Canadian Diffs Rebound on Oil Sands Maintenance; Cushing Stocks Rise

Western Canadian crude inventories leveled off in March, and Canadian differentials bounced back in advance of significant second quarter oil sands maintenance. With rail takeaway volumes increasing and production seasonally declining, heavy crude differentials are expected to recover to near Gulf Coast rail parity in the second quarter. Cushing stocks rose 6 MMB in March, following four straight monthly declines. Cushing stocks should decline slightly in April, followed by additional declines through this summer, which will take stock levels down to 20-22 MMB. Strong WTI backwardation is expected this summer, with prompt prices rising into the $70s. Crude stocks increased again in the Permian Basin, on seasonal refinery maintenance and strong production growth. Midland differentials continued to weaken, particularly in the past few days, on fears of pipeline takeaway capacity not keeping up with this strong growth. Permian price volatility is likely to continue through the end of next year.

WCI Carbon Lower Still

Although trading volumes were stronger, WCI carbon prices declined for a fifth straight month in March, reflecting a lack of compliance pressure and continued regulatory and political uncertainty. Market signals may begin to clarify in 2H, with the ON elections and evolving CA Cap and Trade proposals. While myopic market behavior will keep prices closer to the floor in the near to mid-term, bank draws starting post-2020 will see cost containment measures begin factoring into longer term pricing expectations. Platts Analytics has updated WCI pricing for our spring 2018 long term power sector modeling runs, with lift vs. the floor expected as annual balances turn negative.

Mixed Jobs / Wages Data from U.S.; Better Economic / Energy Data from Brazil

U.S. payroll data for March were disappointing, but the underwhelming result was probably a payback for February. The unemployment rate held steady for the sixth consecutive month, while wage data showed some signs of faster increases. Global business confidence indicators for March were resilient. Brazil’s industrial production data pointed to solid gains for distillate oil demand.

Propane Prices Dip 5.8%

Propane prices fell 5.8% last week and followed crude prices over ongoing concerns about the tariff threats between China and the Trump administration. Ethane prices continued to strengthen last week as Gulf Coast steam cracker ethane demand increases. The Mont Belvieu propane price premium to Conway propane prices averaged over 14 cents per gallon last week and the spread between hubs favors southbound flows. Reported propane implied domestic demand remains robust at 1.3 million b/d due to persistent cold weather in northern states. U.S. propane inventories built by 646,000 barrels during the week ended March 30, according to EIA data. Propane export volumes for the week ending March 30 were reported by the EIA at 575,000 b/d and failed to meet Platts Analytics’ expectations. For the week ending April 6, Platts Analytics projects propane exports of 850,000 b/d. Steam cracker feedstock margins remain weak with all feedstock margins declining except that for natural gasoline. Steam cracker feedstock margins are being depressed by historically low ethylene prices. The low ethylene prices are reflective of perceived length in ethylene production capacity.

Liar’s Poker

At this point it’s hard not to feel like we’re all sitting at a table watching Xi and Trump play a giant game of liar’s poker. If you ever wondered what a Navarro-Cohn swap on trade policy would mean, the answer is now pretty clear. Presumably like you, we are exhausted over the number of “hot takes” and interpretations of what this rhetoric means, and it is just that at the moment, to the fixed income, equity, and commodity markets by every talking head that has a platform. We will not bore you with our opinion because quite frankly we don’t know, nor does anyone know with certainty how this will all play out because it’s all conjecture at this point. We imagine that the pro-farming groups that were the darlings of much of the anti-Trump media last week will be conspicuously absent in the near futures as almost all agricultural markets have had a very nice rebound. While the two main characters in this “game” play with the serial numbers on their folded dollar and yuan notes, we are left to play with the cards that were dealt face up, the ones that everyone can see.

Latin America: Spate of 2018 Presidential Elections Significant for Oil Markets

Latin America will hold several presidential elections in the coming months, which could reverse a regional trend towards market-oriented oil policies and pose risks to short and long-term oil supply. Most importantly for near-term balances, Venezuela’s election on May 20 looks likely to cement the power of President Maduro and the ruling PSUV. This would remove almost any prospect for the economic reforms required to reverse production declines, and could create even more pressure on PDVSA by triggering U.S. oil sector sanctions. The oil market impact from elections elsewhere in the region is a longer-term story. In Mexico, progress in reopening the oil sector to foreign investment looks likely to slow if the populist frontrunner wins as expected, while a return to more nationalist policies in Brazil would endanger momentum in subsalt production. Colombia could see a spike in supply disruptions, as any successor to President Santos will likely be less supportive of the peace process with guerilla groups. More broadly, the elections will provide an indicator of Latin American support for populist politicians, who have gained ground elsewhere in the world since 2016.

US Gas Weekly Report

Henry Hub cash averaged $2.74/MMBtu for the week-ended April 5, up 15 cents/MMBtu (6%) week-over-week, but it was still 33 cents/MMBtu below the same time in 2017. The uptick in cash runs counter to milder weather and offsetting movements in export demand, however, production over the past few days has edged lower. The May contract for Henry Hub was flat week-over-week at $2.70/MMBtu, with little movement across the bal-2018 contracts for the week

What to Make of the Supply Surge from Traditional Sources

The fundamental underpinning of price remains firm despite the seasonal drop in gas demand that is underway. Average demand decreases between March and April are 430mcm/d and can be as high as 600mcm/d in years like 2011, when March is colder than normal and April is warmer than normal. This year could provide such an outlier, given that March produced the coldest weather effect versus normal on demand since Jan. 2017 and the coldest for March since 2013 when NBP price spike to 85p/th for the month. Current prices in the high 40s are not extraordinary for this time of year or in relation to oil and coal, but plenty of warning signs remain that much of the risk is to the high side despite the lower pull on gas tied to weather.

U.S. Commercial Stocks Drop Sharply

Overall commercial inventories fell for the fifth consecutive week, dropping by 3.9 million barrels for the latest week. The deficit to last year has now widened to 152 million barrels, five million barrels more than the prior week. The decline was led by crude which dropped by 4.6 million barrels, more than offsetting a modest overall product stock build. Crude inventory is now the lowest for this particular period since 2014. Also notably crude storage hardly changed since the end of last year compared to a more typical build, which amounted to almost 57 million barrels last year. Adjusted four-week average demand continues quite favorable, up 7.4% year-on-year, or 1.4 MMB/D. Cushing storage rose by the most so far this year or by about 3.7 million barrels, as inflows remained quite high. This week inventories will be flat. Crude stocks are expected to decline by 1.6 million barrels this week. Key light products should continue to see inventory fall with gasoline and distillate dropping by a further 2.7 and 2.4 million barrels respectively.

U.S. Ethanol Prices Increase

U.S. ethanol prices gained the week ending March 30th following the USDA’s Prospective Planning Report estimating that less corn will be planted during the 2018/2019 crop year. Corn futures spiked supporting higher ethanol values. In retaliation for tariffs on steel and aluminum, China increased the tariff on denatured ethanol from 30% to 45%, essentially precluding U.S. exports. The 2018/2019 harvest began in the South-Central region of Brazil.

In Spite of High Snow Cover, Still Little Sign of Recovering Swiss Hydro

The surprising recovery of Spanish hydro stocks that started at the end of February continued in Week 13, raising the level to 54.9% of nominal capacity. By contrast, the trend in the Alpine region remains so far disappointing, in spite of extremely high snow cover on the Alps. Reported hydro stocks in France and Switzerland have now reached 16% and 10% of nominal capacity, respectively, a new historical low for France and at the bottom of the historical range for Switzerland. This result comes while some system tightness appears to emerge in Switzerland.

Coal Prices Rebound on Australian Interruption

Seaborne coal prices rebounded modestly last week, with some concerns regarding Australian coal output following cyclone activity providing a large portion of the bullish momentum. Physical tightness of higher-quality South African coals has pushed FOB Richards Bay forward prices higher, and indeed FOB Richards Bay increased week-over-week by the greatest extent. Platts Analytics views the rebound in prices as a temporary phenomenon, with less supportive fundaments on the horizon, which should pull prices, particularly in the Pacific Basin, lower than the forward markets currently suggest.

IL Order Bearish for PJM REC Prices

An April 3rd Final Order from the Illinois Commerce Commission reverses the Illinois Power Agency’s December Plan to fulfill the state’s expanded RPS goals in the near term through massive spot REC purchases. Citing statutory requirements to prioritize new renewables build (and in-state jobs) over meeting RPS targets, the Order closes off a potentially large near term sink for the excess supply in PJM Tier 1 REC Markets, and is bearish for PJM REC pricing. More broadly, it is another example of the fragility of environmental markets, subject to regulatory pivots and periods of prolonged uncertainty.

Japan Seasonal Demand Declines Continue

Runs rebounded 45 MB/D, while crude imports expectedly surged such that crude stocks built five MMBbls. Finished product stocks were marginally higher, with solid builds in gasoline and kerosene. Demand has continued to decline seasonally, a trend that should continue through April and into May. We have updated our known refinery maintenance schedules and raised the April run assumption. An abnormal build in domestic product stock levels is not anticipated. The implied refining margin continues to be acceptable, along with above average implied marketing margins.

Counter-Seasonal Demand is Revving Up

A recent focus on how the LNG market is handling the surge of Chinese demand has drastically shifted towards how the market is handling the subsidence of demand. The build-up in Chinese demand in the wake of clean air initiatives has been an incredible boon for producers that have been worried about global LNG supply gluts – this is particularly true as China is intending to convert another 4 million homes this year from coal heating to gas. Unfortunately though, a well-balanced market is not made in just supplying China during winter.

Modest Financial Stresses Still Evident

Financial stresses are still elevated with the S&P 500 testing the 2,600 level in a fairly volatile week. VIX volatility rose on the week, while oil volatility was only slightly changed, despite lower prices. Commodities were lower by -0.6%, but energy lost nearly -3%. The metals index bounced off support, gained 0.6%, and remains a key indicator. Disinflation appears to be gaining, while the Baltic Dry index broke lower as trade frictions impact various markets. 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.

U.S. Ethanol Production Declined the Week Ending March 30

U.S. ethanol production declined for the second consecutive week as plants began seasonal maintenance. Output fell 1 MB/D to 1,038 MB/D. Ethanol inventories continued to slide after reaching a record high three weeks earlier. Stocks fell by 365 thousand barrels to 22.4 million barrels, down 1.3 million barrels from this time last year. Ethanol-blended gasoline output increased by 33 MB/D to 8,962 MB/D.

Are Oil Supplies from Planned Long Lead Projects in Jeopardy?

Oil supply project sanctioning remains at low levels despite higher oil prices and lower breakevens. Even with some reduction in costs for non-shale projects, U.S. shale breakevens remain more favourable with a $10/Bbl advantage. Also, a perceived potential slowdown or reduction in long-term oil demand (e.g. greater EV penetration, more government regulations, etc.) raises the risk of weaker prices in the future and therefore the risk for long lead projects that will not start up until the middle of the next decade (i.e. deepwater). This could place some uncommitted projects (~7 MMB/D by 2030) at risk since operators would be reluctant to make large Capex commitments but in our view the world still needs these projects to move forward in order to balance demand growth with a shrinking growth contribution from U.S. shale and OPEC. Concern over future price declines, to the extent it deters investment in long-lead projects, will be a bullish factor for the medium-term price outlook.

Global Equity Markets Fall Back

Global equities fell back 0.7% on the week, while the U.S. lost 1.3%. Among the domestic tracking indices, retail was slightly higher, while housing, utilities and energy were only modestly lower and outperformed. Internationally, Europe was modestly higher, while China and emerging Asia underperformed with trade frictions taking their toll.

Aramco Pricing for May: Curve Ball to Asia Discourages Liftings

Saudi Arabia released their pricing for May liftings last week. Pricing to Asia was much less generous than we expected. The adjustments will clearly discourage liftings at the margin while Asian refiner demand will be on the upswing over the summer. Price adjustments to Europe were in keeping with the modest narrowing in the discount on Urals vs. Dated Brent. U.S. pricing was cut marginally on all but the lightest crude. The pricing adjustments confirm Saudi’s commitment to production restraint. In addition, less barrels will become available as we move forward from May and domestic crude burn inside the Kingdom rises.

Shale Discovery Big for Bahrain but Small Compared to the Rest of the World

Bahrain recently announced a shale discovery with an estimated 81.5 billion barrels of oil and 13.7 tcf of gas resources in place. Assuming a 10% recovery factor, this could mean ~8 billion barrels of recoverable oil resources. The find is notable because it is set to provide a significant boost to Bahrain oil output in next decade. But it is small in comparison to major U.S. and other global shale oil resources. Although still early, we pencil in first production from the Khaleej al-Bahrain basin in 2021 with peak production of 200 MB/D by 2025, assuming 6-8 rigs drilling 100-125 wells per year. We will follow developments closely, as they may accelerate our assumptions.

Potential New U.S. Sanctions Against Venezuela Could Increase the Flows of Heavy Crude into Asia

Tensions between Washington and Caracas continue to rise. In recent weeks, the White House tightened sanctions against President Maduro’s administration by blacklisting four government officials and banning U.S. transactions in Petro, the digital currency launched by Venezuela and backed by its crude oil reserves. In like manner, the Trump administration is considering expanding sanctions to the oil sector on allegations that the electoral system and upcoming Venezuelan presidential elections on May 20 are rigged. If elected, Maduro would remain in power for another six years. The introduction of these sanctions became even more likely with the selection of Mike Pompeo as the new U.S. Secretary of State who is seen as more of a hardliner than his predecessor, Rex Tillerson. If imposed, sanctions could ban Venezuelan crude oil imports to the U.S. and exports of refined products from the U.S. to Venezuela. For now, the White House has stated that no new sanctions will be announced at the forthcoming Summit of the Americas in Lima on April 13-14.

Kinder Morgan Suspends Non-Essential Spending on Trans Mountain Expansion

Faced with active opposition from the British Columbian government to Trans Mountain’s 590 MB/D expansion, Kinder Morgan announced that it is suspending all non-essential spending on the project until there is a clear path forward with respect to its ability to construct through B.C. and attains adequate protection for KML shareholders. Kinder Morgan is wanting to reach an agreement by May 31 to maintain its current planned in-service date of December 2020. In response, the Alberta government announced that it may take an investment position in the project and is bringing forward legislation in coming days that would give the province the power to impose serious economic harm to British Columbia. By taking an investment position in the project, the province could bring the resolve to move forward with construction in the face of obstacles from the British Columbian government and anti-pipeline protester. This would help to dull what had been an effective weapon in the anti-pipeline arsenal, namely, create uncertainty and delays that increase project risks and costs.

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.