ethylene and propylene prices.

U.S. Gas Weekly Report

Henry hub spot prices averaged $3.49/MMBtu for the week, but, the range and distribution in price is important. Prices remained high through the final day of January, averaging $3.71/MMBtu for the month and trading $3.60/MMBtu for the final day of the month. However, prices collapsed during trading for February 1, falling $0.39/MMBtu from the day before to $3.21/MMBtu. On Monday, the February NYMEX Henry Hub futures contract terminated, settling at $3.631/MMBtu —the highest settlement price since the conclusion of 2016. The March contract rallied its first day as prompt, peaked intra-day at $3.259/MMBtu and has since fallen ~40 cents on milder revisions to weather forecasts and a return to record setting production levels

Increases in Chinese Demand Year-over-Year Eclipse U.S. and Australian Supplies – Combined

Indicative of just how tight January has been, the year-on-year increase in Chinese demand was 22% higher than the combined increase from the United States and Australia. Nevertheless, the global LNG market will have to be able to contain Chinese demand. Given how much China is moving markets, we have been making the case that China needs to be in the market to sign more short-term supply contracts. Whether or not China decides to follow our advice has very important implications for market stability and volatility going forward. The markets have seen just how price agnostic Chinese demand can be, best evidenced by national energy policies that have driven regional Chinese LNG pricing to nearly $30/MMBtu.

After Eggborough, Further Coal Closures Might be Triggered by the T-4 Auction Next Week

Among all coal plants that participated in last week’s UK T-1 capacity auction for delivery in 2018/19, only one - a single unit at West Burton – was awarded a contract. After failing to secure one, the 2-GW Eggborough plant announced its closure. With Cottam and Fiddler’s Ferry also lacking contracts beyond 2018/19, their future beyond this timeframe is also at risk. At the same time, the trend observed in the past few years highlights the shrinking utilization of the capacities sitting at the top-end of the stack needed to meet peak demand, something we also noted for other Continental markets, including Germany. What is making things worse for those plants in the UK is the steep downward trend for grid-connected demand. UK national demand this January averaged 34.8 GW, the lowest on record for the month. The closure of Eggborough and the risk of other closures might have an impact at winter peak, with implications for France as well, under the event of a cold spell.

Latin American Refining Woes Continue, Set the Tone For 2018

S&P Global Platts Analytics projects 2018 Latin American crude runs at 4615 MB/D, 130 MB/D lower year-over-year. We expect a continuation of refinery stoppages, mostly unplanned in the key refining centers in the region. We expect 1Q18 Venezuelan runs at a low 315 MB/D, 145 MB/D lower year-over-year. Mexican refineries also continue to limp and expect 1Q18 crude runs to average only 710 MB/D, 235 MB/D lower year-over-year. In Brazil, 2017 crude runs were about 85 MB/D lower year-over-year. Next year we forecast runs slightly up at about 1710 MB/D (30 MB/D up year-over-year). 2018 Ecuadorean crude runs are expected to be 10 MB/D lower year-over-year, impacted by the FCC turnaround in Esmeraldas in Q1/Q2. Latin American gasoline demand is projected to grow 30 MB/D year-over-year in 2018, mostly on the back of a rebounding Brazilian market. Similarly, 2018 Latin American distillate demand is projected to gain around 50 MB/D year-over-year. As refinery issues persist in the region, imports are expected to remain strong in 2018. We project Latin American gasoline imports at around 1200 MB/D, (55 MB/D higher year-over-year) and diesel at 1185 MB/D (70 MB/D higher year-over-year).

Financial Stresses on the Rise

The S&P 500 set a record on Jan. 26 and has since begun to weaken, with the decline at this point -3.9%. Credit is starting to look much less constructive. Some of the indicators had been looking ragged even before the market moved lower. The one indicator of concern was “Skew/VIX”, and that took a big tumble of -16% on the week. The interpretation is that the market is pricing in more “tail” risk via the option market, or said another way…if this is indeed a correction of sorts, it might just be getting started. The U.S. dollar rallied 0.16%, but showed good strength against certain currencies. The reflation trade and strong economic growth paradigm still appears intact, but certain corrective factors have begun to appear. The total commodity index fell back -1.85%, with energy falling back -4.44%. The St. Louis financial stress indicator again moved modestly higher in what appears to be an indication of a trend in increasing stress.

Canada braces itself for severe winter weather

By early February another polar vortex-like cold front is expected to hit Canada, prompting portions of the country to potentially experience record-high levels of demand in the days before the system dips south to bring arctic temperatures to the High Plains, Upper Midwest and the Northeast. Some meteorologists see the conditions setting up to be similar to the polar vortex event during the winter of 2013-14, when demand and storage pulls in both Canada and the U.S. set records. In preparation for the potential extreme temperatures, a look back at historic winters, such as 2013-14, and comparing them to the current winter may shed some light on how Canada (and even more so East Canada) could be impacted by another severe winter storm, which could lead to big price blow-outs and strong pulls on storage.

Russian Exports Face Cloudier Outlook for Demand and Storage Needs in 2Q and 3Q

It is going to be hard for Russia to duplicate the successful year it had in 2017 after so many aspects of the market broke in its direction that are unlike to be repeated. The already heavy year-over-year cut in January flows from Russia to Europe does highlight how a tougher period ahead will be emerging, and it will be winter time sales that will be more important than ever in the years ahead. Short-term weather patterns will boost demand for Russian gas in the first half of February and the announced cut in Groningen production will also provide support, but the increasingly dicey outlook for needs during storage injection season has to be a rising concern for all gas producers.

Coal Prices Shift Sharply Lower Despite Continued Asian Demand Strength

The seaborne coal market corrected sharply lower last week, with the front (2Q18) of all three major forward curves shedding ~$5.00/mt week-over-week. The decline in CIF ARA forwards is fairly easy to explain, with warm weather persisting, and news that another coal-fired generating unit in the U.K. will be retired in 2018, although the market shrugged off the lack of agreement between Cerrejón and labor, which could lead to a strike. However, the Pacific Basin market remains extremely tight, as stockpiles in China were drawn sharply over the past several months, and remain low in India. Concerns that Chinese authorities may re-institute import restrictions after the Chinese New Year may have been behind part of the downshift in Pacific Basin prices. Yet, S&P Global Platts Analytics believes that the weakness in the Atlantic Basin market played a bigger role in the downshift in Asian prices, as the extreme softness in European coal demand has freed up a considerable amount of prompt (and likely deferred) tonnage that will be looking to go to other locations.

U.S. Commercial Stocks Build

Overall stocks built by 2.1 million barrels last week led by a 6.8 million barrel crude inventory increase, the first in eleven weeks. Overall stocks, nevertheless, increased less than last year, widening the year-over-year deficit by 3.3 million barrels to 142 million barrels. Demand is incredibly strong with the latest adjusted four week average up 7.3%, or 1.4 MMB/D. Cushing crude stocks continued their relentless decline, falling 2.2 million barrels last week to 37 million barrels, some 32 million barrels below last March’s peak. For this week’s EIA data, Cushing crude stocks are forecast to show a further decline of 1.5 million barrels, while overall crude inventories increase a modest 1.8 million barrels. Both gasoline and distillate inventories show modest builds this week after last week’s almost 2 million barrel stock decline for each of the products.

Equity Markets Fallback Noticeably from Recent Records

Global equity markets fell back noticeably on the week by -2.6%. In the U.S., the decline on the S&P 500 was -3.9%, with all the tracking indices moving lower. Banking held up the best and declined -1.1%, while retail, housing, and energy all underperformed, and fell -6.5-6.8%. All the international tracking indices also declined, with China and emerging Asia posting the largest losses.

U.S. November 2017 DOE Monthly Revisions: Demand and Stocks

The EIA just released their monthly November 2017 (PSM) U.S. oil supply/demand data. November 2017 demand came in at 20.278 MMB/D, which was 240 MB/D higher than S&P Global Platts Analytics had assumed and revised up 460 MB/D from the weeklies. Distillate was raised 176 MB/D, similar to the upward revision seen for October. Total product demand growth, year-over-year, grew 619 MB/D, or 3.1%, which was a sharp acceleration from the 156 MB/D or 0.8% posted the previous month. The demand strength was concentrated in distillate. End-November total commercial stocks stood at 1,261.2 MMBbls, which were -2.1 MMBbls lower than S&P Global Platts had assumed. Compared to November 2016 PSA data, total commercial stocks are now lower than year-ago by -99.9 MMBbls vs. -83.7 MMBbls seen at end-October.

Hurricane Recovery and Texas Growth Drives Production over 10 MMB/D in November

U.S. crude and condensate actuals for November 2017 came in at 10,054 MB/D, indicating growth of 377 MB/D month-on-month and 1,167 MB/D year-on-year. The Gulf of Mexico drove the growth as production returned following October outages caused by Hurricane Nate. Texas and Colorado growth contributed as well. S&P Global Platts Analytics’ Reference Case outlook forecasts U.S. crude and condensate production growing 1,010 MB/D in 2018 and 650 MB/D in 2019.

Japan Runs Stay Down, Product Stocks Draw Yet Again

Runs again fell back for the second straight week. Crude imports fell back, but crude stocks still built 1.76 MMBbls. Finished product stocks drew 2.51 MMBbls, which is along seasonal trends. The draw was driven by solid pulls in the jet-kero complex, naphtha, and to a lesser extent, fuel oil. Balances remain constructive to cracks. Kerosene demand was only modestly higher despite very cold weather. The kero stock draw rate accelerated further from 99 MB/D to 184 MB/D, with the 4-week average draw rate staying near 80 MB/D, close to the Jan norm. Implied refining margins remain relatively good and gained again on the week. Retail prices continue their rise, while the indicative marketing margin again improved a bit. Both the margin on gasoline and gasoil/diesel remain above norms. The higher costs are being pushed through at the pump, with the entire downstream value chain operating on all cylinders

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

January’s heating degree days came out roughly 3% warmer than the 10-year normal for the three major OECD markets with a composite net oil-heat demand effect of -167 MB/D. On a 30-year-normal basis, the markets were roughly 8% warmer.

Aramco Pricing for March: Europe More Generous, Asia as Expected

Saudi Arabia released their pricing for March liftings last week. Adjustments for Asia were in line with S&P Global Platts Analytics’ expectations, while Europe was clearly made more generous. Pricing on crude destined for the U.S. was reduced for the benchmark pivot crude, Arab medium, along with Arab heavy, while it was left unchanged on Arab Light. The reduction in pricing on Arab medium continues to bring pricing into better alignment with competing domestic grades, though it is still retains a pricing premium of $1.25-1.45/Bb.

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.