Oil Market Narrative Quickly Turns Very Bullish

The narrative in oil markets has quickly turned very bullish over the last two weeks, on market perceptions of Cushing balances, Iran sanctions, and low global spare capacity. Iran oil sanctions have taken center stage, overriding any confidence provided by the OPEC/non-OPEC deal to restore 1 MMB/D to global oil supply. We see President Trump maintaining a hard line on Iranian oil sanctions, causing Iranian crude output to decline by 550 MB/D and 1.33 MMB/D in 3Q18 and 4Q18, respectively. We also made downward revisions to Venezuela and Libya, which could not be offset by higher supply out of Saudi Arabia, other core OPEC, Iraq, and Russia, as well as higher estimates for U.S. production. Downward revisions to global oil demand help alleviate some of the tightness, but balances tighten significantly for 2H18 and 2019. Combined with very low global spare capacity, this suggests higher oil prices for longer. Global crude runs are set to rise by 1.2 MMB/D in July, supporting a 600 MB/D draw in three major OECD crude markets (U.S., OECD Europe, and Japan). Such large stock draws leave oil markets considerably tight, especially in terms of days supply cover. We see Brent crude oil prices strengthening from here. WTI recovery with lower stocks at Cushing lasts through the summer but will weaken again when stocks build back in the autumn. Global refinery margins remain healthy. Diesel cracks will continue to outperform gasoline and the forward curve this summer. Recent gasoline weakness likely overdone with our outlook stronger than the forward curve.

U.S. ethanol prices rebounded to a two week high late this week

Following tumbling corn values during most of June, ethanol prices rebounded the week ending June 29. RINs values plunged after the EPA announced it had granted an increase in waivers and therefore there was a large jump in the RIN banks. The Brazilian sugarcane/ethanol industry rebounded after a strike by truckers. Ethanol prices declined as demand weakened and storage facilities were full. European ethanol prices increased from May values and settled in the 470 Euros per cubic meter range.

The Market Pauses to Recalculate After Strong Stock Builds in Q2, with Risks Remaining on the Curve

Europe faced a huge challenge coming out of last winter with storage stocks close to empty. Storages needed to start injecting rapidly if there was any hope of getting back to reasonable levels prior to Winter-18. This was in the face of narrow seasonal spreads and the weakening of key areas of supply yaer-over-year. European storages out-performed expectations. June marks a third consecutive month of record high injections across Western Europe. The majority of the storage deficit (against last year, 3-year and 5-year averages) has now been made up. However, these record stock builds were largely down to the good fortune of low weather driven demand, and injections have started to find headwinds in June. Continuing to eat away at the deficit in Q3 will remain a challenge, with supply flexibility looking as if it will be stretched until summer-19.

Belgium Nuclear Revisions Tighten the Continental Markets, as Hydro Moves Lower

The major downward revision in the Belgian nuclear availability in 3Q and, to a lesser extent in 4Q, is tightening the NWE system considerably. As hydro availability moves lower for seasonal factors and French gas appears to be ramping up more slowly than in 2017, the tighter overall nuclear situation leaves interconnector flows in an even more important role to balance the system. September is set to be tight for France itself, but French export flows are also likely to shrink in July and August from currently high levels, leaving Italian and Spanish prices particularly exposed to upsides, especially during heatwaves.

Higher gas prices, lower hydro supply, hot weather forecast, nuclear outage: Western markets fire on all cylinders

Spot prices rose month-over-month in June with on-peaks in the low $30s at Southwest hubs, up $8/MWh at NP15 and SP15 and $10 higher at Palo Verde. Mid-Columbia averaged in the mid-teens, up $2 from May. Q3 implied heat rates are expected to increase from last year’s strong levels with the exception of SP15 where tight gas markets will continue to squeeze generator margins. Above normal temperatures and a late June outage at Palo Verde 3 should get the quarter off to a strong start. Gas prices were up mont-over-month in June with negative basis differentials narrowing at several hubs relative to a firming Gulf Coast market. The largest increases occurred at the SoCal border (up $0.50/MMBtu) and Malin (+$0.40/MMBtu) as power sector gas burn increased East of California and in the Northwest.

U.S. Coal Stocks Built by Less than the Five-Year Average in April

On June 25, the EIA reported end-April electric power sector coal stockpiles of 129.0 MMst, a build of 2.6 MMst m/m. That was 54% below the 5.7 MMst average April build over the most recent five-year period (2013-2017) and is one of several bullish indicators in the U.S. coal markets. Coal stockpiles at the end of April were 36.2 MMst, or 22% lower than the most recent five-year average (2013-2017) and 21% below prior-year levels. Days cover at the end of April are estimated to have stood at 81 days, 11% lower year-over-year, but just 2% lower than the most recent five-year average. Two-month forward days cover of subbituminous coal ended April 2% higher than the most recent five-year average, while bituminous days cover came in 9% below the five-year average as they benefited from elevated U.S. coal export levels.

Electric Vehicle Sales and Policy Scorecard

EV penetration of global passenger car sales in Q1 2018 reached 1.53%, with nearly 310,000 vehicles sold. Most sales are concentrated in only a few countries, notably China, where quarterly sales of 132,000 are more than the next five countries combined.

Though key growth markets such as India have not taken steps to develop national-level incentive frameworks, increased EV penetration is expected in China, the European Union, and some other regions through the end of 2018.

Latin American Gasoline and Distillate Demand Under Pressure

Latin American gasoline and diesel demand declined sharply year-over-year in 2Q18 as renewed economic issues impacted the region. 3Q18 Latin American gasoline demand is expected to average 2700 MB/D, ~65 MB/D lower year-over-year. 3Q18 Latin American diesel demand is forecast to reach 2790 MB/D, around 50 MB/D lower year-over-year. Regional refinery crude runs are set to remain relatively low despite some modest recovery in Brazil and Mexico. Venezuelan runs remain severely constrained and projected to stay around 200 MB/D the rest of the year. Gasoline and diesel imports into Latin America are forecast to remain strong in 2H18. Gasoline imports are seen 40 MB/D higher year-over-year in 3Q18 while diesel flows are estimated 50 MB/D higher year-over-year. Diesel and gasoline import incentives into Brazil have turned negative, which should result in an increase in domestic output in the short term.

What to expect from the U.S. economy as it enters tenth year of expansion

This week’s U.S. data releases provided more information about the likely pace of GDP growth during the second quarter – it is currently tracking around 4%. Meanwhile, leading indicators and confidence data have remained solid, and fiscal stimulus measures enacted earlier (tax cuts for consumers and businesses, and relaxation of the federal spending cap) are starting to have impacts – chances are good that U.S. growth will continue at an above-trend pace of around 3% in the second half of 2018.

Higher OPEC Output Will Help Tanker Markets Emerge from Deep Slump

Tanker markets have been under duress during 1H 2018 due to rapid fleet growth and higher than expected compliance by OPEC to the production cuts first implemented in 2017. But that could change during 2H 2018 as the cartel agreed at their June 22 meeting to raise production by 1.0 MMB/D from recent levels, while tanker scrapping has accelerated to its highest level in a decade.

Propane Prices Rebound

US Gulf Coast propane prices rebounded to near one-month highs last week. Front-month non-LST propane gained 10.7% or 9.12 cents/gal week-on-week to close at 94.38 cents/gal. US propane/propylene stocks increased 4.3 million barrels to reach 58.4 million barrels for the week ending June 22. The injection brings total inventories 86,000 barrels below year-ago levels and 7.8 million barrels below the five-year average. The EIA reported total propane exports of just 566,000 b/d, a decline of nearly half from the previous week and a possible contributor to strong stock builds in PADD 3. S&P Global Platts ship tracking data shows exports last week of just under 900,000 b/d and a similar rate for the week ending June 29. Steam cracker feedstock margins continue to languish with declines for all feedstocks last week.

Focus Shift

As the markets move away from the Acreage and Stocks reports from this past Friday, attention is quickly turning to the July WASDE in little more than a week’s time. While acreage adjustments to reflect Friday’s 89.1 million acres in corn, up 1.1 million from the Prospective Plantings report, and 89.56 million in soybeans, up 560K from the March report, are knowns, the USDA will also reportedly make adjustments to demand components on the 2018/’19 balance sheets in order to reflect current uncertainty around the imposition of counter-tariffs scheduled for this Friday the 6th. Although Friday’s QSR showed strong disappearance rates in the 3rd quarter of the current Marketing Year, signaling good demand, the numbers were for the most part in line with both the market’s and our thinking, offering little reason to alter old crop demand next week.

US Gas Weekly Report

Expectations for an upcoming heat wave helped push the July NYMEX contract to a ~$2.99/MMBtu expiration on Wednesday, the upper end of the monthly trading range. Interestingly, the spread between peak summer NYMEX gas (July & August) and early winter (November & December) has come in throughout the month. Such price action was highlighted by July’s expiry slightly above the November 2018 NYMEX contract. Henry Hub cash prices have remained well supported this month at $2.93/MMBtu. Given forward looking balances, it appears highly plausible that July could see cash prices average at or above $3.00/MMBtu for the first time since January. Platts Analytics July Henry Hub price forecast is $3.07/MMBtu.

Searching for a Producer That Would Prefer Selling LNG to NW Europe Right Now

In response to the ever wide pricing gap between Europe and the rest of the LNG world, Platts Analytics has significantly cut LNG demand to all of Europe – in particular Western Europe for 3Q. Platts Analytics has had to respond to the recent widening in spreads by turning down significant volumes to Northwest Europe for the balance of the summer. We have lowered supplies for 3Q’18 by 21-Mcm/d and have lowered net deliveries into Northwest Europe to levels that are the recent minima for 3Q at ~40-Mcm/d. While there is always downside as long as the numbers are above 0, we feel reluctant to lower deliveries any lower. This is particularly true as we are finally seeing some early, but small signs of a recovery in supplies.

Coal Prices Fade Slightly Despite Tight Fundamentals, Near-Term Outlook Weaker

Coal prices have faded slightly over the past month, pulled lower by weaker oil and gas prices as well as a modest build in Chinese coal stockpiles. However, the market remains extremely tight, as evidenced by the perilous state of India’s stockpiles of approximately 10 days of forward cover. While we acknowledge the near-term upside pricing risks that could send the market soaring by over $10/mt, we believe the fundamentals point to a weaker price level over the balance of 2018 into 2019.

U.S. Federal Regulatory Calendar

Federal agencies are advancing the Trump Administration agenda through traditional rulemakings, stays, and increasingly, through guidance and policy memos. The pace of rulemakings has picked up – in 2Q 2018 so far EPA has (1) submitted for OMB review a freeze of vehicle standards, (2) begun to formalize changes to New Source Review permitting, emissions accounting guidelines, and ‘once-in, always-in’ policy for major sources of air pollution, (3) proposed an increase in RFS biofuels requirements, and (4) advanced actions on 2008 and 2015 Ozone NAAQS, including a ‘Back to Basics’ memo and a proposed denial of DE and MD’s Section 126(b) petitions. The released Spring 2018 Unified Regulatory Agenda provides greater clarity into the timing of key upcoming regulatory actions including (1) EPA’s rollback of light duty vehicle standards and a truck glider kit repeal proposal, (2) EPA’s reconsideration and stay of methane NSPS regs, and (3) BLM’s revision of venting and flaring rules. Further down the pipeline will see solicitation of comments to accelerate the NEPA process and EPA efforts to “standardize” cost benefit analysis. A review of power plant new source performance standards is expected soon, while a Clean Power Plan repeal is expected sometime in 2019. The Republican Congress is considering whether the Congressional Review Act can be used to repeal rules and guidance going back to the 1990s.

U.S. Commercial Stocks Experience Large Decline

Overall commercial stocks fell 4.6 million barrels last week led by a huge 10 million barrel crude stock decline, 2.7 million barrels of which was in Cushing. Another large overall crude inventory decline is forecast for this week with Cushing again declining by some 2 million barrels to the lowest level since 2014. With the prospect of further Cushing stock declines in July, pulling inventories to critically low levels, the front of the WTI market has had to move to a sharp premium to protect minimum inventories. Light product demand is forecast to substantially increase in thisweek’s data, in anticipation of the July 4th holiday, causing gasoline and jet kerosine inventories to both significantly decline while distillate inventories are flat again.

Modest Evidence of Financial Stresses Continue

Financial stresses continue a bit elevated in certain areas, but they do appear to be spreading or increasing materially. The S&P 500 fell by 1.3%. Oil (WTI) hit a new cyclical high on the week at $73.50, and bested the previous high set May 21st. Overall commodities were modestly changed, but energy gained nearly 4%. Emerging market debt remains under pressure. The dollar strengthened only slightly on the week, though certain key currencies retain a weakening trend. The St. Louis financial stress indicator was again modestly changed with overall stress levels remaining low.

Production of ethanol-blended gasoline reached a record the week ending June 22

U.S. ethanol production rose to a six-month high 1,072 MB/D, up 8 MB/D from the previous week. Total ethanol inventories built by 27 thousand barrels to 21.7 million barrels, though stocks sunk to a four-year low on the West Coast. Ethanol-blended gasoline production increased 132 MB/D to a 2018-high 9,377 MB/D along with higher gasoline output.

Study Takes Aim at Oil and Gas Production Emissions

According to a new study published in the journal Science last week, the US oil and gas industry emits 13 million metric tons of the potent greenhouse gas methane from its operations each year — 63% more than had been estimated by the US Environmental Protection Agency. Moreover, the authors of the study contend that the national figure might prove even higher if a full reckoning of downstream activities occurred. Even so, based on the underlying data (largely focused on production, gathering and processing), it would appear that an equivalent of 2.3% of total natural gas gross production might be wasted into the atmosphere each year.

In Japan it’s Darkest Before the Dawn...Refining Margins Under the Gun

Refining margins took another tumble on the week and remain under pressure. Runs dropped to a new seasonal low, but aggregate demand improved, with finished product stocks drawing 2.1 MMBbls. Gasoline demand performed better after a string of subpar performances. Gasoil demand has held up. Marketing margins improved further and are a partial offset to the weak refining environment.

Global Equities Again Mostly Lower

Global equities were down -1.4% on the week, with the U.S. S&P 500 lower by -1.2%. In the U.S., energy (+1.1%), and utilities (+2.3%) posted strong gains, while banking and retail underperformed. International tracking indices were mostly lower, though Latin America staged a rebound, despite acute weakness in Argentina. China was also moderately lower. Norwegian equities remain one of the strongest performers on the strength of energy.

Global Equities Mostly Lower

Global equities were down -1.9% on the week, with broader weakness seen outside U.S. markets. In the U.S., the S&P 500 was lower by -0.8%, with retail, utilities, and energy all still able to post gains, while industrials, housing and materials, all lagged. International tracking indices were broadly lower with losses of 2-4% common in many of the tracking indices.

Asian Sulfur Standards for Gasoline Converging with China and India Tightening

Lowering the sulfur levels in gasoline has been a key goal for governments in Asia. Last year, the world’s two most populous countries, namely China and India, took the spotlight by implementing stricter sulfur levels for gasoline. China implemented the Nation 5 standard with 10 ppm sulfur levels (equivalent to Euro 5) nationwide in January 2017 while India rolled out the Bharat IV standard (50 ppm or Euro 4 equivalent) nationwide in April 2017. Asian refiners have been adding upgrading capacity including cracking capacity (FCC + HCU + Coking), reforming, alkylation and aromatics extraction. But specific to the product specification changes, they have added substantial hydrodesulphurization/hydrotreating capacity allowing significant progress toward lowering sulfur levels in gasoline. The region mandated some 22% of gasoline demand to meet a 10 ppm sulfur standard in 2011 and this rose to over 60% in 2017. The progression towards 10 ppm gasoline will continue in the coming years, requiring more upgrading/desulphurization capacity, with sulfur standards in the region converging.

The U.S. EPA Proposes Increase in Biofuels Requirements by 2019

The mandates for 2019 were 19.88 billion gallons including 4.88 billion gallons of advanced biofuels and 381 billion gallons of cellulosic ethanol. By difference the market for conventional biofuels, primarily corn-based ethanol remained at 15.0 billion gallons.

U.S. Production Sequentially Flat in April

U.S. crude and condensate actuals for April 2018 came in at 10,487 MB/D, 1,340 MB/D higher year-on-year, but flat compared to March 2018. This month, the moderate growth reported in Lower 48 production was completely offset by losses in the Gulf of Mexico and Alaska. The April actual fell below our Reference Case estimate for the month by 130 MB/D. Looking ahead, we forecast year-over-year growth in U.S. crude and condensate production of 1,460 MB/D in 2018 and 820 MB/D in 2019.

The information above is part of S&P Global Platts Analytics weekly Energy Market RecapPlatts Analytics weekly Energy Market Recap – which alerts readers to our current analysis of energy markets around the world as well as the key economic and political factors driving those markets. To read S&P Global Platts Market Recap first, subscribe here.

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