European Refinery Margins & Runs Will Remain Healthy Through the Mid-Year
Oil prices are still consolidating but will go over $60 late this year as surplus stocks are drawn down. Refinery margins and runs will stay strong for now, but high gasoline stocks will cap further improvement. Gasoline cracks will ease and diesel cracks will increase in 2H17. HFO cracks will trend a bit lower but still remain relatively firm. European runs will decline in 2H17 with higher expected maintenance and seasonally softening margins.
Key Data Continue to Suggest Broad-based Global Expansion
There were three main takeaways from the latest U.S. labor market data release: first, there are no signs of slowing in the pace of job creation; second, people who are not in the labor force are still not rushing to be a part of it; and third, wages are growing only at a moderate pace. This was a positive release for the U.S. economic outlook, but it may also reignite debate at the Fed about possible overheating in the labor market. This week’s other economic releases (European GDP, and confidence readings from various sources) were also mostly positive.
U.S. Propane Stocks see Second Consecutive Build
Propane stocks increased a meager 16 MB to 39.7 MMB. For the past two weeks, stocks are basically unchanged. The y-o-y deficit continued to widen to 32.2 MMB. This is the seventh consecutive week that y-o-y deficits have increased, largely due to robust exports. The EIA reported that exports declined to 764 thousand barrels, which is the lowest level since early December 2016. Cargos are expected to temporarily remain relatively low in May due to weak arbitrage economics, as well as declining heating demand overseas.
U.S. Ethanol Prices Fall
U.S. ethanol prices were lower the week ending April 28. Manufacturing margins worsened. 2017 D6 RIN values plunged to April 28. Brazil began its 2017/2018 sugarcane harvest in April, but heavy rain limited output. The Latin American country is considering tariff of 17% on U.S. ethanol imports. Hydrous ethanol prices are now competitive with gasoline at the retail level in parts of the Southeast region. European ethanol prices have bottomed and are increasing.
Wheat Tour’s Results Questioned
The 2017 Kansas Wheat Tour barely finished before many started to discount the findings, some entirely. While a somewhat typical response to Tours in general if the results don’t fit a specific narrative, this year’s Tour was hampered by the much-publicized spring snowstorm which resulted in an inordinate amount of subjectivity in the reports. Some have claimed that scouts drove for 90 miles without taking a sample on Wednesday due to poor weather conditions, invalidating the results. From the number of samples taken in the hardest hit areas out west, which were well below normal, that concern seems legitimate.
Fundamentals Warrant Price Support Despite Production Uptick
NYMEX futures prices have held up relatively well this week with the June 2017 contract barely down. Nevertheless, the slow descent from early April highs is largely a factor of the market’s uncertainty surrounding structural tightness — with the latest U.S. production data likely failed to assuage any such concerns. The EIA Monthly Crude Oil and Natural Gas Production Report, reflecting the first pass at February 2017, showed a sizeable ~1.4 BCF/D increase in dry production compared to the prior month, marking the largest sequential gain since 2014. Yet, this month’s “surprise” was not limited to just one side of the ledger; the EIA observed concurrent strengthening on the demand side, in effect expanding the size of the market rather than merely balancing on storage.
U.S. Cargos Steer Clear of Europe Even as Sabine 4 Ramps Up
Atlantic Basin trading maneuvers are set to become more intricate, as more LNG is pushed out of Sabine Pass into the region in a lower priced 2Q/3Q environment. At the same time, keeping gas out of N.W. Europe to support NBP netbacks will remain a priority. Or looked at another way, N.W. European netbacks have not been large enough to secure U.S. cargos, and spot marketers are seeking more attractive markets.
Indian Producer Keeps Gas In House
Reliance Industries (RIL) will sell the natural gas it produces from coal seams in Madhya Pradesh to its own units in Gujarat and Maharashtra. After last month's government decision to give coal bed methane (CBM) producers freedom to discover market price, RIL invited bids from users of gas. Five companies including RIL participated in the bidding process, according to the bid evaluation report the company posted on its website. The bidders besides RIL were Deepak Fertilizer & Petrochemicals Corp Ltd., state-owned gas utility GAIL India Ltd and GMR's Rajahmundry and Vemagiri power plants. While RIL bid for using the gas at its petrochemical plants at Patalganga and Nagothane in Maharashtra and Jamnagar in Gujarat, Deepak Fertilizer was a close second.
Warmer Weather Undermined Demand in April, but U.K. Losses Larger than Expected
Demand in April declined by 5% across the largest markets (France, Germany, Italy, Iberian Peninsula and the U.K.), with April this year not as cold as last year, while seasonal factors are also in part to blame. However, the declines reported for the U.K. and, to some extent, France, have been relatively wider than the rest of Europe. The more contained demand losses in Spain and Italy suggest that macroeconomic conditions outside of the U.K. appear relatively stable. While intra-month volatility in temperatures could explain the large fall in French demand, the trend still warrants closer attention in the upcoming months.
Long-Term Gas Demand Rests on Winning a War of Attrition vs. Other Thermals
Even though gas plants will gradually dominate the non-renewable (shrinking) slice of the power generation pie, PIRA does not predict that Western Europe will ever have the gas-to-power demand it achieved in 2008. To reach such heights, gas would have to become over 42% of non-renewable power generation in 2017 – 8% higher than forecasted. For the moment, though, gas is on a trend towards greater dominance in power generation over other thermal technologies, which not only means that fuel switching potential becomes gradually limited, but that gas demand becomes more a function of renewable supplies.
Coal Prices Shift Lower on Weaker Oil Prices
The coal market moved considerably lower this week, with weaker oil prices adding further bearish momentum to the downward correction in coal supply/demand fundamentals. The decline in pricing was particularly acute for prompt FOB Newcastle and FOB Richards Bay prices, flattening their respective forward curves. India’s electricity generation increased by 3.9% year-over-year, although resurgent hydro generation suppressed coal-fired generation growth to just 2.4%, which is not sufficient to stimulate thermal coal imports. U.S. thermal coal exports hit a three year high in March, but should shift lower.
WCI Carbon Market Challenged by Legislative Proposals
WCI carbon prices reset to a higher level after the auction verdict, averaging $14.20 in April. Early May has seen a retreat from end-April levels, as proposed legislation threatens the market framework and the Scoping Plan/Cap and Trade amendments are yet to be finalized. Significant buying needs for CP2 should give the May auction a boost vs. the severe undersubscription in February. However, given that one set of uncertainties has been replaced by another, continued undersubscription is a real possibility.
2Q17 Latin American Gasoline & Diesel Imports Higher
2Q17 Latin American gasoline demand is 35 MB/D lower year-on-year. Mexican demand is slowing, Brazil is flat and Venezuela is down. The diesel market is also softer, we expect 2Q17 consumption to be 40 MB/D lower year-on-year. We see demand picking up again later in the year. Overall Latin American refinery crude runs are forecast to decline year-on-year in 1H17 but improve in 2H17. PIRA estimates Latin American gasoline and diesel imports to be up on the year in 2Q17. Attractive import incentives continue to support high imports of diesel into Brazil, keeping domestic refinery runs unusually low.
Stresses Low, Energy Credit Holding Up
Financial stresses remain extremely low, as evidenced by the St Louis Fed stress indicator continuing to trend down, the DOW breaking above 21,000, and the S&P 500 nudging up against the 2,400 level. Commodities remain soft, particularly energy. However, energy credit indicators are not as soft as cash oil prices might suggest. Price trends in non-energy high yield debt still look positive.
Ethanol Stocks Remained Near Record Levels
U.S. ethanol production fell 1 MB/D the week ending April 28 to 986 MB/D, matching the six-month low achieved three weeks earlier. Output outside of the Midwest was just 68 MB/D, the lowest since June 2014. Total inventories fell by 56 thousand barrels to 23.3 million barrels as East Coast stocks retreated from a five-year high. Ethanol-blended gasoline manufacture dipped to 9,203 MB/D from a 2017-high 9,220 MB/D in the preceding week.
Crude Stocks Fall on High Refinery Runs, Syncrude Fire
U.S. crude stocks declined in April, for the first time this year, falling 8 million barrels as refinery crude runs topped 17 MMB/D – a full 1 MMB/D higher than last year. Cushing stocks also fell, 2 million barrels, on higher shipments out to the Gulf Coast and to the Midwest, where refiners had to replace sweet crude supplies following the fire at Syncrude’s oil sands facility in March. Western Canadian stocks also fell in April, as the Syncrude shutdown affected both light and heavy supplies – the latter due to the need for synthetic light crude in bitumen synbit blends.
Global Equities at or Near Record Highs....
Again, most equity tracking indices posted a positive week. The broad U.S. market set another record high. Banking, technology, and retailing indices did the best, while energy was the only sector giving ground. International indices were also mostly higher, with Europe doing the best, though China eased.
Fracking Policy Monitor
The opening months of the Trump administration have been positive for industry as federal regulations have been rolled back. The EPA has withdrawn its request for data on methane emissions and has temporarily stayed implementation while the rules are reevaluated. The BLM intends to let its well integrity rules die in the court system. In response, states and localities are tightening their own regulations. PIRA expects further loosening at the federal level and further tightening at state and local levels. However, the primary oil producing states such as Texas and North Dakota are expected to remain friendly to industry and not tighten regulations further.
U.S. Commercial Stocks Flat with Last Year
Overall commercial stocks built 1.3 million barrels with another disappointing crude stock draw, at just 0.9 million barrels, which was more than offset by a product build. Adjusted product demand continues to grow at about 2.4% (or 470 MB/D) year-on-year in the latest four weeks. Cushing crude inventories drew 0.7 million barrels. Crude stocks should show a larger decline next week, but the major light products are forecast to build.
Heavy North Sea Maintenance Forecast for Q2 and Q3
PIRA forecasts another year of heavy maintenance in the North Sea in 2017. Oil production loss due to maintenance is expected to rise to 230 MB/D in Q2 and 360 MB/D in Q3, up from 40 MB/D in Q1. Maintenance will taper at the end of the year to 100 MB/D in Q4.
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.
