Asian Product Markets to Tighten

PIRA expects India’s oil demand to recover and post growth this year as the effect of demonetization wanes. China’s crude imports will stay high this year, supported by rising crude runs and declining domestic crude production. At the same time, PIRA expects China’s net exports of gasoline, kero/jet and gasoil (including blending components) to ease due to the tightening of export quotas. Asian product markets in general look reasonably constructive in 2017.

Henry Hub Gains Assist Broader Price Strength

This month’s average daily Henry Hub (HH) price is $3.09/MMBtu to date, in line with PIRA’s forecast of $3.10. In consideration of the warmer-than-normal temperatures that have been so prevalent this April, the maintenance of price support is remarkable. No doubt, the impact from the early end to heating demand is significant and is the primary factor behind the upwards of 100 BCF of additional storage that will be on hand by end-month. Even so, the broader market price strength seen across most regions — sans the NE — stems from the market’s emphasis on the challenges U.S. balances face for the upcoming injection season tied to structural demand growth amidst the ongoing year-on-year supply losses.

Lower Water Levels Leave Upside to French Peak Prices

French hydro output is down 32% year-on-year month-to-date to 6.0 GW. Our latest Monthly Outlook has assumed that the French hydro situation would normalize by the third quarter, but there are clear risks that the hydro output will remain low in the upcoming months, in France and across South-Western Europe. Under a scenario with lower hydro levels, French gas units, and even more, the French interconnector flows would respond, ultimately impacting prices, especially at on-peak hours.

Coal Markets in Holding Pattern As Queensland Infrastructure Recovers

Physical coal prices and front-end paper prices generally moved lower this week, following news that the recovery in the Queensland rail network will occur ahead of schedule. The coal market has been searching for an equilibrium for nearly a year now, after being swayed by a periodically overheated coking coal market and shifting paradigms in coal demand and supply in China. PIRA believes that the backwardation in coal forward markets is well founded, due to falling import demand in the Atlantic Basin, flagging Indian imports, and a risk that Indonesian exporters will overproduce this year. However, the strength in Asian demand led by China will offer some support to pricing, particularly if PIRA’s bullish outlook on crude oil prices is correct.

Global Equities Post a Mostly Positive Week

Most equity tracking indices posted a positive week. The broad U.S. market rallied almost 1%, with banking, retail, housing, and industrials, all outperforming by a solid margin. Energy was the clear laggard, down -2.2%, while utilities were fractionally changed. International indices also were mostly higher, but tended to lag the U.S. performance.

U.S. Ethanol Prices Increase

U.S. ethanol prices climbed to a record high the week ending April 14. RIN prices were steady. Output and sales of ethanol in the Brazilian South-Central harvest year of 2016/2017 were sharply lower. European ethanol manufacturing margins increased because of lower raw material cost.

Modest U.S. Decline

Overall commercial inventories drew 1.7 million barrels this past week but the crude stock draw of 1.0 million barrels was disappointingly low. Cushing crude stocks drew almost 0.8 million barrels, somewhat more than expected. Overall inventories are now slightly below last year and this deficit should widen with next week’s data. Higher imports and higher runs have eliminated gasoline stock draws for now, while for distillate continued strong demand from improving economic activity (including rig growth) and the start of planting season along with contained imports will limit the extent of inventory builds.

Slowing Appalachian Production Momentum Likely Underestimated

The potential supply impact of an additional ~20 BCF/D of near-term Appalachian takeaway capacity weighs heavily on price structure — particularly beyond the 2017-2018 heating season. Yet, the recent relationship between production and takeaway suggests something more than a “if we build it, they will come” association is at work here. Signs seem to point toward more measured production gains. Moreover, a more rationalized approach to delivering low-cost supply has already tightened balances. Consequently, slower-than-anticipated Appalachian production growth, opens the door to for further upside ahead.

PRB Firm on NG Prices, Little Impact from Cyclone Debbie

With demand entering shoulder season, higher gas prices and cyclone activity in Australia are having a muted impact on U.S. coal market sentiment. Prices, except in the PRB, have been slipping in quiet trade. As with last month, PIRA remains most bullish on PRB prices and we expect subdued market activity in the other U.S. coal contracts until summer.

Financial Stresses Remain Low, Commodities Weaken, but Energy Credit Holding Up

While stresses remain low, there has been an uptick as measured by the St. Louis Fed Stress indicator. The recent disinflation trends have not yet reversed, despite the equity market rally this week. Energy performed very poorly on the week, but is still showing month-on-month gains. Commodities, in general, weakened as noted by the posted declines for the spot commodity index, copper, iron ore, aluminum, and ags.

U.S. Ethanol Production and Stocks Rise

U.S. ethanol production rebounded the week ending April 14, increasing by 7 MB/D to 993 MB/D though several plants remained closed for spring maintenance. Stocks rose by 131 thousand barrels to 23.0 million barrels, up from 22.0 million at this time last year. Ethanol-blended gasoline manufacture increased slightly to 9,044 MB/D from 9,005 MB/D in the preceding week.

Seasonal Japanese Demand Declines Still Tempered and Margins Better

Japanese crude runs rose 37 MB/D on the week. Crude imports rose sufficiently to build crude stocks 2.2 million barrels. Finished product stocks built 1.3 million barrels as seasonal demand declines continue. The rate of seasonal demand declines remains tempered. Margins improved $0.63/Bbl on the week, and while still somewhat subpar, they have improved. Our marketing margin indicators eased again for the third straight week, but they remain slightly above average.

2017 Rate Decline Moderating

The tanker market decline seen from end 2016 moderated in March. The persistent decline in VLCC rates seen since the beginning of the year was halted in April by a flurry of long-haul Atlantic Basin movements to Asia, including U.S. grades and by record imports by China. But the rebound in VLCC rates is unlikely to persist into 2Q/3Q 2017. At the other end of the size spectrum, MR product tanker rates were strong globally in March on heightened activity with rates in the Atlantic Basin rising to multi-year highs, driven by a wide open gasoline arb and rising U.S. exports.

Rough Outage Was Clearly Expected – What Are Markets Expecting Next?

The Rough outage caused little-to-no-uproar in European natural gas prices – it was already priced-in and then some. Rough has been an active and key part of winter infrastructure since 1975, but it’s tired and needs to either be fixed or retire. This winter the U.K. will have to make do without it. Over the past 10 years, the facility has supplied winter months with 25-mmcm/d of gas on average, up to a maximum of just about 46-mmcm/d on peak demand days. These volumes won’t be cheaply or easily replaced - after all, the Rough gas was bought at summer prices and now it will have to be bought at spot winter prices from the Continent or abroad. Problems with the storage facility have been going on for long before last summer and the ailing facility has made it more than clear that problems keep on popping up. Worst of all, the problems may persist forcing the market to look towards a United Kingdom without a seasonal storage facility, but with significantly higher risk premiums come winter time.

Bauxite Trade + VLOC Loss Set to Boost the Cape Market

Cape rates have weakened this month following a drop in the number of fixtures. Cape traffic at Kamsar in Guinea has jumped this month and is developing into a 50 MMmt/year long-haul trade and is now a major driver of Cape demand and prompted PIRA to raise the outlook for rates. The loss of the converted VLOC Stellar Daisy is raising doubts over the continued employment of 50 other similar ships. PIRA believes that Cape freight rates will push higher in late 2017 and outperform current FFA rates.

Chinese Data Upbeat; U.S. Manufacturing Looks for Upturn

Based on the latest GDP, industrial production, retail sales, and fixed asset investment, economic activity in China picked up pace broadly in early 2017. There were three major reasons for this: stronger momentum in construction activity; positive effects from industrial price reflation; and the improving landscape for global trade. Based on expected future trends, however, the pace of Chinese growth will probably moderate somewhat in the coming period. U.S. industrial production for March was weak: the performance of capital-intensive industries was especially disappointing, though energy-intensive industries registered sharp gains. Manufacturing confidence in the U.S. and Europe ran high during April.

Lower U.S. Refinery Gasoline Yield during the Driving Season

Summer grade gasoline season has arrived; terminals need to be ready by May 1, 2017. Typically, refinery yield of gasoline is reduced during this transition period. The average yield decline was 0.6 percentage points between March and April over 2012-2016. With historically high runs expected this summer, refinery gasoline yields will be only around 50%.

LNG Can Run to the Baltics, but Can’t Hide from Central European Hubs

Long considered isolated and squarely part of Gazprom territory – Northeast Europe is diversifying its supply mix and this will eventually impact Central & Western European balances, despite the hopes and dreams of LNG producers. The LNG marketer strategy of placing LNG carefully in isolated and illiquid markets may have somewhat of an expiration date even though it is working reasonably well for now.

Asian Demand Growth: Accelerating Demand Growth Returns

After an expected slowdown, PIRA's update of major country Asian product demand indicates that year-on-year growth has again accelerated. However, the improvement needs to be put in proper context, as it is driven by China’s apparent demand improvement. PIRA had been expecting Asian demand growth acceleration to evolve over the next several months, but the narrowness of the foundation in this month’s snapshot needs to be acknowledged.

Supply Surge Adds Liquidity, Subtracts Contracts, FIDs

The conclusions to be drawn for 2017 are that we are still not in a place where FIDs are expected to be concluded, the Qatar moratorium notwithstanding. Last year only 8.7-bcm/yr. of FIDs were signed according to GIIGNL (Tangguh train 3 and Elba Island). PIRA also has Canada’s 3 BCM/Yr. Woodfibre LNG in its database for FIDs in 2016. Regardless of location, the most critical feature of this new supply will be its unquestionable cost competitiveness vs. other contenders.

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.