Product Stocks Will Draw Boosting Refinery Margins

Oil prices have been consolidating and will soon move higher. Demand growth is strong and OPEC/non-OPEC cuts accelerate the drawdown of surplus stocks while recovering U.S. shale growth will take time. Relatively firm gasoline cracks will support margins and runs to cover both local demand and the import pull by Latin America/Africa for gasoline and distillate. China imports of mixed aromatics also supportive for Atlantic Basin gasoline. Light product stock levels are still high but will decline with gasoline going first. Gasoline cracks will outperform diesel. HFO cracks will trend lower but still remain relatively firm due reduced Russian and Venezuelan exports.

The NBP Forward Curve: How is LNG Changing Its Value?

The LNG market may not be delivering much actual LNG into N.W. Europe, but it is beginning to deliver more liquidity into the forward curve for NBP and its benchmarking neighbors. PIRA surmises that while physical LNG from Atlantic Basin producers is being delivered into the Mediterranean, Caribbean, and even South America, the financial risk associated with these cargoes is increasingly tied to U.K. prices. This disconnection bears watching. PIRA believes the forward curve will become increasingly reflective of Atlantic Basin gas fundamentals rather than just the U.K. itself or even N.W. Europe.

Spain: Price Strength Continues in Spite of Diving Gas Prices

Spanish day ahead prices are showing resilience, even in the most recent weeks, in spite of surging imports from France (almost 2 GW on average in the second half of February) and a noticeable decline in gas prices. We have analyzed Spanish day ahead power prices in February, compared to coal and gas capacity dispatched in the corresponding days. Our analysis shows no noticeable shifts in the dispatching patterns during the month, suggesting that plant operators’ behavior has not been really changing, in spite of diving gas prices or higher imports from France.

Pacific Basin Coal Prices Move Higher on China Supply Concerns

Despite losing significant ground on Friday, seaborne thermal coal market forwards finished the week higher than last Friday. This was most pronounced for the FOB Newcastle market, which increased by over $3.00/mt at the front of the curve. The Pacific Basin market in particular continues to focus on the negotiations over the potential return of the working day cap at Chinese coal mines, which has been made more complex considering the banning of North Korean anthracite. These fears of tighter supply in China and the surrounding area likely explains for some of the relative strength in FOB Newcastle prices. PIRA continues to believe that the working day cap will go back into place at the end of 1Q17, which will underpin strength in China’s imports and prevent sizeable pricing losses for FOB Newcastle.

Concerning Quiet Before RGGI Auction

Benchmark RGGI contract pricing has moved higher in 2017 but scant trading volumes and extremely low open interest are cause for concern in advance of the March auction. Although there is a surplus of allowances, bank draws are required each year and players without compliance needs hold a significant portion of the bank. The RGGI Program Review has been progressing very slowly without clear market signals. Price support could come from the proposed Emissions Containment Reserve. Various state level emissions reduction initiatives are advancing and undermining the role of RGGI, though the NEPOOL IMAPP effort has slowed.

U.S. Ethanol Prices and Manufacturing Margins Decline

Prices retreated from a six-week high the week ending February 17. Manufacturing margins fell for the first time in three weeks. D6 RIN prices decrease. Brazil’s South-Central region is in its inter-harvest period. Production plunged and prices fell. European prices soared to the highest level in over a year.

Fed Will Tighten Policy Again Fairly Soon, but Remains Dovish

The minutes for the January 31 – February 1 Fed meeting provided a few important pieces of information about the likely path of the future U.S. monetary policy. First, a consensus is building for another rate hike in the next several months. After a probable rate hike by mid-2017, policymakers appear uncertain about a plan for proceeding – an uncertainty about the Trump administration’s fiscal policy plan is a key reason. So overall, the likelihood is that the central bank will tighten monetary policy only at a gradual pace this year. In recent periods, the Fed’s balance sheet size has emerged as a flash point between policy hawks and doves. But based on what the minutes said, the Fed is not expected to start tapering its bond purchases anytime soon.

Brazilian Crop Size

Soybean longs may have received some “cover” from the option expiration last Friday, but negative news was prevalent late in the trading week as the USDA Outlook Forum acreage number of 88 million was a bit unexpected. More importantly in PIRA’s opinion, local Brazilian crop estimates continue to seemingly jump by leaps and bounds regularly as Agroconsult posted a 108M MT expectation late last week, with an upwards bias, while adding a 65M MT second-crop corn estimate.

India's Reliance Takes Delivery of Third Ethane Tanker

The Ethane Pearl, the third VLEC (Very Large Ethane Carrier) delivered to India’s Reliance Industries was seen loading in Morgan’s Point, TX at Enterprise’s ethane export terminal on 2/15. The newbuild tanker, capable of transporting over 500,000 barrels of ethane cargo per voyage, was seen leaving the shipyard some weeks ago. The vessel idled in port for about five days and departed on 2/20. The cargo is expected in India with an ETA of 3/20. With the fourth of six total delivered VLECs, the Ethane Opal, en route to Houston, ethane exports from the PADD III terminal will surely ramp.

U.S. Product Stocks Lead the Inventory Decline

Commercial inventories drew by about 11 million barrels for the latest reporting week, reversing the build of the previous week, and narrowing the year-on-year stock excess to 43.8 million barrels. The stock decline was led by products which were 11.6 million barrels lower, with key light products leading the draw. Crude stocks saw only a slight 0.6 million barrel build this week to another record high of 518.6 million barrels, 42.4 million barrels ahead of last year, slightly narrowing the excess position. Cushing stocks drew once again falling by over 1.5 million barrels for the past week.

Assessing Post-Winter Recovery

The degree-day meltdown during the second half of the heating season has temporarily eased the market’s concern about emerging structural tightness. Yet, the tepid supply recovery reinforces the need of price-driven demand destruction. With gas prices in higher than the current trading range likely needed to achieve adequate demand accommodation, we expect that end of winter price weakness will likely be followed by green shoots this spring.

Cape Freight Rates and Iron Ore Prices Diverge

The 180,000 dwt Baltic five-route Cape average peaked in mid-January at just over $12,500/day. It then declined steadily to reach a low of just over $4,600/day last Tuesday but then rallied to close on Friday at just over $6,100/day. Weaker Chinese steel exports have been weighing on freight rates, although output from major iron ore producers has remained strong. PIRA continues to look for a rebound in Capesize dry bulk freight rates in 2H17 based on constructive fundamentals.

USDA Acreage Forecast Leaves Questions

At 178 million combined soy and corn acres, the USDA Outlook Forum numbers are still 2 million acres below PIRA’s target and also 900K below the Bloomberg survey expected mix. Whether or not the USDA is allowing for possible Prevent Plant in their total, or possibly estimating the impact of large farmer bankruptcies, of which we read more and more about every day, is anyone’s guess. All things being equal, PIRA still believes that a drop of 3.6 million acres in the 8 largest crops, and 3.9 including the Conservation Reserve Program, is a stretch.

Another Record Setting Week

The S&P 500 set another record this past week. Stresses remain very low, as does volatility (VIX). High yield debt (HYG) and emerging market debt (EMB) gained in price on the week. On the commodity front, total, energy, and ex-energy all fell, but precious metals retained their bullish bias. There was a softer tone in industrial metals and ag commodities. The dollar was mixed. With regard to interest rates, it appears the disinflation trade has regained momentum, with lower rates on the longer-term maturities in many of the tracked countries.

U.S. Ethanol Stocks Built for the Seventh Consecutive Week

The week ending February 17, U.S. ethanol stocks built for the seventh consecutive week, increasing by 169 thousand barrels to a 47-week high 22.7 million barrels. PADD II stocks soared to a record 8.1 million barrels, 282 thousand higher than the previous high set two weeks earlier. Domestic ethanol production dropped for the third straight week, falling 6 MB/D to a 2017-low 1,034 MB/D. Ethanol-blended gasoline manufacture rebounded to 8,644 MB/D from 8,462 MB/D.

Japanese Crude Stocks Surprise to the Downside and Hit New Low

Japanese crude runs eased on the week. Crude imports were very low, which drew crude stocks aggressively by 5.9 million barrels to a new record low. Finished product stocks rose a modest 0.3 million barrels. Finished product demand fell back for a third straight week. Gasoline demand fell back and is characterized as soft and stocks built for a second straight week. Gasoil demand was higher, but the supply side increased more and stocks posted a second weekly increase. Kerosene demand fell back again as heating requirements have peaked. The stock draw rate moderated further. Refining margins were lower on the week, but levels remain acceptable, for now.

No Equilibrium in LNG Markets as the Supply Keeps Coming

Global gas balances will continue to loosen over the next few months, as incremental supply rises and seasonal gas demand drops precipitously. The first drop in seasonal gas demand will occur in Asia in the second quarter followed by a large drop in Europe during the third quarter.

Prices Slip with Nat Gas, But 1H17 Price Fall Overdone

Warm weather is quashing NG demand and prices, but coal demand continues to run higher year-on-tear as natural gas prices are significantly above last year’s levels. Coal prices have slipped with falling natural gas prices, but coal price declines may be overdone given solid underlying fundamentals.

Global Equity Strength Continues

Markets continue to generally advance. In the U.S., more records were set, with utilities, consumer staples and housing performing the best. Energy was again a laggard, down 1.4% on the week. Internationally, emerging markets, emerging Asia, and China did well, while Europe lagged and moved lower on the week.

Asian Refiners May Get a Breather as Growth in China’s Net Exports of Key Products Slows in 2017

Asian refining margins have been pressured over the past year due to increased exports from China of gasoline, kero/jet and gasoil/diesel. Independent refiners raised refinery runs after receiving quotas to import crude as feedstock. For 2017, PIRA expects China’s crude runs growth to ease from last year. Chinese apparent demand for gasoline and kero/jet is forecast to remain healthy, though domestic demand for gasoil/diesel is expected to remain relatively weak. Asian refining margins should generally be moderately supportive this year as regional demand growth is expected to outpace incremental refinery throughput in the region. Overall, Asian refiners may get a breather as the growth in China’s net exports of key products slows in 2017.

February: One for the Records

Since 2000, February traditionally accounts for 23% of winter heating demand. Yet, this season February will account for just 19% of seasonal load — a standout mild event in an otherwise warm winter. The ensuing accelerated downward pressure on gas prices — for the benchmark Henry Hub (HH) as well as all key markers tracked by PIRA — is more than understandable.

Ukraine’s Industrials Get Gas Price Relief

Natural gas prices for industrial consumers will lower by 7% in March 2017 which corresponds to a decrease on the European market. Naftogaz of Ukraine also confirmed that natural gas prices for household consumers had been set at a lower rate as a result of special obligations imposed on Naftogaz of Ukraine NJSC and other market participants by the Cabinet of Ministers of Ukraine.

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.