Production Outlook Raised for 2017; Focus on Permian
The U.S. Midcontinent production forecast has been raised for 2017, with Permian Basin growth now expected to exceed 300 MB/D this year, approaching current pipeline takeaway capacity by late 2017 or early 2018. New oil sands capacity in Western Canada could also run up against pipeline capacity constraints next year. An open export arb and closed import arb on the Gulf Coast are supportive of U.S. crude fundamentals in early 2017, as OPEC and non-OPEC production cuts begin to take effect.
Bullish Building Blocks Remain Solid Even though Weather is Barely Influential
With so much attention being paid to massive changes in the LNG market, the considerable changes in European pipeline supply are flying a bit under the radar but are no less significant. Russian and Algerian pipeline supplies into Europe have hit a new gear thanks to the somewhat erratic availability of LNG in the Atlantic Basin and noticeably lower Dutch output. Both producers have met the challenge so far, as the market reaches its seasonal demand peak in early February, but we have to be concerned about the reduced amount of supply flexibility in the supply pool and what this means for risk along the forward curve. Constraints are based on midstream chokepoints and upstream limitations, but they both mean the same thing when it comes to price. Higher spot prices since mid-December already reflect this issue to some extent.
As U.K. Demand Remains Sluggish, Risks Move Lower for France
The emergence of colder weather this week has pushed French demand to a new maximum for the winter, with RTE reporting hourly demand hitting 89.6 GW in the morning of Jan 6. However, the maximum hourly price settlement that day was €169/MWh, set at the evening peak when the demand reached 88.8 GW. This is a relatively low outcome, given the recent price history in France.
FOB Newcastle Prices Plummet, Atlantic Basin Prices Pulled Lower
The coal market corrected downward sharply this week, with pricing losses concentrated in the FOB Newcastle market. Indications that Chinese wholesale electricity prices for on-grid tariffs will remain flat in 2017 amid an even greater push into renewables, and an uptick in dry bulk freight rates were significant factors in the downward correction. As PIRA has noted, a downward correction in the coal market was inevitable, given the number of bearish factors stacked up in early 2017. The lack of an electricity tariff increase in China comes in addition to weaker seasonal demand (on top of the demand slowdown associated with Chinese New Year), a rebalancing of the coking coal market, and rising domestic production in China. These factors were always going to depress seaborne coal prices, with FOB Newcastle was decidedly in the crosshairs.
No Major Surprises from First Full Quebec Emissions Data Release
Quebec has, for the first time, released historic emissions data for 2013-2015 for suppliers of fossil fuels – and now offers complete Broad Scope emissions covered under the cap and trade program. These emissions are both larger and show more variation year-on-year than the Narrow Scope sectors (industrial, electricity generating sources). Quebec’s Broad Scope emissions are in line with levels that PIRA has been building in its long-term forecasts of balances - anchoring what had (until now) been a potential major unknown in calculations of market balances. Total QC cap and trade emissions were 8% below the available and the resulting 5 MT surplus in 2015 is similar to annual surpluses in the first two years of the program.
LPG Prices Improve
LPG price outperformance continued last week, with February Mt Belvieu butane prices surging 7.3% higher to near 96¢/gal. February propane at the market center was 1.2% higher on the week, but is 10% higher than two weeks ago. PIRA expects butane inventories to fall to near 14 million barrels by the end of February, below the seasonal low levels set for the product in 2010.
Stresses Remain Low
The S&P 500 pushed to a new record high this week. Financial stresses remain very low, with volatility falling. Prices for high yield debt (HYG) and emerging market debt (EMB) both moved noticeably higher. The U.S. dollar generally eased for the week, but it remains relatively strong.
Trump’s Impact on Agriculture
As the calendar inches closer to January 20th, ethanol, DDGs, and China seemingly make ag-related headlines every day as tensions rise over the possible effects of the new administration. After seeing a year over year increase of over 300% in U.S. exports of ethanol to China in 2016 (monthly average of ~67K T), the re-imposition of a 30% import tariff on all ethanol imports may make China’s Ambassador-designee Branstad’s “new assignment” a bit more tricky.
U.S. Ethanol Manufacturing Margins Plumme
U.S. ethanol prices were mixed during the final week in 2016, but manufacturing margins were sharply lower. Renewable Identification Numbers (RINs) also declined. Brazil is in its inter-harvest period with only 55 mills still operating in the South-Central region. In 2016, Brazilian ethanol exports were down 4.2% from 2015 levels.
Large U.S. Stock Build but Year-On-Year Stock Excess Narrow
A huge product stock build, especially in the three major light products, more than offset a large crude stock draw to cause overall inventories to increase 6.1 million barrels in the last week of 2016. Product demand was the weakest of the year because of the holidays, while bad weather in the Gulf restricted crude imports and product exports. Cushing crude stocks built 1.1 million barrels the last week of the year, leaving the stocks both up 3.6 million barrels on the year and at absolute high levels supporting substantial contango.
Weather Masks Emerging Structural Tightness
This year started out on a sour note for gas bulls, with the prompt month contract declining ~40¢ since last Friday’s close. Nevertheless, despite some near-term concerns surrounding seasonal rebalancing, increasingly supportive weather-adjusted balances have helped to stymie an all-out price rout. Setting aside the variable weather patterns, there appears to be a growing awareness of the emerging structural tightness in the industry — with markedly weaker than anticipated production taking center-stage.
U.S. Ethanol Production Reaches a Record High
U.S. ethanol production soared last week to a record 1,043 MB/D the week ending December 30, eclipsing the previous high of 1,040 MB/D established three weeks earlier. Ethanol-blended gasoline manufacture plummeted 878 MB/D to an eleven-month low 8,398 MB/D. Inventories were flat at 18.7 thousand barrels, but they were 2.4 million barrels lower than they were at this time last year.
Global Equities Set Multiple Records
In local currencies, five specific country equity indices set record highs, of which the U.S. S&P 500 was one of them. Domestically, all the tracking indices, other than retail, gained on the week. The strongest U.S. indices were consumer discretionary and technology. Internationally, all the tracking indices gained, with Japan doing the best. All the international indices outperformed the U.S. gain, for the week.
Stocks Continue Normalizing
EIA data estimates for electric power sector stockpiles for October came in at 163.5 MMst, just above the 162.9 MMst that PIRA forecast, but a substantial 12.7 MMst lower than October 2015. PIRA’s projections show that stockpiles grew in November due to the warmer than normal weather, but have since fallen in December to 156.1 MMst. Compared with last year’s levels, December 2016 stocks are a whopping 41 MMst or 21% lower.
Crossing the Rubicon into 2017
Japanese crude runs eased but remain near peak levels. Crude imports rose strongly to build crude stocks 1.95 million barrels. Finished product stocks built 0.3 million barrels. Good draws on gasoline and kerosene were more than offset by builds in gasoil, jet, and fuel oil. Gasoline demand was strong and helped by the holiday, drawing stocks. Conversely, gasoil demand was dampened by the holiday, building stocks. Kerosene demand was much higher by 0.2 MMB/D. The kero stock pattern reverted back to a draw of 0.7 MMB/D. Margins improved on the week, along with light product cracks.
2017 Price Conundrum: Will Anticipated Lows be Thwarted by Market Sentiment, Supply Management, and This Trading?
PIRA is grudgingly raising its Asian spot price forecast for 2017 by a hairsbreadth based on strengthening oil prices, supply management applications (both intended and not), and finally thin trading. PIRA stands by its view that weakness is inevitable, particularly in Asia, as the region stands to gain an additional 115-mmcm/d in net new supply by the end of this year.
Aramco Pricing Adjustments: Meeting Expectations
Saudi Arabia's formula prices for February were just released. The adjustments were in line with expectations, with increases for Asia and cuts for Europe. U.S. pricing was raised modestly on the two lightest grades. Saudi Arabia’s pricing remains competitive, and is thereby achieving its committed 486 MB/D cuts by reducing allocations. Thus it is not unilaterally reducing the attractiveness of its crudes by using pricing to reduce refiner demand, but rather it is cutting back supply to leave that demand unmet.
Saudi Arabia’s Industrial Gas Users Given a Price Reprieve
While feedstock prices for gas-to-power producers and petrochemicals manufacturers were more than doubled in last year’s budget, the kingdom is not planning further increases in 2017. Saudi Arabia introduced massive gas feedstock reforms in its 2016 budget. Gas-to-power generators now receive supplies at prices 66% higher. Elsewhere, petrochemical producers saw gas feedstock prices increased by more than 200%.
Solid U.S. Jobs Data, but Trumponomics and Fed Are Bigger Stories
In December, U.S. job growth was more or less as expected, while the unemployment rate was roughly unchanged from the previous month. The minutes of the December 14 Fed meeting showed policymakers engaging in vigorous debates about several key topics. One such topic was how Donald Trump’s win in the presidential election would impact the economic outlook. Fed policymakers held that it will take time before the effect of Trump’s economic policies will become clear. But the anticipation of Trumponomics has already boosted confidence, and is starting to influence behavior of households and businesses.
Mexican Domestic Gasoline and Diesel Price Hike Will Impact Demand
Mexican gasoline and diesel pump prices set by the government were increased significantly for January 2017. These adjustments set the tone for the rest of the year when the country is expected to transition to market prices, away from government-set prices. Reflecting the higher prices, demand for gasoline and diesel is projected to each weaken year-on-year by 10-15 MB/D. Imports will tend to level off or even decline but remain more dependent on domestic refining operations which are optimistically forecast to increase modestly year-on-year.
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.
