Energy Market Recap for the Week Ending January 17 , 2017

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More Canadian Crude Shipments Off West Coast Likely as Trans Mountain Expansion Meets B.C. Gov't

PIRA Energy Group

Another large reported commercial stock build of 13.4 million barrels last week with EIA re-benchmarking likely substantially contributing to the build.

NYC-based PIRA Energy Group reports that more Canadian crude shipments off the west coast likely as Trans Mountain Expansion meets B.C. government. In the U.S., a large stock build was reported with EIA re-benchmarking likely substantially contributing to the build. In Japan, crude runs rebounded back to near peak levels while crude imports fell back sufficiently to draw crude stocks. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Large U.S. Stock Build

Another large reported commercial stock build of 13.4 million barrels last week with EIA re-benchmarking likely substantially contributing to the build. Four major products saw a big 12.7 million barrel inventory build while NGL stocks were down sharply again as refiners pumped up runs to the highest weekly level in years with refinery turnarounds about to start. Crude imports surged to over 9.0 MMB/D reflecting crude oil delayed by Gulf Coast fog and tax issues. This week’s data should return to normal but continued relatively high runs will lead to large light product builds while crude inventories should slightly decline.

Supply Weakness Aiding NYMEX Volatility

The moderate recovery that has taken place this week suggests a growing awareness of emerging structural tightness. Despite milder weather unfolding in January, U.S. balances remain tight, with the year-on-year storage deficit remaining largely intact relative to end December.

As the French Market Enters a Critically Tight Week, Spanish Market Stays Bullish

The French market will see its system adequacy severely tested this upcoming week, as demand is expected to shatter the previous highs reached this winter. Even with all the interconnectors importing at full capacity (11.7 GW), France might be looking at a shortfall of roughly 4 GW at the time of maximum demand on Jan. 19, which might trigger the need to implement exceptional measures to balance the system. Frigid weather conditions are also expected to affect most of Western Europe, with Spain also seeing very bullish short-term power prices.

U.S. Ethanol Prices and Margins Plummet the Week Ending January 6

RIN prices declined but recovered after assurances that the Trump Administration will support the RFS. Brazil became a net exporter of ethanol in the fourth quarter. European ethanol and manufacturing margins surged.

California Prices Jump, While Ontario Market Program Launches

CCA prices are up sharply with the new auction floor, but regulatory uncertainty limits the upward potential of prices. The upcoming lawsuit hearing could result in a decision prior to the next auction in Feb. This, along with fossil units’ operational concerns, have drained interest in longer-term hedging. Particularly strong hydro generation in 2017 should displace gas-fired generation, but despite allowance surpluses, regulated emitters will still need to procure instruments for compliance with 2017 emissions. Offsets are a wildcard – sources are on track to use only about half of allowable offsets and environmental justice concerns could result in usage restrictions. The start of Ontario’s cap and trade program have not seen trades and carbon prices, but a cost of carbon is already being reflected in wholesale power. Free allowance allocation and the first Ontario auction in Mar. could jump start trading.

Industrial Momentum Is Rolling, While Negative Risks Stay in Check

The expected growth-enhancing and reflationary policy stance of the Trump administration, or Trumponomics, has boosted U.S. growth prospects. But by attracting global capital flows into the U.S., Trumponomics has the potential to destabilize financial market conditions in emerging economies. So far, emerging markets have exhibited resilience, but the situation will have to be carefully monitored. Most key economies reported better-than-expected manufacturing data in recent days, and year-on-year growth in global industrial production accelerated sharply in November.

Coal Prices Rebound on Atlantic Basin Rally

The seaborne coal market rebounded markedly this week, particularly in the Atlantic Basin. Both CIF ARA and FOB Richards Bay forwards increased by more than $4.00/mt across the forward curve, bringing 1Q17 prices to their highest point since early November. A more tepid rise in FOB Newcastle prices this week, coupled with a sharp drop last week has seen 1Q17 FOB Newcastle prices fall well short of the highs painted earlier this month as well as fall below FOB Richards Bay and CIF ARA. Cold temperatures in Europe, rising Atlantic Basin exports into the Asian market, and the anticipation of the Chinese demand slowdown for the Lunar New Year were all factors in the pricing dynamics of the past week.

Argentina Wet Again

At the risk of being repetitive, and after going over the January WASDE a few more times, PIRA reiterates our opinion that there’s no story in corn until the acreage estimates hit the market with the Prospective Plantings report on March 31st. Both corn and wheat are in “follow modes” at the moment. Where there is a real story is in soybeans, and weekend rains in Argentina are once again on everyone’s radar.

Holiday Tide Rolled In, Now Rolls Out

Japanese crude runs rebounded 80 MB/D back to near peak levels, while crude imports fell back sufficiently to draw crude stocks 0.2 million barrels. Finished product stocks, however, built a whopping 5 million barrels, as demand fell sharply into the New Year. Significant builds were seen in all the products other than naphtha. Both finished product and crude stocks remain in significant deficit to year-ago levels (about 10%, or a combined 18 million barrels). Margins declined on the week, with all the product cracks other than naphtha giving ground. Still, margin levels remain healthy.

Russian Gas Flows Freely in the Face of Extreme Cold, but so Is Power Demand

In past years, it would be reasonable to expect a ramp down of gas deliveries from Russia on the order of 25-mmcm/d in the face of extreme cold in the East – this year has proven to be a surprise exception. Temperatures in Moscow have been as cold as 16 degrees below normal or -30°C, but Russia has proven to be a reliable supplier in the face of the bitter cold. Traditionally, this turn down of exports has been part of a policy to prioritize domestic demand over contractual demand in Central and Western Europe. Temperatures in Moscow have reached lows not seen for around 5 years – however, deliveries to Europe have only increased in the face of that cold. So instead of a 25-mmcm/d turn down, we are seeing a 25-mmcm/d ramp – a swing of 50-mmcm/d is certainly a welcomed surprise.

Stress Still Low

The S&P 500 was fractionally changed on the week. Financial stresses remain very low, with volatility falling. The U.S. dollar has generally been easing of late against many currencies. However, it has continued to strengthen noticeably against the Turkish lira and Mexican peso. Globally, euro interest rates have begun to rise, along with those in the U.K. The Baa bond yield has continued to fall after a protracted rise. Mortgage rates have begun to ease slightly.

Weather Adjusted Loads Showing Signs of Life

Loads in the East soared by 8% year-on-year during December as heating degree days for the contiguous U.S. rose by 35% year-on-year, which also led to higher power prices year-on-year in all markets. Forecasts for second half of January are bearish and loads for the full month may decline. Gas production continues to struggle even with start-up of new Appalachian pipeline capacity, which should offer price support if weather returns to normal. The largest gain is expected in Ontario where prices will also reflect carbon costs. However, incremental coal-fired generation during 1Q, and a combination of lower cooling loads and new gas-fired and renewable capacity will result in downward pressure on implied heat rates.

U.S. Coal: 2016 Year in Review and 2017 Outlook

Few years in recent memory were more turbulent for the U.S. coal market and arguably none was so difficult for producers as 2016. As we enter 2017, the outlook for production and prices is more constructive overall, though not by a large margin.

European Carbon Price Volatility on Weather, New Volumes, Policy

Expectations of relatively flat prices for European Carbon (EUAs) in 1Q17 reflect near-term higher power sector carbon demand (driven by colder weather and continued French nuclear outages) against the backdrop of otherwise poor fundamentals and continued market oversupply. With a continued lack of clarity on what European policymakers are thinking regarding post-2020 market reform, negotiations in the coming months have the potential to move the market in either direction.

WASDE Surprise

A surprise yield cut in soybeans and a larger-than-expected acreage cut in winter wheat were the main highlights of Thursday’s reports and while one market exhibited a large reaction, the other did not.

U.S. Ethanol Production and Stocks Higher

U.S. ethanol production started 2017 at a record high 1,049 MB/D, up 6 MB/D from the previous week’s record. Inventories soared in most of the country, rising 1.3 million barrels to 20.0 million barrels. Despite the increase, however, stocks were still 1.3 million barrels lower than this time last year. Ethanol-blended gasoline manufacture continued to plummet, dropping 365 MB/D to a 53-week low of 8,033 MB/D.

More Canadian Crude Shipments Off West Coast Likely as Trans Mountain Expansion Meets B.C. Gov't

On Jan. 11, B.C. premier Christy Clark announced that Kinder Morgan’s Trans Mountain Expansion project has meet its five conditions including providing British Columbia with a fair share of the project’s fiscal and economic benefits. This helps pave the way for completion of the project to increase access for Canadian crude to West Coast/Asian markets. The province granted an Environmental Assessment Certificate for the B.C. portion of the project but added 37 conditions over and above the 157 conditions recommended by the NEB and adopted by the federal cabinet. Kinder Morgan committed to paying $25-50 million annually (based on heavy crude shipments) to fund local environmental projects. This risks setting a precedent that may undermine the chances of success for the Energy East project.

Global Equities Post a Positive Week

On the strength of international equity performance, global equities posted a positive week. All the international tracking indices posted solid gains, with emerging markets, China, Latin America, and emerging Asia doing the best. The U.S. market was marginally changed. Consumer discretionary and retail outperformed, while energy was the weakest, down 2% on the week.

Europe Snubs LNG in Favor of Pipeline as Gas on Gas Competition Heats Up

Until this week, European buyers have shown little interest in securing incremental LNG cargos in the face of surging gas demand and with a few exceptions such as Greece and Turkey, it’s not clear that this is set to change in the coming months in any sustainable way.

January Weather: The U.S. Warm; Europe and Japan Cold

At midmonth, January looks to be colder than the 10-year normal by 7% for the three major OECD markets with oil-heat demand stronger than normal by 400 MB/D. The markets are roughly 2% colder on a 30-year-normal basis.

Indonesian Ceramics Industry to Receive Lower Gas Price

The Indonesian government is set to lower the price of gas for the ceramics industry this year as mandated by Presidential Regulation No. 40/2016 on gas prices. The Industry Ministry has given priority to the ceramics sector for the gas price cut as it is one of the fastest growing industries [in the country], said Industry Minister Airlangga Hartarto in a statement. “The national ceramics industry has been performing well with sales growing by 10-15% with a volume of 385-402-mmcm/d” he said during the launching of a new ceramic firm owned by publicly listed PT Arwana Citramulia in Mojokerto, East Java, on Monday.

Tanker Rates Likely to Decline in 2017

After a strong finish in 2016, tanker are rates expected to weaken substantially in 2017 as OPEC and non-OPEC production cuts are implemented during 1H17.

Cash LPG Prices Strong in Asia

Cash LPG prices in Asia strengthened as cold weather in North Asia is improving demand. Refrigerated propane cargo prices in the Far East were called near $502/MT which was 1% higher week-on-week. Cash butane was called at a $60 premium to C3. Propane Far East Index futures for cargoes arriving in February, which are trading at a $36/MT discount to cash, suggests that the market may in fact be softer than recent cash deals suggest.

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.

Click here for additional information on PIRA’s global energy commodity market research services.

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