U.S. Stock Deficit Slightly Widens
Overall commercial oil inventories fell 2.6 million barrels this past week led by another sizable crude stock decline of 5.1 million barrels with Cushing crude inventories falling 3.3 million barrels, the largest weekly decline since 2009. Another sharp crude inventory decline of 5.5 million barrels is forecast for next week with the Cushing decline moderating to 1.2 million barrels. Gasoline stocks built another 5.7 million barrels last week and PIRA sees them increasing 3.2 million barrels in next week’s EIA report, further narrowing the year on year inventory deficit. Distillate stocks draw 3.8 million barrels in next week’s report, following upon this past week’s 1.4 million barrel inventory decline which should lead to a further widening of the year on year inventory deficit to 29 million barrels (19%). Overall adjusted product demand is up 3.3%, or 630 MB/D year on year over the last four weeks, while total commercial stocks are 94 million barrels (7%) below year ago levels.
Better Growth, but Missing Inflation to Keep Fed and ECB from Jumping the Gun
According to updated projections from the U.S. Federal Reserve and the European Central Bank, 2018 GDP growth is expected to be very healthy in both the U.S. and the euro area. On the inflation outlook, the Fed projects a rebound for next year, but confidence in this view is apparently not high. The ECB looks for low inflation for 2018. If inflation in developed economies remains subdued, central banks will then likely react by changing policy in baby steps. In China, November activity indicators were constructive. Retail sales data showed that the single’s day was a big deal for internet commerce.
Propane Prices Weaken on Small Inventory Build
All NGL purity product prices except ethane declined week-on-week. Ethane prices rebounded with news of two Gulf Coast steam cracker plant restarts. Propane prices fell 7% on news of a second consecutive weekly stock build. While implied propane demand was respectable at 1.39 million barrels, strong production and imports coupled with weak exports contributed to the propane stock build, which placed downward pressure on prices. Propane imports from Canada reached 213 thousand b/d, which is 36% greater than the corresponding week last year. Propane exports were 706 thousand b/d, which is down significantly from the November export levels due to strong U.S. propane prices and a tight Asian arb. However, propane exports are expected to rebound this week to about 900 thousand b/d based on observed increased ship activity at U.S. Gulf Coast ports. U.S. steam cracker margins increased last week for all feedstocks except ethane. The week-on-week changes in steam cracker margins were consistent with NGL feedstock and olefin price movements. Olefin prices were mixed with ethylene prices declining, propylene prices increasing and butadiene prices unchanged.
Fundamentals: Bearish Power Prices; Bullish Gas Burn
Spot on-peak energy prices in Northeastern locations were mostly higher y/y due to higher gas prices and cold weather driven loads. Most PJM and Midwest locations had small gains, while ERCOT and SPP prices were mostly lower y/y. Eastern Interconnect average raw loads increased 3.6% y/y in November. The increase in raw loads is the second consecutive y/y increase, and follows the previous four months which saw y/y drops during a milder than normal summer and fall. Current estimates suggest that December will register below normal GWHDDs. This has led to downward move in spot and near-term gas price. Limited potential production growth in the back half of 2018 and into 2019 is partly why our 2019 price outlook remains anchored around ~$3.20/MMBtu.
EUA Prices Set to Weaken in 1H2018
Recent sources of EU ETS policy uncertainty, regarding both post-2020 market reforms and the potential impact of Brexit on U.K. compliance in 2018, are mostly resolved. As such, European Carbon (EUA) price formation for now should come mostly from supply-demand fundamentals. These are set to weaken in 1H2018, given high auction volumes and lower power sector EUA demand. However, prices could move upwards after that, especially with Market Stability Reserve implementation coming in 2019.
Japan Staying on Glidescope for Year-end Final Approach
Two more reporting weeks lie ahead before year-end, with most trends remaining on glideslope. This week, crude runs rose marginally, while crude stocks corrected back down, due to a low import figure. Finished stocks drew less than 0.5 MMBbls on a good kero and fuel oil draw. Aggregate major product demand rose 97 MB/D, with the 4-week average rising 42 MB/D. Kerosene demand was strongly higher. Incremental exports rose 44 MB/D, while modestly lower yield trimmed supply. The stock change pattern reverted back to a draw of -110 MB/D, after a modest build. Degree-days remain ahead of last year and ahead of norms. Implied refining margins rose, and remain very good. Retail prices posted only a modest change, while the indicative marketing margin has been improving and is now above norms.
U.S. Ethanol Prices Tumble
U.S. ethanol manufacturing margins declined the week ending December 8. RIN prices plunged following the new RFS mandates for biofuels for 2018 and biomass-diesel for 2019. Brazilian ethanol exports soared in November. The harvest is winding down in the South-Central region. European ethanol prices slide.
The Blame Game, Part II
On November 3rd, a report with the same title was issued wherein we looked at the lack of influence of the record Fund short on corn prices. At the time December futures were on the precipice of making their low of $3.3625 on November 16th. If the “last contract sold” at that price was rolled to March at the worst price of the spread during the roll of -10.25 cents, the short would theoretically be on the books at $3.47, within the recent, and overnight, range. Hardly much of an influence on prices as tens of thousands of contracts have been covered, and subsequently re-established, since making that low in the December contract, with almost no effect on prices as March futures have traded in a 14-cent range for the last 6 weeks and made a new low of $3.465 on Friday, which was duplicated overnight. While PIRA is on record as “blaming” the Technology Treadmill for many of the ills that plague corn prices, and the majority of grain and oilseed markets, others are now weighing in on possible causes as 2017 comes to an end.
U.S. Gas Weekly Report
For the EIA week ended December14, Henry Hub cash averaged $2.76/MMBtu, down by 12 cents/MMBtu (4%) from the prior week —while also marking the fourth W/W decline in a row. Furthermore, the national benchmark reached a significant low of $2.67/MMBtu on December 14 —the lowest mark since November 4 at $2.64/MMBtu. Futures also fell with cal-18 settling Thursday at $2.71/MMBtu. Moreover, the shape of the curve has flattened significantly, with the typically-premium January and February 2018 NYMEX contracts settling basically flat to July and August 2018/
It's Now or Never for European LNG
A triumvirate of European gas outages (Baumgarten, Forties, Troll) are impacting LNG pricing around the world and gas flows around Europe, though the immediate impact on European LNG imports has been negligible.
Gas Outages Expose New Layer of Bullish Risks for Power
An unusual combination of outages through the European gas networks has sent a warning signal to the power markets about new upside risks this winter that go beyond the delayed restarts of the French nuclear plants and low hydro levels in the Southern markets. The UK and Italian gas markets are expected to remain tight in the near term, with the potential added risk of reduced CCGT dispatch in these markets to preserve gas stocks in case of a cold spell. These two elements have been driving French power exports higher towards those markets in the past few days, while the maintenance of the 1 GW Doel-3 Belgian reactor, initially planned until Dec. 10 and now extended to mid-April, is also limiting imports from the Belgian/German border.
Lower California Carbon Prices
Benchmark contract prices for California carbon allowances declined in Nov and Dec, moving below $15 after the ON auction results. PIRA has been expecting a combination of weak emissions data and increased supply in the near term to limit upside pricing momentum for the WCI market. Key CA cap and trade decisions will be made in 2018-19 to determine the eligibility of out-of-state offsets and the cost containment pricing points and to address "overallocation." Canadian provinces will look to continue progress on developing offsets as the QC/ON balances turn negative sooner than those of CA.
Seasonal Demand, Gas Disruptions Support Coal Pricing
Seaborne coal prices moved notably higher this week, supported by a surge in oil and gas prices and heightened demand levels in key consuming markets in both the Atlantic and Pacific Basins. The fundamental developments and the pricing response underscores PIRA’s prevailing view, that risks to the prompt market are skewed to the upside, particularly as demand is approaching seasonal highs.
Asian Oil Demand: Ending the Year with Yet Faster Growth
Our snapshot of Asian oil demand growth improved on the month to 1,244 MB/D vs. 980 MB/D seen last month. It was the fastest growth since June 2016. Our expectation is for a slowing in year-on-year growth, Dec-March, to about 750-900 MB/D. This month, the key drivers of the 264 MB/D incremental improvement to demand growth were gains in China (a gain from last month of +217 MB/D) and India (+156 MB/D). China’s demand improvement was supported by steady growth in crude imports, along with higher product imports. India’s growth was driven by fading impacts of the July 1st goods and services tax implementation.
More Records, Low Stress
The S&P 500 managed to close above the 2,675 level for the first time as the Santa Claus rally continued. With such new record highs have come lower volatility and positive high yield credit metrics. Oil volatility (OVX) was much lower on the week, though the energy commodity subsector performance was poor. There is a certain level of noted divergence that continues between equity performance (S&P 500) and credit (HYG). Nowhere is that more apparent than with the U.S. banking tracking index (BKX) vs. the 10-2 yr spreads, which scream divergence. Commodities were up modestly, but ex-energy did much better, up +0.94%. The dollar was modestly changed. The St. Louis financial stress indicator again moved higher from the record low set two weeks ago.
Output Fell, from the Prior Week but was still the Second Highest Weekly Production Ever
U.S. ethanol production dropped 19 MB/D last week to 1,089 MB/D, still the second highest weekly domestic output on record. Total inventories fell from a six-month high, declining by 170 thousand barrels to 22.4 million barrels. Stocks built on the Gulf Coast as large export volumes from that region are expected during 1Q 2018 when most Brazilian mills are closed for the season. Ethanol-blended gasoline production increased by 353 MB/D to 9,089 MB/D, rebounding from a six-month low.
The Fund Exodus
An article in Thursday’s Wall Street Journal focused on the intense interest in Bitcoin as a trading vehicle. While many don’t even know what Bitcoin is, never mind how it trades, when a massive buzz is created everyone wants “in”, reminiscent of the Gold Rush in the 1980’s when the average Joe bought gold for the simple reason that everyone else owned it at the time; no one wants to be left out. What investors don’t want to own at the moment is commodities, highlighted by the fact that commodity hedge fund closures outnumbered launches this year for the first time in the 17 years since such data began to be collected, according to the same article. In fact, only 8 new commodity funds were launched this year as compared to 130 in 2011. With stocks making record highs seemingly every other day, commodities have become very difficult to trade, especially given the lack of volatility. (If someone had said six months ago that the only way to make money in corn was to sell straddles and walk away for a while, more than a few eyebrows would have been raised.) The bright spot in all this is that the herd has been culled as too many traders were chasing limited returns, especially in agricultural commodities.
Global Equities Set More Records
Global equity markets set more records this week, with the S&P 500 closing above the 2,675 level for the first time. The strongest domestic sectorial performers were technology (+1.5%) and consumer discretionary (+0.7%). Internationally, many of the tracking indices again underperformed the gains seen in the U.S, with China showing the greatest fallback, (-1.3%).
A Tale of Two European LNG Importers in Stressful Times
Murphy’s Law states that anything that can go wrong will go wrong and the plethora of recent unplanned problems in European gas proved the law true. What becomes interesting is how the system managed one issue after another. In the case of the U.K., we saw a flexible market that was able to manage lost volumes, while the Italian market was left looking in awe as day ahead prices screamed up to €80/MWh. Despite having 7 sources of supply, Italy actually only had one truly flexible form of supply – conventional storage, not LNG.
3Q17 U.S. Producer Survey: Slow and Steady to Y/Y Growth
U.S. gas production achieved positive Y/Y growth during the past quarter, the first time since the beginning of the production collapse in 1Q16. On balance, the production momentum achieved has positioned these companies for the growth that is currently unfolding this winter, establishing a fast start out of the gate in the new year. Yet, with both oil and gas producers having discovered the religion of frugality, we see an increasing risk to growth momentum now developing for 2018.
Forties Force Majeure is First in the North Sea in Nearly Thirty Years
On December 14th, Ineos, operator of the Forties Pipeline System (FPS), formally declared force majeure. It is the first time force majeure has been declared in the North Sea in nearly thirty years. The last incident was the Piper Alpha explosion in 1988. Ineos also confirmed that the hairline crack in the pipeline has stabilized and no further growth was recorded in past 48 hours. The company reaffirmed prior notice that repairs will take at least two weeks and up to four. PIRA forecasts the shutdown to last approximately three weeks.
December Weather: U.S. and Europe and Japan Cold
At mid-month, December looks to be 7% colder than the 10-year normal for the three major OECD markets, bringing the month oil-heat demand to 326 MB/D above normal. On a 30-year-normal basis, the markets are 3% colder.
2017 Company Production Ownership Changes
Key acquisition and divestments in 2017 resulted in approximately 800 MB/D of liquids changing hands. The main winners were Canadian companies (CNRL, Cenovus) that acquired oil sand assets from Shell and ConocoPhillips. In addition, Total benefited from the acquisition of Maersk. PIRA’s updated company ownership database allows clients to get the most current ownership of global liquids production including distinction between public and state companies.
Current Forties Outage Could Be Largest Ever
The Forties Pipeline System (FPS) remains shut after closing yesterday as the owner (Ineos) addresses a crack in the onshore section south of Aberdeen. The currently forecast outage of two to three weeks could amount to the largest ever unplanned outage the system has seen.
Forties Pipeline Closure to Limit North Sea Volumes for Weeks
Operator Ineos announced Monday December 11th it would close the Forties Pipeline System in the UK North Sea to repair a crack in the pipe. The crack occurred south of Aberdeen in Aberdeenshire, Scotland in the onshore section of the pipeline. A spokesperson for the company reported that the outage would last several weeks. Flows were limited last week but expected to return to normal over the weekend. However, the initial “hairline crack” expanded further and Ineos decided to shut down the pipe entirely. Prior to the outage, the Forties system was forecast to flow 468 MB/D in December.
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.
