Latin American Crude Runs to Remain Weak in 2018

Latin American refiners continue to struggle. Platts Analytics projects 2018 refinery crude runs in the region to average 4430 MB/D, 325 MB/D lower year-over-year. Utilization is estimated to reach 55%. However, some small recovery is expected in 2H18 vs. 1H18. Mexican refinery crude throughput in 2018 continues to disappoint and is forecast to average around 700 MB/D for the year, 75 MB/D lower year-over-year. Newly elected officials plan to overhaul all Mexican refineries simultaneously, in what looks like an unfeasible task from a planning, logistics and administrative perspective. Platts Analytics projects Latin American diesel demand marginally higher in 2018 as GDP growth expectations fall to 1.5%. On the other hand, 2018 Latin American gasoline demand (excl. ethanol) if forecast to be 55 MB/D lower than the prior year. As local refined product output falters, the call on imports stays high: 2018 Latin American net gasoline/blendstock imports are projected 120 MB/D higher year-over-year and diesel over 100 MB/D higher year-over-year.

U.S. ethanol prices steady during most of July

U.S. ethanol prices were steady during most of July but increased late in the month. June D6 RIN generation was lower month-on-month but higher year-on-year. LCFS credit values reached a record high. Sugarcane processing in Brazil’s South-Central region was lower but ethanol production and sales soared. European ethanol prices were slightly higher.

Weather, SoCal gas constraints deliver huge pay out

WECC U.S. hubs rose sharply in July with on-peak prices at SP15 and Palo Verde averaging near $100/MWh and Mid-Columbia and NP15 near $70. Day-ahead prices for July 24, the peak of the heatwave with temperatures from Portland to Phoenix averaging 9º above normal, ranged from $220/MWh at Mid-Columbia to $350 at Palo Verde with SP15 LMPs close to $380. Limited import availability and tight gas supplies in Southern California that constrained local generation, contributed to the price spikes. Sustained heat in the Southwest raises the odds of a replay in early August. As seasonal temperatures fall later in the month, risks will become more focused on Southern California, but the market has demonstrated that it can cope with reduced gas supply if energy is available for import.

Coal Prices Diverge, Newcastle Strengthens While All Others Fall

Seaborne coal pricing diverged over July, which saw high-cv FOB Newcastle prices move to an unsustainable premium relative to other pricing points as well as low-cv FOB Newcastle prices. Heatwaves in both Western Europe and Japan have not translated into much incremental coal demand, and Chinese demand is expected to be lower year-over-year in July due to notably cooler temperatures year-over-year. Coal fundamentals have loosened, which should deflate coal pricing over the short-term.

US Gas Weekly Report

Market expectation for end-October US storage is now down near 3.45 Tcf — 100 Bcf below the start of July. Nevertheless, NYMEX prices remain relatively subdued considering to the ongoing storage deficit — with the 2018/2019 heating season strip remaining below $3/MMBtu. Thursday’s low ball EIA storage report seemed to jump start some bullish sentiment, though, with the September contract settling above the 100-day moving average ($2.80/MMBtu) on the nearby continuation chart for the first time since early July. The next area of overhead resistance is ~$2.85/MMBtu.

Higher Global Crude Output Led by Saudi Arabia, Fleet Demolitions, and Idling of Iranian Tonnage Will Help Tanker Markets Emerge from Slump

Higher global crude output led by Saudi Arabia, rising fleet demolitions, and idling of Iranian tonnage due to impending sanctions by U.S. will help tanker markets emerge from recent slump over 2H 2018. The recent Saudi decision to suspend oil movements via the Red Sea could also provide added support depending on its duration.

Propane Prices Retreat

Front-month non-LST propane ended the week 1.7% lower week-on-week to close at 95.9 cents/gal. On the other hand, front-month non-LST ethane gained 18.3% to close the week at 38.8 cents/gal. Supply issues are likely driving ethane prices higher as Mont Belvieu fractionators are reported operating at full capacity. US propane/propylene stocks increased by 1.8 million barrels to 66.3 million barrels during the week ended July 27, according to EIA data. Total stocks are 1.3 million barrels below year-ago levels after recovering from a nearly 18 million barrel deficit to start the year. US propane exports reached 1.24 million b/d, the highest EIA-reported weekly export figure since the week ended May 12, 2017. Platts Analytics forecasts a similar export rate for the week ending August 3. Steam cracker feedstock margins remain weak.

“Going Backwards”

More than one I-state farmer offered that prognosis over the weekend as warm and dry conditions are being reflected in the appearance of crops. Reports from central Indiana, an area that we’ll be in two weeks from today on Crop Tour, suggest that some of the bean crop there is about “ready to turn”, remarkable for the second week of August. Overnight moisture from some fast-moving storms in both Iowa and Illinois offered some short-term relief, but this week’s Root Zone moisture reading from NASA should show very little change from last week’s, which showed dryness in some areas of Illinois and Iowa matching those in Missouri where many are expecting a 40-50 bpa drop in corn yield from 170 bpa last year. While the next two days will offer a cool-down of sorts, a majority of both Belts will see temperatures in the mid to high 80’s and dry conditions for the next week to 10 days, a far cry from last year’s August cooldown.

U.S. growth powers on, while Chinese policy shifts course

The U.S. labor market data for July were constructive, and the Fed’s latest communication suggested that the central bank will stay on the same policy path as before. In China, data have not weakened markedly, but there have been changes on the policy front. Europe’s latest GDP and inflation data were about as expected. Japan has committed to more monetary easing. Brazil’s industrial production rebounded in June, following a nationwide truckers’ strike in May.

Trinidad: It is Not Just About New Suppliers, Traditional Ones Can Re-Emerge

Trinidad and Tobago has been one of the quieter surprises of the year with a resurgence in LNG exports. Tanker loadings YTD from the Caribbean nation are up 19% year-over-year. The country has been producing LNG since 1999, however their production peaked in 2012 and has been on a bit of a downtrend that ended last year. January ‘18 production levels were the highest since January 2015, with utilization of their existing Atlantic LNG trains at 95%.

U.S. Commercial stock surprise build reverses last week’s decline

Total commercial stocks built by 10.5MMB last week, driven by an unexpected increase in crude inventory (+3.8MMB), and by a surge in “other products” inventory (+4.7MMB). The two main factors behind the surprise crude stock build were a large adjustment in the crude balancing item (+680 MB/D), and the equally big drop in crude exports to 1.3MMB/D. As anticipated, stocks at Cushing continued to fall, dropping to 22.4MMB, or 29% of working capacity. Total inventories in PADD 2 declined by 503 MB, implying that ‘other PADD 2’ has built 4 out of the 5 past weeks as Cushing has been rapidly declining. For this week, inventories at Cushing are expected to continue to fall, but at a slower pace (by 0.3 MMB). These very low inventory levels will continue to sustain WTI’s backwardation in the prompt months. For this week, we forecast refinery runs to increase to 17.51MMB/D. We also anticipate crude imports to increase to 8.05MMB/D, and crude exports to revert to 2.0MMB/D. As a result, we forecast crude stocks to resume their declining trend, and drop by 4.6MMB. Currently, products demand remains strong, supported by positive trends in disposable income and industrial activity. For this week, we anticipate gasoline stock to continue to draw and jet stocks to draw only slightly. On the other hand, we still expect distillate stocks to build, as they did last week, due to high refining runs and high distillates yields, and despite an anticipated rebound of distillate demand to a level just above 4.0MMB/D and very high exports.

Ethanol Stocks Built the week ending July 27

U.S. ethanol production fell by 10 MB/D last week to 1,064 MB/D. Ethanol stocks increased for the first time in three weeks, led by a 574 thousand barrel gain on the East Coast. Gulf Coast inventories fell for the third consecutive week after reaching an all-time high in the first week of July. Ethanol-blended gasoline production was relatively flat, rising by 9 MB/D to 9,337 MB/D, a four-week high.

Heatwaves in Southern Europe and Asia leave Iberia exposed

The outlook looks increasingly bullish for Spain’s PVB hub, with potential upside to current spreads with NW European hubs. Europe’s July heat waves were concentrated in the North, with temperatures much more significantly above seasonal normal in Scandinavia than they were in Spain or Italy. The heat has wept southward in August, with higher end user power demand undoubtedly bullish for prompt pricing, particularly for PVB. However, power sector gas demand remains lower year-over-year, with a strong recovery of hydro stocks to more normal levels this spring, and other regional power fundamentals also restraining gas to power demand. What may be even more influential for Spanish/Iberian pricing over balance of summer heat, is the hot weather in NE Asia, and its recent impact on global LNG pricing.

Despite heatwave, strong imports add to robust hydro output and keep Spanish clean dark and clean spark spreads at historic allow levels

Weather-related demand in Spain has added more than 4 GW on a daily basis this week, or levels last observed in Aug 2012, contributing to keep the Spanish premium over France despite restrictions at some of the reactors there. However, the impact was barely reflected in the Spanish Clean Dark Spread (CDS) and the Clean Spark Spread (CSS), coming in at historical low levels. Besides robust hydro output, this is the result of strong imports from France and Portugal. Those from Portugal are a surprising development because largely driven by gas dispatch. Portuguese plants are somehow better hedged against high gas prices and the resulting exports are emerging as an important element preventing price increases in Spain.

Coal Prices Diverge Amid Hot Temperatures in Key Markets

Seaborne coal prices once again diverged last week with both CIF ARA and FOB Richards Bay forward prices falling, while FOB Newcastle continued to resist a bearish turn. The divergence in pricing was not just a widening in Atlantic/Pacific spreads, but in Pacific Basin quality spreads as well. 6,300 kcal/kg FOB Newcastle prices for 4Q18 are now more than $40/mt above its 5,500 kcal/kg counterpart, a full $4.00/mt larger spread than at the end of last week. A lack of availability of U.S. thermal coals has been reported by market participants in recent weeks, however, U.S. export data released August 3 show that U.S. thermal coal exports for June came in at the second highest levels of the last 18 months, just 10% off of six-year highs witnessed in April.

Japan Seasonal Demand Rise Absorbing Higher Runs, for Now

For now, rising seasonal demand in Japan is absorbing the higher refinery run rates coming out of maintenance. Aggregate demand rose 237 MB/D on the week and finished product stocks drew 1.25 MMBbls. Runs continued to edge higher, while a very low crude import figure drew crude stocks 6.2 MMBbls. Refining margins continued to improve, but remain soft. Implied marketing margins remain above statistical highs. As we move into August, known maintenance will continue to lessen, runs rise, and if demand doesn’t continue to rise, then stocks will tend to build creating a renewed risk to refinery margins.

Financial Stresses Remain Low

Last week was generally positive, though many of the credit metrics were only modestly changed. The S&P 500 gained 0.75% on the week, while VIX was modestly lower though oil volatility was modestly higher. Overall commodities were higher by 0.07%, while energy fell 0.42% and industrial metals were the weakest performer, lower by 1.37%. The dollar was modestly higher, while the St. Louis financial stress indicator was fractionally changed with stress levels remaining low.

An argument for higher Henry Hub prices in 2019

2019 is setting up to be a bearish year for the gas market, or so it seems. Next summer's strip is trading at $2.60, $0.20 below this summer's average cash price. Amazingly, this is in spite of inventories tracking to 3.3 Tcf entering the coming winter, what would be their lowest levels in a decade. Weighing on the market is production. Platts Analytics forecasts roughly 6 Bcf/d of growth in 2019 over 2018, which is on top of the 6.8 Bcf/d expected in 2018 over 2017. However, amid the bearish backdrop, there is one reason to be more bullish next summer. Infrastructure, or the lack thereof. With more than 3.0 Bcf/d of demand growth forecast in the Southeast and Texas next summer and insufficient capacity into that region from the Northeast and Permian, Henry Hub could be short gas, providing upside risk to 2019 prices.

U.S. May 2018 DOE Monthly Revisions: Demand and Stocks. Very bullish figures for diesel demand

The EIA just released their monthly May 2018 (PSM) U.S. oil supply/demand data. May 2018 demand came in at 20.357 MMB/D, which was 150 MB/D higher than what Platts Analytics had assumed in its balances. Many of the pieces of the report were extraordinarily bullish. Demand was revised higher by 118 MB/D vs. the weeklies, with distillate revised higher by 290 MB/D. Overall demand grew 1.7% vs. year-ago, with distillate higher by 7.7%. With regard to stocks, total commercial stocks came in 10 MMBbls lower than Platts had assumed, with products lower by 7.2 MMBbls. Distillate stocks in May drew 5.4 MMBbls, vs. an assumed draw of 0.7 MMBbls, and against a normal average monthly build since 2000 of 4.2 MMBbls. The only other draws seen since 1988 were in 2017, 0.7 MMBbls, and 2012, 3.2 MMBbls.

Global Equities Ease Slightly

Global equities eased slightly on the week, with many international indices declining, while the U.S. performed positively. The U.S. S&P 500 gained 0.8%, with consumer staples continuing to build momentum and moved higher by 1.7%. Retail, utilities, and technology also outperformed and gained about 1.2%. Energy declined 1.8% and was the weakest sector. Internationally, China and Hong Kong displayed acute weakness and were both lower by about 4%, while Europe also generally lost ground. Latin America continued to rally and moved higher by 1%.

U.S. May Production Declines as GOM Maintenance Outweighs Slower Onshore Growth

U.S. crude and condensate actuals for May 2018 came in at 10,452 MB/D, 35 MB/D lower month-on-month but still 1,260 MB/D higher year-on-year. Losses in the Gulf of Mexico due to maintenance weighed on production. Shale growth also slowed. The May actual was 127 MB/D below our end-July Reference case. Looking ahead, we still forecast year-over-year growth in U.S. crude and condensate production of 1.4 MMB/D in 2018 and 0.9 MMB/D in 2019.

Saudi Arabia: Latest FX reserves up slightly, stabilization evident

Saudi Arabia reported their end-June foreign exchange reserves last week. Reserves increased $1.8 billion USD on the month and reversed the $2 billion draw seen in May. FX reserves have clearly stabilized due to oil price realizations reflecting Dubai holding near $73/Bbl, and the decision of allowing domestic Saudi interest rates to become market responsive to what had been a rise in US-Libor rates. With US-Libor having stabilized, Saudi domestic rates have also stabilized. In having let domestic rates respond to US-Libor rates meant there was much less need to use fx reserves to defend the USD-Riyal fx peg. This, along with stronger oil pricing has allowed fx reserves to stabilize. The twelve month forward FX rate has also been relatively stable.

Shale Costs Going Up While Non-Shale Keep Coming Down

Since oil prices collapsed in 2014, worldwide breakeven costs have been reduced significantly as a result of concessions from service contractors and efficiencies. However, U.S. shale oil is now experiencing cost inflation due to increased activity. Continued efficiencies in shale oil are not expected to offset inflation and break-evens are projected to be slightly higher in 2018 compared to 2017 (+2%). For non-shale worldwide developments (e.g. offshore, Canadian oil sands), concessions from service providers are continuing in 2018 and break-evens are also expected to be lower this year (-3%). The gap in break-evens between U.S. shale and non-shale is narrowing and cost pressures on shale oil are expected to linger beyond 2018 while for non-shale further cost concessions are likely due to continue due to low activity.

Expected increase in Japanese nuclear and renewable power generation to impact demand for fuel oil

Seven years after the powerful 2011 earthquake and Tsunami led to the shutdown of Japan’s nuclear industry, nuclear generation has made a small comeback in recent years with five more units expected to return to service from June through end 2019. This is expected to lower resid consumption and crude burn by 10 MB/D this year and by a further 13 MB/D in 2019. Underlying this forecast is a continuing decline in total electricity demand and a larger role for renewable and nuclear. Absent these bearish assumptions, the effect on power sector oil demand would be even smaller. We expect that new regulations limiting high sulfur bunker fuel consumption - which will come into force in 2020, will result in resid partially displacing crude burn in 2019.

Aramco Pricing for September: Nothing out of the set

Saudi Arabia just released their pricing for September liftings. Saudi pricing adjustments were mostly in line with the market drivers. Having already increased production from 10.06 MMB/D in May to 10.5 MMB/D in July and August, the adjustments are not geared towards pushing any further large-scale increases in output. Pricing to Asia was cut slightly less than the change in Dubai structure would have suggested, as product cracks have strengthened and refiner demand rises with higher runs. In the U.S., pricing was tightened across all grades and essentially reverses the cuts made for August liftings. The LLS-Mars spread narrowed in July, while the margin on Mars in the USGC improved, which supports the tightening of OSPs. Saudi barrels still remain priced at a premium to domestic barrels by $1.25-1.45/Bbl. In Europe, pricing was cut $0.40/Bbl on Arab light, and reflects a wider discount on Urals vs. Dated Brent.

Vietnam: Nghi Son Refinery Starts Up, Product Imports to See Sharp Decline

Vietnam is expected to begin full operations of the Nghi Son Refinery in August. The greenfield 200 MB/D project began trial runs in late February, and will be the second refinery in the country alongside the 140 MB/D Dung Quat. The new refinery will run mainly imported Kuwaiti crude and turn Vietnam into a net crude importer. Continued declines in domestic production could see Vietnam’s crude exports decline to minimal levels over the next several years. Vietnam imported about 300 MB/D of oil products in 1H 2018, the bulk of which was gasoline (70 MB/D) and gasoil (137 MB/D). Imports currently account for about 65% of domestic consumption but will decline sharply once supply from the new refinery hits the market. Given continued demand growth, imports could rebound to current levels by 2026-27 if no further refinery capacity is brought on stream. Current product imports are sourced mostly from Singapore, Malaysia and South Korea, and reduced requirements will have a mild negative impact on regional refining margins, all else being equal.

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