More Consolidation Required Before Next Leg of Bull Market
The oil market remains in consolidation mode because of positioning, the sharp move up in prices since August and the fact that the impact of the OPEC/non-OPEC cuts have not yet been seen in onshore markets. Geopolitical risks to supply are growing, especially with the new U.S. Administration that is likely to change the rules of engagement in the Arabian Gulf. Gasoline cracks will stay generally healthy while distillate cracks gradually recover. OPEC cuts have tightened medium-sour balances, narrowing light-medium quality differentials.
Canadian Producers Continue to Grow Output
With 2016 in the history books, the embryonic backdrop of 2017 now taking shape is emerging as a significantly different landscape than 2016. Canadian producers discouraged by persistent headwinds through last year should find some freedom from concern in the latest increases in rig mobilization and in-basin prices. Most importantly however, the absence of key Appalachia pipeline approvals represents a windfall opportunity for Canadian marketers plagued by a lack of growing markets. PIRA’s expectation of near-term Canadian supply growth is further enhanced by the challenging US regulatory environment, currently in a state of flux, given the latest political developments. Irrespective of regulatory uncertainties which are admittedly difficult to foresee, the premium placed on “steel in the ground,” is anticipated to grow — with the remainder of the heating season set to underscore the critical importance of existing midstream assets.
Up to Half of U.S. Nuclear Generation Potentially at Risk of Early Retirement
Recent years have seen increasing pressure on U.S. nuclear power plants, due to low energy prices and/or rising plant costs. PIRA recently completed a detailed unit-by-unit analysis of the U.S. nuclear generation fleet considering a range of risk factors, including plant economics, safety, and environmental concerns. The analysis indicates which U.S. nuclear units may face early retirement risk, and discusses the potential implications of these retirements for electric generating capacity, natural gas supply, and carbon emissions.
President Trump: Crazy as a Fox
Following the inauguration of President Donald Trump, the U.S. is undoubtedly entering an era of “America first” policies and deal making. The absence of a political track record makes it difficult to pinpoint many specific policies Trump may implement. But his 1987 book The Art of the Deal sheds some light on his convictions and worldview, so may provide hints into how policy will be conducted over the next four years. Trade and foreign affairs are two areas in which the executive branch enjoys significant autonomy, so both areas appear set for a major shakeup. We see potential implications for U.S. trade deals (NAFTA), trade policies (border adjustment tax, tariffs), and foreign policy (Russia, Iran, Asia). Post-World War II alliances appear less solid, and multilateral institutions will take a back seat to U.S. interests.
Argentina Concerns Dissipating
After a 3.5 day rally from 30 to 65 cents mid-month, the July/November soybean spread has seen 7 straight trading days of lower highs and lower lows, trading down to 38.5 cents at the low Friday, a loss of 40% from the highs. While volatility in this spread is some of the highest of any spread on a year-to-year basis, that volatility is usually seen in later months like April or May as South American production numbers firm up and U.S. acreage does the same. This year however the spread got an “early start” as memories of last year’s spring flooding in Argentina, along with stories of 90 million U.S. acres in soybeans for 2017, “spooked” the spread higher. While much more gradual than the run-up, this recent selloff would seem to indicate that concerns over Argentina are waning, the Brazilian crop is confirming to be a record, or a combination of the two.
Warmer Weather Cools Seaborne Coal Market
Coal prices pushed lower this week, ending a two week bullish rally. CIF ARA forwards prices declined by the greatest extent, due to the end of the cold snap in Europe, which drove up loads and coal demand. Additionally, stockpiles at ARA ports are nearly at 5 MMmt, a high point over the past 12 months. FOB Richards Bay prices also fell off considerably this week, with prompt pricing sliding by over $2.00/mt from the end of last week. FOB Newcastle prices held up by comparison, only sliding by $0.40/mt despite the beginning of the Chinese New Year Festival. PIRA has stated previously that we believe that FOB Newcastle prices were trading at too large of a discount relative to other pricing points, and it appears as if this situation has already begun to be rectified. With seasonal demand risks fading, a key pillar of support for coal pricing is starting to crumble.
U.S. Ethanol Prices were Stable
Manufacturing margins worsened for the week ending January 20. RIN generation in December climbed. The South-Central region of Brazil is in its inter-harvest period with only 15 of the sugarcane mills still operating. European ethanol prices soared to a 13-month high.
Economic Data Stay Expansionary; Market Data Break from the Past
Fourth quarter GDP data from the U.S., U.K., South Korea, and Taiwan were more or less as expected, and pointed to solid economic activity for the most part. Leading indicators from the U.S. and Europe were encouraging. Messages from financial markets were more complex. According to recent movements in world equity and bond prices, financial markets remain bullish about economic growth prospects, but apparently no longer expect a sharp tightening in global monetary policy conditions. A breakdown in a historical relationship between oil prices and the dollar exchange rate has also been noteworthy.
U.S. Stock Excess Widens
Commercial oil inventories built almost 9 million barrels last week as reported demand fell over 2 MMB/D. Gasoline inventories were up 6.8 million barrels as reported demand was very weak, in good part because of wintry weather, although 24% higher year on year retail prices are not helping. Crude stocks built despite lower imports as refiners cut runs, mostly because of maintenance.
Premium Regional Prices Highlight Difference between Security of Supply and Logistical Growing Pains
This winter’s regional price spikes are a classic example of the difference between the benefits of long-term planning versus the short-term realities of changes in the commercial landscape. The current European gas infrastructure is not adapting quickly enough to the realities of what is happening on the ground. The net effect will be several more years of major price volatility during peak demand seasons until the investments in traditional infrastructure catch up with new patterns in trade flows.
German Market Tighter than Expected – Spot Prices Return to Multi-Year Highs
While the French market continues to be tight, Germany also saw prices surging this month, with day ahead prices averaging €53/MWh so far in January and reaching €102/MWh in baseload on Jan. 24, the highest level since Nov. 2008. The unavailability of nuclear capacity, down to 8 GW from a nominal 10.8 GW, has certainly played a role in price formation. However, a key factor impacting dispatch and prices has been the severe lack of wind, with 800 MW of wind reported on that day. Put in a pricing perspective, it’s interesting that the back of the curve has moved so little in the recent market context of extreme dispatching patterns and price surges.
Ukraine to up Industrial Gas Prices in February
Naftogaz Ukrainy from Feb. 1, 2017 will raise the price of gas sold to Ukraine’s industrial customers on a prepayment basis by 22%. According to a company press release, this price is relevant for consumers buying gas in the amount of more than 50Mcm/mo. and under the condition the companies have no debts to Naftogaz. The price for other customers next month will rise by 21.1%.
U.S. Stockpiles Surge
U.S. ethanol inventories soared for the third consecutive week, building by 613 thousand barrels to 21.7 million barrels. Ethanol stocks are up 3.05 million barrels since the end of December. Domestic ethanol production dipped slightly to 1,051 MB/D from a record 1,054 MB/D during the preceding week. Ethanol-blended gasoline manufacture dropped to 8,302 MB/D from 8,363 MB/D.
US LPG Prices Soar on Dwindling Stockpiles
U.S. LPG prices skyrocketed higher as propane inventories dwindle to multi-year lows. February Mt Belvieu propane prices improved by nearly 8% to over 82¢ or 65% of WTI crude’s price. Tight butane supply led to a 14¢ rally in butane prices, with normal settling near $1.12 and iso above $1.13/gal at Mt Belvieu.
Global Equities See More Record Highs
Increasingly, global equities continued to post new record highs on the week. In the U.S, the growth indicator did particularly well, while the defensive indicator lagged. The strongest performing sectors were materials, banking, housing, and technology. Energy was modestly lower. Internationally, all of the tracking indices posted gains, with emerging markets, emerging Asia, and Latin America doing the best.
Japanese Demand Surges, Stocks Draw Sharply
Crude runs eased again, but are off only 114 MB/D from peak levels. Crude imports fell back and crude stocks drew 4.7 million barrels. Product demand surged and finished product stocks posted a broad based draw of 3.3 million barrels. Combined crude and product stocks remain in deficit to year-ago levels by 16.4 million barrels or about 10%.
Winter Rebalancing Underway
Despite what is shaping up to be another mild winter, Henry Hub (HH) prices have averaged more than $3/MMBtu through the first three months of the heating season. Price bulls are clearly “winning without weather” thanks in part to lackluster supply in the face of structural demand gains from the “Big Three.” While acknowledging the possibility of price erosion, as the winter begins to wind down and the market eyes more than adequate inventory levels, this season’s evolving structural tightness has undoubtedly raised the floor for 2017 prices. Indeed, until the uptrend in drilling activity translates into more material production gains, the extension of supply losses deeper into the year opens the door to even greater upside price risks ahead.
S&P Gains, Stress Low
The S&P 500 posted a solid week of gains and began to test its ability to break above the 2,300 level, but failed to do so at closing basis. Financial stresses remain exceedingly low. High yield debt added to its bull run, but prices on emerging market debt eased. Volatility as measured by the VIX index moved still lower. The U.S. dollar has generally been easing of late against many currencies. With regard to interest rates, there is still a broad upward movement in long-term interest rates.
Long Term Crude Prices Marked Down, Natural Gas Prices Updated in Advance of SPS Guidebook
PIRA lowered its long term (post-2025) Brent crude price outlook, but the outlook has NOT been changed between now and 2020. North American (Henry Hub) and global gas prices were also updated. The primary driver for the reduction in oil and gas comes from the supply side of the equation, as the potential shale resource base continues to grow, and production has exhibited greater resilience than expected to lower prices. This will put greater pressure on higher cost non-shale producers to reduce costs in order to remain competitive.
Spot Demand Cools and Seasonal Off Lingers
The winter reprieve for LNG marketers is about to come to an end. More LNG supply and a drop in seasonal gas demand are about to upend the balances. Assuming additional supply disruptions or a sudden rebound in demand growth is a lot to ask. Asian prices are already showing signs of strain and more is on the way.
Calls to Build a Wall Not Likely to Impede the Exodus of Gas Molecules to Mexico
While it’s difficult to speculate on the potential trade issues for cross border gas to Mexico with NAFTA renegotiations on the card, these potential changes are unlikely to affect US exports of natural gas for many reasons. On the US side, the incentives to export would be kept in place and on the Mexican side, there aren’t really any viable alternatives to US gas in the medium term.
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.
