U.S. Stock Decline Moderates

Overall commercial inventories declined 2.9 million barrels last week for another counter-seasonal draw, widening the year on year stock deficit by another almost 12 million barrels to a huge 139 million barrels, or 10.4%. Four week average adjusted demand is up 4.8%, or 925 MB/D. Crude stocks drew 1.1 million barrels this past week, with Cushing down 3.2 million barrels to 39.2 million barrels, confirming WTI backwardation. For this week, S&P Global Platts Analytics sees another 2.2 million barrel crude stock decline while Cushing crude stocks fall another 3.0 million barrels. Last week’s data showed another gasoline inventory build, but it was less than normal, while distillate stocks surprisingly built. For this week’s EIA data, S&P Global Platts Analytics sees another somewhat below normal gasoline build, while distillate stocks show a slight draw with demand rebounding.

U.S. Gas Short-Term Forecast - January 2018

The price forecast for the balance of 2018 has been raised in response to the impact to balances of the exceptional weather events in recent weeks. The February-December Henry Hub forecast average is $2.98/ MMBtu, up $0.17/MMBtu from last month’s forecast, which was published prior to the cold temperatures.

Global Choke Points Crimp LNG Trade as New Supply Generation Ramps Up

Choke points in the period of stronger netbacks to Asia give buyers and suppliers pause, one of the more important ones being the Panama Canal. Utilization rates by LNG have vessels shot up to 67% in December according to the Panama Canal Authority, begging the question of when it becomes a choke point as opposed to an access point to Asia.

Cape Freight Rates Rally Briefly but Then Drop Sharply

Capesize dry bulk freight initially rallied in early January, but have since fallen off considerably. Some of the previous bullish turn for rates was derived from strength in Chinese iron ore imports, although much of that strength was built upon an unsustainable buildup in stockpiles. S&P Global Platts Analytics has a bearish outlook on short and medium-term Cape freight rates and worries over the long-term implications of continued new ship ordering.

Japan Demand Pops, Runs Drop, Product Stocks Draw

Runs unexpectedly fell back 125 MB/D from max levels, with no planned maintenance scheduled until end-Jan. Crude stocks built 3.4 MMBbls on higher imports. Finished product stocks drew 1.2 MMBbls on higher demand among all the major products. It was the second weekly demand increase of about 375 MB/D. Balances remain constructive to cracks. Kerosene demand rose again as expected, with marginally lower yield and refinery output. The stock draw rate accelerated from 76 MB/D to 99 MB/D, with the 4-week average draw rate staying at 86 MB/D, close to the Jan norm. Implied refining margins remain relatively good and gained slightly on the week. Retail prices continue their rise, while the indicative marketing margin again improved a bit. The margin on gasoline remains above norms, while the margin on gasoil/diesel has recovered to just above norms.

U.S. Economic Growth to Stay Solid; Monetary Policy in Europe and Japan to Stay Dovish

The pace of U.S. GDP expansion moderated somewhat between the third quarter and the fourth quarter – but the underlying economic strength has continued to pick up. For one thing, volatile inventory and trade sectors subtracted from GDP last quarter. For another, a large number of industries has begun to report large investment spending, and the consumer sector has also experienced positive developments. Financial markets have been speculating that the European Central Bank and the Bank of Japan will shift policy in the hawkish direction this year. But no changes were announced this week, and policymakers suggested that policy shifts will not come anytime soon.

Propane Prices Fall on Asian Market Length

Propane prices fell 11% last week on perceived Asian market length. Ethane prices rose 4% as crackers come back online from unplanned shutdowns caused by the extreme cold snap on the Gulf Coast. U.S. raw mix production increased 1% and fell just shy of 4.0 million b/d. Propane exports were 722 Mb/d last week, which was 27% under expectations. Inventories declined 4.0 million barrels. PADD I propane stocks fell to 14 thousand barrels, and short supplies are being augmented with TEPPCO pipeline deliveries and imports from Europe. Propylene prices begin to retreat as propylene production begins to rebound with Dow’s PDH plant returning to service and Enterprise’s new build PDH plant preparing to come online in early February.

U.S. Ethanol Prices Decline

U.S. ethanol prices declined the week ending January 19. A total of 19.32 billion RINs were registered in 2017, down 0.8% from 19.48 billion in 2016. The European Parliament (EP) voted to cap the volume of biofuels that can be counted toward renewable targets for transportation fuels for the individual member countries at current levels or 7%, whichever is lower. The EP also voted to exclude palm-oil-based biodiesel from the list of biofuels that can be counted for the renewable targets.

Dry and Wet

Hopes for some weekend rains in Argentina, which had been the basis of Friday’s weakness in the soy complex, proved fruitless and the market gapped higher Sunday night with an eye towards Wednesday’s high of $10.10 basis March futures. More significantly however is the 5-day forecast for Argentina’s soybean Belt, which shows very little prospect for meaningful rains through Saturday. As usual, Argentine concerns should manifest themselves through the meal market but a heavy lift will be required there to overcome some longer term price hurdles.

North American Gas Regional Short-Term Forecast

NYMEX futures soared last week with the nearby contract setting a new 52-week high. Traders are fixated on the prospect of another Arctic blast, which would further weigh on storage levels. Futures are calling for NGPL Midcon and Waha’s historical near one-for-one relationship to end as soon as next month, but Platts Analytics expects NGPL Midcon to chase Waha downward into this summer. Strong winter demand continues to support spot LNG prices across Asia, with the Japan Korea Marker (JKM) rising to $10.55/MMBtu for March deliveries, $2.46/MMBtu (23%) stronger than last year at this time.

Indian Prices are Deviating from JKM - Emerging as an Independent Pricing Point

Indian LNG buyers have a reputation for being quite price sensitive, and we see that playing out for the balance of this winter. LNG buyers like GAIL and Petronet have made headlines with successful contract renegotiations with the likes of Exxon, Qatargas, and Gazprom. However, there also seems to be a short-term LNG buying dynamic at play with DES West India pricing widening to $1/MMBtu. This is effectively sending the signal to producers like Qatar not to let their cargoes stop at Dahej because there is more money to be had sailing off to Guangdong (CN), Higashi Ohgishima (JP), or Incheon (KR). Much of this is short-term, but has been impacting the market for the last month and is set to break, but does show an evolving global market that was once just about Henry Hub (US), NBP (EU), and JKM (East Asia). The current price action is starting to make a case for adding DES West India as an independent hub with its own market dynamics.

As Policy-Induced Closures May Be Avoided (for Now), Economics Are Back into Focus for Coal Plant Operators

As the policy framework remains a question mark for the future retirement of coal (and lignite) plants in Germany, recent developments in the fuel pricing complex are increasingly endangering their profitability. While coal prices remain relatively flat since the beginning of the month, EUA prices have surged well above €9/MT from the €7.8/MT observed at the beginning of the month. At the same time, CDSs have declined by €1.5-2/MWh across the board, making even the €2/MWh of 4Q-18 barely profitable for a generic 36%-efficient coal plant when fuel transportation and maintenance cost are taken into account.

Early Retirement Risk for U.S. Nuclear Generation

We have updated our analysis of early retirement risk amongst the U.S. nuclear generation fleet. The prior analysis, completed last year, included a detailed unit-by-unit analysis considering a range of risk factors. Based on this updated analysis, we continue to find that up to half of currently installed nuclear capacity in the U.S. faces some degree of early retirement risk in the next decade. Should nuclear generation be retired, it would impact reserve margins and result in a need for replacement power. Based on our estimate of 12 GW of early retirements between now and 2025 (including already announced retirements), 2-3 BCF/day of natural gas could be required to replace the lost generation. This would increase power sector CO2 emissions approximately 35 million metric tons, or 2% of 2016 levels. Discussions about the role of nuclear generation have continued in the states, at FERC, and various ISOs/RTOs, and proposals under consideration this year have the potential to affect nuclear plant revenues and decisions on operations.

Atlantic Basin Prices Continue to Lag Red-Hot Pacific

Prompt coal prices continued to diverge last week, with physical FOB Newcastle and NEAT Index prices rising significantly (+$1-2/mt), while CIF ARA prices moved lower. In the forward markets, while all deferred prices moved higher, the front of the CIF ARA and FOB Richards Bay forward curves moved lower, despite gains in FOB Newcastle. This divergence is all the more impressive considering the heightened probability that Atlantic Basin supply could be curtailed because of a labor strike in Colombia. Much of the divergence in the front of the market is likely due to extreme strength in Pacific Basin demand, while demand in Atlantic markets has been somewhat lackluster as warm and windy conditions have dented European coal demand.

Solar PV Module Tariffs Weaker Than Requested, Minimal Impact on New Builds

The recent announcement that President Trump would impose import tariffs on solar crystalline photovoltaic (PV) cells and modules had been expected for some time, although the final tariff levels were weaker than what petitioners initially requested. Tariffs at these levels will only slightly increase solar installed costs for both utility-scale and distributed installations, and are not expected to have a major impact on new U.S. solar builds over the next four years. Annual tariff exemptions and the lack of inclusion of thin film modules from the tariff regime may further mitigate the impact of the tariff regime. Other policies, such as state-level renewables targets, as well as the desire to capitalize on both the expiring Investment Tax Credit and existing net metering policies, will continue to play a major role in determining new U.S. solar capacity going forward.

New Tax Law Drops U.S. Oil Breakevens

The recently enacted tax law reduces U.S. breakevens by around $3/Bbl (-6%). Average breakevens of major U.S. shale oil plays are reduced by $2/Bbl while GOM projects by $4/Bbl. The new law lowers the corporate tax rate from 35% to 21% and allows operators to expense all capital investments (previously mostly depreciated over several years) for income tax purposes. New U.S. investments starting in January 2018 will get the full benefit while currently producing fields will continue to depreciate assets under the previous law but will be subject to the lower income tax rate of 21%. This change will further lower the tax burden for the energy sector while encouraging more capital spending. However, other factors such as outlook for oil prices, the recent capital discipline demonstrated by several U.S. oil producers, and cost pressures from service providers will also play a role on how much additional investment takes place.

Financial Stresses Stay Low

The S&P 500 continues to set new records as it begins to close in on the 2,875 level. Credit remains constructive, though the divergence that has developed, and visible in certain key charts, continues provide a hint of caution. Also a concern, VIX has risen 26.6% since the January 3, while “Skew/VIX” has fallen -27.8%. One interpretation is that the market is pricing in more tail risk via the option market, all while new market highs continue to be set. The U.S. dollar continues to weaken noticeably, down -1.64% on the week and -4.24% on the month. The reflation trade and strong economic growth paradigm remains the central theme. The total commodity index moved higher by 2.55% for the week. The St. Louis financial stress indicator moved modestly higher for the second straight week.

Stocks Reach an All-time High

U.S. ethanol stocks climbed in every region last week, bringing total inventories to a record 23.8 million barrels. The 1.06 million barrel build for the week was the sixth highest ever reported. Ethanol production was relatively flat, increasing 1 MB/D to 1,062 MB/D. Ethanol-blended gasoline output dropped sharply, falling to 8,231 MB/D from 8,515 MB/D in the preceding week.

It’s Conference Season

The mood at this year’s three-day Top Producer conference in Chicago is best described as reserved, which was certainly expected given the current price structure. Attendance was reportedly down slightly from last year according to Farm Journal, organizers of the event, but measurably lower than just 3-4 years ago, also reflective of the current environment. All the major seed companies were there hawking their services as to be expected, as well as “data” groups like Farmer’s Edge and the Farmer’s Business Network. A walk through the exhibition hall at the Chicago Hilton however saw very little interaction between producers and the industry as our takeaway from the 3 days was that the U.S. producer is holding his/her cards very close to their vest.

U.S. Gas Weekly Report

Henry Hub spot prices averaged ~$3.28/MMBtu for the week-ended January 25, a decrease of 75 cents/MMBtu (19%) W/W. Much of the losses can be attributed to significantly milder weather W/W, as temperatures increased by 11 degrees (33%). Despite weakening Henry Hub spot prices, the NYMEX futures prices saw increased bullish sentiment as forecasts turned colder for February. Indeed, the February NYMEX contract hit a weekly high of~$3.62/MMBtu (settled at ~$3.53/MMBtu) on January 23, the highest level for the rolling prompt month contract since December 2016.

Northwest Markets Shift to Price Taker from Maker, With Added Risks

Another week of price deterioration confirms our view that gas demand is losing ground in both the power sector and R/C sector. The steady decline in winter prices since mid-December is now building momentum across the balance of winter as current storage levels have moved well above normal and capacity to inject this spring and summer is now becoming more of a problem than an opportunity. Summer/winter spreads for 2018 remain a very healthy 9p/th, so the less injection room that is available come April, the more the downward pressure that will emerge on spot prices in 2Q and 3Q. If Winter 2018 holds up relative to summer, the incentives to inject will only grow.

November is Third Consecutive Month of Bullish Stockpile Data

On January 24, the EIA reported bullish end-November electric power sector coal stockpiles of 143.1MMst, a build of 1.9MMst m/m as compared to a 6.4MMst average November build over the most recent five-year period (2012-2016). At 143.1 MMst, end-November stockpiles were sitting a sizeable 27 MMst lower y/y and 26 MMst below the most recent five-year average. November is the third month in a row when the build in stocks has come in below the most-recent five year average.

Saudi Arabia: Latest FX Reserves Suggest Further Improvement in Fiscal Balances

Saudi Arabia just reported the level of their end-December foreign exchange reserves. Further improvement towards fiscal stabilization was apparent with the level increasing $2 billion USD vs. November and marking the third straight month of increase. The October level had increased by $8.1 billion USD to start the string of noticeable improvement, but that had been influenced by a $12.5 billion bond issuance in September. The results for November and December are more indicative of the underlying trend. Further progress is anticipated with the increase in fuel prices that recently went into effect, a 5% value added tax that began in January, along with an excise tax on certain commodities such as soft drinks, energy drinks, tobacco, and certain potential luxury goods.

Equity Markets Sets More Records

Global equity markets continued to set many new records. The U.S. market was higher by 2.2%, with the S&P 500 beginning to test the 2,875 level. The strongest gain was registered in consumer discretionary (+3.2%). Most of the other domestic tracking indices either underperformed, or matched the broad S&P 500. All the international tracking indices gained on the week, with the best performances again being in Latin America (+5.5%), China (4.5%), and emerging markets (+3.3%).

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.