WTI Moves into Backwardation; Canadian Differentials Plunge on Surplus

WTI has risen above $60/Bbl and the prompt month is now in backwardation for the first time since late 2014. U.S. crude stocks declined more than 20 million barrels in December, with Cushing stocks falling 7 million barrels, following a 9-million barrel Cushing drop in November. Canadian crude differentials continued to fall, as stocks climbed again in December on higher production and residual effects of November’s Keystone pipeline shutdown. Bakken differentials fell, making rail shipments to the East Coast economically preferable to pipeline shipments to Clearbrook for North Dakota producers. Midland differentials continued to strengthen as West Texas stocks declined with more pipeline capacity from the Permian to the Gulf Coast. Nevertheless, the Permian Basin production forecast has been sharply raised and could result in a shortage of pipeline takeaway capacity later this year.

In Developed Economies, Labor Market Improvements are not Producing Faster Wage Growth

Payroll figures for 2017 demonstrated the dynamism of the U.S. economy. In 2018, the forward momentum for the U.S. is considerable. Sentiment indicators (such as the ISM manufacturing index) are solid, and the new tax law will also start to stimulate activity. PIRA projects 2018 U.S. economic growth to accelerate from the already healthy pace in 2017. But fast growth is not expected to result in economic overheating, based on recent labor market data. In the euro area and Japan, labor market improvements during 2017 did not lead to faster wage growth and inflation. Monetary policy is expected to stay accommodative in both jurisdictions during 2018.

NGL Prices Weaken

U.S. Gulf Coast NGL prices moved counter to crude prices over the week, with all purity products weakening except for ethane. With propane stocks appearing sufficient to carry the winter draw season, propane prices fell 5.25 cents/gal over the week to close at 93 cents/gal. Normal and isobutane each lost 12 cents/gal. Normal butane and isobutane prices were assessed at 97 cents/gal and 105.5 cents/gal on Friday, respectively. Market sources have attributed recent weakness in butane to high inventories in the latest EIA monthly data. The EIA reported exports of 534,000 b/d for the week ended December 29, a significantly lower figure than ship tracking data would suggest. Based on observed activity at US LPG export terminals, total LPG exports during the week were about 978,000 b/d. The discrepancy could be due to end-of-year accounting issues and, to some extent, increased butane in the LPG export mix. For the week ending January 5, LPG exports are expected to increase to 1.2 million b/d, with at least sixteen VLGCs observed loading at US ports this week. U.S. steam cracker margins surged last week due to the combination of lower feedstock prices and higher olefin prices. US spot polymer grade propylene prices soared to a three-year high on Thursday as ongoing planned and unplanned outages at steam crackers and PDH plants reduced prompt supply.

U.S. Ethanol Rebound the Week Ending December 29

U.S. ethanol manufacturing margins higher, but D6 RINs values lower. U.S. biodiesel margins rise to an annual high and manufacturing margins soar. Ethanol prices in Brazil higher as the South- Central region is in its inter-harvest period. The Latin American country passes RenovaBio, a national policy to support the sugar ethanol region. Ethanol prices in Europe steady, supported by higher mandates in 2018.

U.S. Polar Vortex Redux: “Oil-d” Wine in New Bottleneck

Electricity markets in the Northeast U.S. are currently facing cold weather reminiscent of the winter 2013/14 “Polar Vortex”. This time around – even with more efficient gas capacity installations, robust gas production nearby and recent gas pipeline expansions – we are seeing similarly high oil-burn for power generation. This latest rate of oil burn for power sector is about 500 KBD higher than what we would expect to see in a normal winter in the U.S. at this time of the year. If these generators start hitting environmental permit restrictions on burning oil or if they start running out of oil stocks in case of a more sustained cold period, then it could lead to forced outages and/or even higher wholesale power prices.

U.S. Gas Weekly Report

Record breaking demand and reduced supply helped propel the Henry Hub cash price to a seven day average of $4.40/MMBtu for the week-ended January 4, reaching $6.88/MMBtu on Thursday —the highest levels since the polar vortex in 2014. The February 2018 contract revisited and surpassed the $3.05/MMBtu mark, but by January 4, on the heels of the EIA storage report which fell short of industry expectations, quickly slipped to $2.87/MMBtu.

LNG Market Has Some Strong Pricing Decisions Going into April

Shoulder months are always tricky in energy markets. Demand can quickly shift away from heating and there becomes an interesting dynamic shift across LNG markets, as supplies gradually shifts away from Asia. Currently, Asia has its seasonal peak share of global demand in January of traditionally around 77% of global supplies and that will likely go down to around 67% come May. This certainly makes the global markets incredibly dependent on Asian demand, as they have very limited space to store excess LNG – so anything not used, by and large, needs to find a home elsewhere.

U.S Massive Commercial Stock Swing

Overall commercial inventories built 1.2 million barrels this past week, a far smaller than typical build, thereby widening the year on year stock deficit at the close of the year to 97 million barrels (7.3%). Crude stocks had their seventh consecutive weekly stock draw with this past week’s decline of 7.4 million barrels being the largest, rounding the decline to an astounding 35 million barrels over this period, a vivid illustration that surplus stocks are virtually gone. Both gasoline and distillate had large stock builds last week as demand cratered from the weight of the holiday, which will also influence next week’s data where PIRA is forecasting another week of substantial, though smaller, gasoline and distillate inventory increases. Cushing crude stocks declined 2.4 million barrels this past week, falling below 50 million barrels (or to 49 million barrels) for the first time since the 1Q 2015; another stock decline of 1.3 million barrels is predicted for next week’s EIA data while overall crude stocks fall 2.7 million barrels.

Here We Go!

Ready or not, a plethora of data will hit the markets this Friday with the release of the January WASDE, Annual Crop Production, December Quarterly Stocks of Grain and Winter Wheat Seeding reports. Given the fact that the QSR and wheat acreage reports are heaped onto other pertinent information, there can be little debate that the January release day is one of the most important of the year for grain and oilseed markets. When you add that Friday also starts a 3-day weekend for U.S. markets, the 140 minutes of trading after the data release could be some of the most volatile of the year. However, looking at the current positioning held by major players there would appear to be little upside fear, as well as much concern that a volatile move is imminent. With so much negativity represented in the markets, can the only risk be to the upside, or is continued downside risk still possible?

Beyond Weather, Constructive Economic Data Underpins Underlying Demand Trends across Major Continental Markets

With forecasts through mid-month, January weather-related demand losses are set to average some 9 GW across Western Europe, equivalent to about 4% of total demand, putting January 2018 among the warmest months in recent memory, similar to February 2017 or December 2015. However, beyond the weather, underlying demand trends have been particularly strong in major markets, as a result of a brighter macroeconomic picture. The latest Industrial Production data across the Euro-zone is now hovering at the highest level in a decade. Germany, in particular, has seen its overall Industrial Production reach an historical maximum. While German electricity demand is benefitting from stronger industrial needs, the data reveals a considerably narrower role of energy efficiency than previously emerged.

Further Gains for Coal Pricing in the First Week of 2018

The coal market started 2018 the same way it ended 2017, with bullish momentum, particularly in the Pacific Basin. 1Q18 FOB Newcastle forwards increased to $103.75/mt, up by $3.65/mt W/W, while gains in the Atlantic were more muted by comparison. Heavy rain in Indonesia, the impending lockout at Port Kembla, and strong seasonal demand in Asian markets were key factors for the increase in the market this week, particularly as the oil market creeped closer to $70/Bbl over the past five days. PIRA’s short-term reference case for seaborne coal pricing has long favored the bullish side, as the prevailing seasonal and structural risks have been skewed to the upside.

NOx Prices down After Ozone Season; EPA Avoids Final NAAQS Designations

Despite uncertainty around EPA’s direction, the CSAPR Update Seasonal NOx program saw its first compliance period conclude in September. Some states emitted above their budgets, but total emissions were below the cap. CSAPR Seasonal NOx allowance prices have fallen since the end of the Ozone Season. A recent EPA memo supports the CSAPR Update as a complete remedy for resolving interstate transport issues associated with the 2008 NAAQS. It is unlikely that this EPA will rush to tighten CSAPR emissions caps on the basis of the 2015 Ozone NAAQS, which are under review and experiencing delays in nonattainment designations.

Aramco Pricing for February: Predictably Minor Adjustments

Saudi Arabia just released their pricing for February liftings. Adjustments were in line with PIRA’s expectations and suggest Saudi is not pushing volume into the market and instead is willing to let markets tighten further and prices rise. Asian pricing on Arab light was left unchanged in keeping with only a minor change in Dubai market structure, while heavies were lowered slightly and lighter grades were raised similarly. European pricing was raised less than fundamentals would have suggested. U.S. pricing was cut -$0.10/Bbl on all but the lightest grade, Arab extra light, where it was reduced -$0.30/Bbl. This was in keeping with the erosion seen in the refining margin on domestic Mars grade (TRC refining configuration) in the USGC. Even with the U.S. reduction in pricing, Saudi crudes are still seen as priced at a premium relative to domestic grades by $1.40-1.60/Bbl.

Financial Stresses Move Lower as Credit Remains Constructive

The S&P 500 blew through the 2,700 level to a new record like a hot knife through butter and the DOW industrials closed above the 25,000 level for the first time. The credit side of the picture remains constructive but noted divergences are apparent in some areas. The reflation trade appears to be back with certain commodities, such a palladium, copper, and aluminum doing very well. Implied inflation has also again been rising. The dollar was lower by about -0.17%. The St. Louis financial stress indicator moved sharply lower after four straight weekly increases.

U.S. Ethanol Inventories Build

U.S. ethanol production declined sharply during the final week of 2017, falling 58 MB/D to an eleven-week low 1,032 MB/D. Inventories built by 588 thousand barrels to 22.6 million barrels with most of the increase occurring in the Midwest. Stocks are up 3.9 million barrels from this time last year. Ethanol-blended gasoline production declined by 891 MB/D to 8,490 MB/D, but was still up 1.1% year-on-year.

U.S. Coal: 2017 Review and 2018 Outlook

In this annual report, we examine some of the highs and lows of the U.S. coal markets in 2017 and provide an overview of how we expect markets to play out in 2018.

International Oil Activity is Starting to Pick Up

Since oil prices collapsed in 2014, global breakeven costs have been reduced significantly as a result of concessions from service providers and efficiencies. Costs reductions have been achieved in U.S. shale and also in higher-cost developments (deepwater, Canadian oil sand expansions). These are becoming more competitive and permitting more new projects to move forward (twice more approvals in 2017 than in 2016). As a consequence, International E&P spending is expected to show a modest increase (+4%) in 2018 compared to double digit reductions in 2015 and 2016. However, most of the spending growth in 2018 is in North America (+21%), which is dominated by U.S. shale oil. Overall, global E&P spending is expected to increase around 9% in 2018. Costs in 2018 are projected to increase for U.S. shale (mainly pressure pumping) but continue to decrease offshore due to relatively low activity. Beyond 2018, costs for non-shale are likely to start to increase due to expected higher oil prices and increased activity.

Equity Markets Begin 2018 with More Records

Global equity markets continued to set many new records. The U.S. market was higher by 2.4%, with many of the key indices advancing further into record territory. The strongest gains were registered in energy (+3.8%), materials (+3.8%), and technology (+3.7%). The utility index was the only tracking index to decline, lower by -2.5%. All the international tracking indices gained, with again, more new records set in a host of markets. China, Latin America, emerging markets, and emerging Asia were all particularly strong and outperformed the U.S.

December Weather: U.S. and Japan Cold, Europe Warm

December was 7% colder than the 10-year normal for the three major OECD markets with a gain of 310 MB/D of oil-heat demand versus normal. The markets were 2% colder on a 30-year-normal basis.

Oil's Role in the U.S. Economic Recovery

It is said that success has a thousand fathers and failure is an orphan. The recent pick-up in U.S. GDP growth has been owned by both President Trump and former President Obama. A good case can be made that lower oil prices may have also played a part. Econometric model simulations suggest that a $10/Bbl decline in oil prices would boost GDP growth by .2% to .3%pts. These model simulations track changes in income and investment to come to their conclusions. These simulations were conducted before the advent of the shale revolution and recent estimates suggest only .1%pt extra GDP growth from a $10/Bbl price decline. PIRA has done its own analysis, approaching the problem from the supply side using a Cobb Douglas production function of the U.S. economy to estimate the impact of lower oil prices on GDP. Labor, capital and energy are the factors of production in this model. Our conclusions confirm the estimates of .2%pts GDP growth for ten dollar reduction in oil prices pre-shale, and also make the case that shale will Improve U.S. GDP growth potential and will have a larger GDP impact than pre-shale.

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.