PIRA Energy Market Recap for the Week Ending January 23, 2017

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Asian Refining Fundamentals Look Reasonably Constructive into 2017

PIRA Energy Group

Asian refining fundamentals should generally be supportive this year as demand growth is expected to outpace incremental refinery throughput.

NYC-based PIRA Energy Group reports that Asian refining fundamentals look reasonably constructive into 2017. In the U.S., commercial stocks declined. In Japan, the post-holiday demand recovery on track. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Asian Refining Fundamentals Look Reasonably Constructive into 2017

Oil prices will inevitably move higher as market rebalancing continues. Lighter products (LPG, naphtha and gasoline) continue to show the strongest growth. Asian refining fundamentals should generally be supportive this year as demand growth is expected to outpace incremental refinery throughput. China’s runs growth will be concentrated in the state-owned refiners as independent crude runs are likely to be deterred by lower margins and CDU closures. Asian refining margins are expected to remain supported due to winter heating demand in Northeast Asia and heavier refinery turnarounds than last year.

Speculators Betting on Extended Gas Rally

The volatility gripping NYMEX futures in recent months eased amidst the holiday-shortened trading week. With the nearby contract at ~$3.30/MMBtu, prices are only modestly lower relative to last Friday’s close. The lack of more concerted selling pressure stands in contrast to the increasingly warm finish to January.

Italian Market Tight: Forward Prices Set to Stay Strong

During a week when the French TSO RTE has barely avoided the use of exceptional measures, French spot prices settled at levels well below what we observed in previous peaks this winter and not far off from the marginal costs of fuel oil units (€100/MWh, at current fuel oil NWE prices). These price settlements were surprisingly low also in light of a surge for PEG SUD/TRS gas prices, which have been trading at €43.6/MWh, taking marginal costs for CCGTs located in that zone in proximity of €90/MWh. While the French flows were largely in line with expectations, the cross-border flows with Italy have been somewhat surprising, suggesting the Italian market has tightened considerably, especially the NORD and CENTER NORD zones.

China Orders the Halt of 120 GW of New Coal-Fired Generating Capacity: How Much Does This Matter?

As part of the new Five-Year Plan, the Chinese government ordered the cancellation of ~100 new coal-fired power plants totaling 120 GW of capacity. In reality, demonstrably less capacity will be cancelled, and the impetus for the order may be as much about trying to limit the amount of stranded assets and capital as it is about controlling CO2 emissions, encouraging renewable growth, or improving air quality in major cities.

U.S. Ethanol Prices Fall Sharply

Manufacturing margins worsened the week ending January 13. D6 RIN values tumbled. Brazil’s South Central Region is in its Inter-harvest period with only 15 mills continuing to operate in January.

The Trump Effect

The first full week of the Trump Administration brings with quite a bit of uncertainty in regards to agriculture. We find ourselves much less concerned about the new Secretary-designee Sonny Perdue, and how long his confirmation process will take, and more focused on the ramifications of Trump trying to make a “splash” his first week in office after what was an isolationist inaugural address.

Chinese Growth and U.S. Inflation to Stay Front and Center in 2017

China’s economic growth during 2016 turned out to be constructive. Based on recent business confidence data, the country’s economic momentum is picking up. But there will also be modest policy headwinds this year, and the housing and vehicle sectors will be under pressure. The U.S. and the euro area reported sharply higher inflation in December, but core inflation remained moderate in both places. The European Central Bank vowed to keep policy accommodative in the face of the inflation pick-up. The U.S. monetary policy outlook is not so clear-cut.

LPG Prices Outperform Broader Markets

U.S. LPG prices ripped higher last week, as a strong propane inventory decline moved markets higher. February Mt Belvieu propane futures surged 6% higher to 76.7¢/gal, the highest since the fall of 2014. Butane prices rebounded, adding 5.1% or 5¢ as C4 stocks seem to be dwindling to multi-year lows. PIRA’s projections indicate that butane stocks will fall to 14 MMB by the end of February, which will be the lowest level for the petrochemical and gasoline blending feedstock since 2011.

U.S. Commercial Stocks Decline

Commercial stocks fell 2.0 million barrels last week, largely driven by strong NGL disposition including ethane cracking, butane blending and propane heating as well as robust exports. High level crude imports combined with the first week of the winter turnaround season led crude inventories to build 2.3 million barrels, despite Cushing crude stocks drawing 1.3 million barrels. Reported demand accelerated with a strong pick up in all products except gasoline which was negatively impacted by this past week’s ice storms.

Storage Withdrawals Might Have to Go Completely Dry by Mid-March

PIRA has been regularly highlighting the incredibly high withdrawal rates we’ve seen this winter. They are so high, in fact, that we may eclipse the total withdrawals for Winter ‘12/13 – this month. As a quick reminder, that winter was one of the coldest winters in recent European memory. This year, storage facilities are being called on to fill the gap created by not just a 31% increase in European gas-to-power demand year-on-year, but also LNG supplies that are down by 6% year-on-year and HDDs that were 181% higher than normal across Europe last quarter. With this extra heating and power demand and lower LNG supply, storage is becoming ever more crucial – however, it is dwindling quickly and threatening a serious supply crunch come March.

Coal Prices Rise Modestly on Prompt Market Strength

The coal market moved higher this week, with the strength in pricing again centered in the Atlantic Basin, due to continued cold temperatures and high coal-fired generation in the European market. FOB Richards Bay prices increased by the greatest extent, with FOB Newcastle falling to a greater discount to FOB Richards Bay. The relative weakness in FOB Newcastle occurred despite indications of continued strength in Chinese demand, likely due to the impending Chinese New Year slowdown. With Chinese domestic production on the rise, structural declines in European coal demand (after the natural gas market recalibrates), and limited upside for imports in other Asian markets, there is little doubt that weaker prices are ahead.

U.S. Ethanol Sets a New Record --Again

U.S. ethanol production attained a new record high for the third consecutive week, reaching 1,054 MB/D, up 5 MB/D from the previous week. Inventories soared again, building by 1.1 million barrels to 21.1 million barrels. The 2.4 million barrel increase in ethanol stocks over the past two weeks is unprecedented. Ethanol-blended gasoline manufacture rebounded to 8,363 MB/D from a 53-week low of 8,033 MB/D.

Global Equities Little Changed

Global equities showed only minor changes, on balance, for the week. The U.S. was fractionally lower, though consumer staples was up a strong 2.1%. Banking and retailing were the weakest performers. Internationally, many of the tracking indices lost ground slightly, though Latin America outperformed and was up 0.9%.

Post-Holiday Demand Recovery on Track

Japanese crude runs eased slightly, but remain near peak throughput levels. Crude imports were little changed and stocks built fractionally. Despite a sharp rebound in major product demand, finished product stocks built 1.9 million barrels, with increases in all the major products other than kerosene. Gasoline demand remains lackluster, post-holiday. Gasoil demand rebounded sharply, recovering a good chunk of the post-holiday decline. Kerosene demand also rebounded, but not as much as the post-holiday decline. Margins remain healthy at a time when runs are running close to max throughput.

Ukraine Pays More for Gas by Choosing France

France’s energy group Engie started direct gas deliveries to Ukraine at the beginning of January. According to a press release from Ukraine’s gas transit company UkrTransGaz, Engie started delivering gas as per the contract that the parties had signed in October last year. According to Russian media, the price of gas from EU countries was 20% more than what Russian gas would have cost Ukraine, if it had agreed to imports. Ukraine stopped purchases of Russian gas in 2015 over a gas pricing dispute, with relations between the two countries already soured with Russia’s annexation of Crimea.

Cape Freight Rates Expected to Strengthen in Late 2017

Cape freight rates had a buoyant start to 2017 outperforming both the Panamax and Supramax sectors. However, rates are expected to fall in the near term due to reduced iron ore loadings. More iron ore supply is expected to come out of Brazil, Australia (Roy Hill) and India in 2017 while China’s appetite for the product is expected to peak in 2018. There have been only marginal changes to PIRA’s Capesize utilization forecast, with balances set to tighten in 2H17 and into 2018. We continue to assert that monthly average Cape freight rates are expected to push over $20,000/day in late 2017.

Canadian Pipeline Probabilities

Recent developments have improved the prospects for construction of new oil pipeline capacity out of Alberta to downstream markets. These include the Canadian government’s approval of Enbridge’s Line 3 replacement, B.C.’s determination that Kinder Morgan has met the five conditions to support construction of the Trans Mountain expansion, and the inauguration of President Trump with his campaign promise to approve construction of Keystone XL. Completion of these pipelines is not guaranteed as environmental activists and certain indigenous groups are expected to mount strong opposition through protests, blockades and legal challenges. PIRA sees the Line 3 replacement as being the project with the highest likelihood of completion, followed by the Trans Mountain expansion and then the Keystone XL project.

Asian Demand Growth: Robust and Improved

PIRA's latest update of major country Asian product demand shows growth remaining strong. Demand is at its highest level since the July 2016 snapshot. Our latest assessment of growth is now 1.1 MMB/D versus a year ago. Versus the assessment last month of 0.8 MMB/D, there was noted demand acceleration in China and India, along with a swing in Japan from negative to neutral. China and India remain the key drivers in Asia. Chinese economic data have recently showed renewed acceleration on a host of fronts, which bodes well for oil demand growth.

World Refinery Capacity Reaches New Record Level

2017 begins with world crude plus condensate splitter capacity at around 102 MMB/D. This follows the roughly 1.6 MMB/D gain that occurred in 2016, which was an above average period for refinery additions. Between 2010 and 2016, the average annual change was closer to 1.3 MMB/D. Around one-half of the 2016 gains occurred in the Asia-Pacific region, with increases throughout the region including China, India, and East Asia. The Middle East, FSU, and the U.S. account for much of the other capacity gains. By contrast, Western Europe had a net loss of about 0.3 MMB/D during the year.

Few Oil Projects Start to Move Forward with Higher Oil Prices

Low oil prices have significantly slowed major oil project sanctioning: 33 in 2013 and only 5 in 2016. Of the five projects sanctioned in 2016, four happened in the second half when oil market balances started to significantly improve and oil prices had more fundamental support. Another factor that is now helping projects move forward is the significant cost deflation that has taken place since 2014. The peak net impact of oil projects delayed due to low oil prices reaches 2 MMB/D in 2020. Some 15% of delayed projects are being permanently cancelled, mostly in areas where breakeven costs remain relatively high despite significant efforts to reduce them (mainly Canadian oil sands).

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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