PIRA Energy Market Recap for the Week Ending March 20, 2017

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Gasoline Imports Into Latin America to Stay Strong in 2Q17

PIRA Energy Group

Asian net exports of key light products will ease as demand growth is expected to outpace incremental refinery runs in the region in 2017.

NYC-based PIRA Energy Group reports that gasoline imports into Latin America to stay strong in 2Q17. In the U.S., light products lead inventory lower. In Japan, crude stocks build while demand eases seasonally. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Asian Net Exports of Key Products to Ease

Asian refiners have been buying more crude from the Atlantic Basin due to narrower Brent-Dubai price spreads and declining freight rates. Asian net exports of key light products will ease as demand growth is expected to outpace incremental refinery runs in the region in 2017. Product exporters to Australia are fighting for market share. Asian LPG imports will grow more slowly this year due to moderating demand growth. Asian refining margins will remain generally healthy in 2017.

Russian Gas Price Up in February

The price of gas supplied by Russian state-owned Gazprom at Germany’s border climbed 14% in February IMF data show. Day-ahead gas on the UK’s National Balancing Point fell 20% in February, according to broker data compiled by Bloomberg. Gazprom, which supplies about a third of Europe’s gas, sees its prices recovering from a 12-year low in 2016. Most of the exporter’s contracts have an oil link, usually with a delay of six to nine months, while some also have minimum and maximum prices indexed to market rates. Gazprom plans to ship a record volume to its biggest market for a second year even as more liquefied natural gas may come to Europe this summer. It sees European gas demand rising about 5% in 2017, deputy head Alexander Medvedev said last week in an interview.

U.S. Power Storage Outlook

PIRA’s U.S. Power Storage Outlook reviews the latest trends in U.S. storage project installations, policy and market changes, and technology and cost developments, providing an updated market penetration forecast through 2024. PIRA has upgraded its post-2018 penetration forecast for SPP, ISO-NE, and NYISO, which will be most impacted by FERC’s recent proposal, along with other updates. Beyond the FERC proposal, PIRA does not see Trump administration policies changing our outlook, though tax reform, FERC appointments, and an infrastructure package are areas to watch in the coming months. The report also reviews the state of long-duration storage systems, including pumped-hydro storage (with around 30 U.S. projects in the development pipeline), compressed air, gravitational storage, thermal storage, flow batteries, and hydrogen systems.

EU Council Weighs in on Post-2020 Carbon Market Reforms, With Short-Lived Price Gains

EU Carbon Allowance (EUA) prices rose on the EU Council’s support for post-2020 market reforms and a stronger oversupply measures at their Feb 28th meeting, but the price gain was short-lived. The reform package could still change in the upcoming “Trialogue” negotiations, but the reforms currently on the table will have only a limited near- to mid-term impact on market oversupply. With the exception of a compliance-related rise in April, we maintain a generally flat view for EUAs in 2017. The possibility of price gains from positive Trialogue talks is balanced by a poor fundamentals situation, with auction volumes remaining high and declining power sector EUA demand.

Lower Price Trend to Persist as Shoulder Approaches

With warmer weather dominating in February, electric loads fell nearly 4% year-on-year and coal burn was up only negligibly as compared with last year’s levels. As winter supply risks have fallen off and demand is close to entering the shoulder period, it is unlikely that coal prices will be able to break out of their downward trend and push higher until summer arrives.

U.S. Ethanol Prices Higher

U.S. ethanol prices bounced late in the week ending March 10. RIN prices rebounded after plummeting the previous week. January exports of fuel grade ethanol climbed after shipments to Brazil reached a five year high and cargoes to Asia more than doubled. European ethanol values plunged as more supply became available.

USDA Cuts

A deeper dive into the Trump budget released Thursday morning showed that the hefty $4.7 billion proposed cut to the USDA budget would not affect crop insurance although that remains a hot button topic. Cuts in USDA county offices and statistical capabilities at NASS were specifically mentioned, along with rural water infrastructure. The county office cut was previously mentioned by the Obama Administration with no result. Going to be a long and tough fight amongst factions on the USDA budget in our opinion.

Fed Paints Rate Hike in Positive Light; Better Data from U.S. / China

At the policy meeting, the U.S. central bank did two things. First, as expected, it hiked the policy interest rate by 0.25%. Second, it sent a constructive message about the economic growth and monetary policy outlook via its communication tools. Specifically, policymakers assigned a good grade to the economy’s current performance; and they also made certain to communicate that the Fed has not become more hawkish compared to three months ago. In China, data releases for January / February were solid, indicating that the economic growth rate probably strengthened from the fourth quarter of last year.

Weak Start in 2017 Portends Challenging Year

Tanker rates are off to a slow start in 2017 and are expected to weaken further due to OPEC and non-OPEC production cuts and excessive vessel supply growth. Suezmax markets were a notable exception with rates recovering in February from rock-bottom levels in January. But the respite may be short as we approach the seasonally weak second quarter.

Gasoline Imports into Latin America to Stay Strong in 2Q17

Gasoline imports into Latin America are expected to stay strong in 2Q17. However, gasoline and diesel demands are forecast to be modestly lower year-on-year. Mexican and Venezuelan gasoline demand is projected lower year-on-year while Brazil’s is flat. Furthermore, Brazilian spark ignition fuel demand is set to fall in 2017 with petroleum gasoline demand to be flat as ethanol market share is projected to decline. PIRA expects regional refining crude runs in 2Q17 to be lower year-on-year.

Storage Deficit Re-Widening Ends Assault on Prices

Winter-like weather conditions finally returned — catching many off guard — with some parts of the U.S., primarily in the Northeast and Midwest, facing the coldest temperatures of the year. The belated return of cold air from the Arctic put an end to worries that U.S. storage levels would swell to 2.2+ TCF, which was weighing heavily on price expectations throughout February. The end of such concerns is allowing attention to shift back onto the other issues at work that have tightened weather-adjusted balances and kept gas prices at ~$3/MMBtu throughout much of the heating season.

French Nuclear Availability Low in March, in Spite of ASN Clearance

French nuclear availability remains at a multi-year low point for this time of the year (48.3 GW, or the lowest in the past six years), but the French nuclear regulator ASN has issued a press release on March 15 confirming the authorization to restart 12 of the reactors affected by the steam generator anomaly. It is interesting to note that the previous minimum availability for nuclear in March was set in 2014 (50.8 GW), i.e. 36 months ago. As a result of the generation cycles adopted by EDF, similar availability patterns are likely to recur every 3 years because of the length of the two maintenance cycles. The increased availability to 50.3 GW next month, the highest of the past six years for April, and high levels of availability through to June, based on REMIT data, recalls the pattern seen in 2014, when availability was also at a record high.

FOB Newcastle Prices Drive Higher, Atlantic Basin Dips

Coal market prices diverged considerably this week, with FOB Newcastle prices rising considerably across the forward curve, while FOB Richards Bay and CIF ARA prices pushed lower. Physical tightness surrounding China was the driving force behind the rise in FOB Newcastle prices in PIRA’s view. PIRA’s belief that China’s domestic coal demand strength was maintained into 2017 was confirmed this week, with the National Bureau of Statistics (NBS) releasing strong electricity generation figures for the January/February aggregate.

LPG Prices Fall in the United States

Despite some strength in WTI prices, falling demand and a decline in Henry Hub prices lowered U.S. NGL prices. Mont Belvieu ethane futures fell by 5% to 22¢/gal, while propane futures fell by 6% to 59¢/gal. Normal butane futures declined by 5% to 75¢/gal and isobutane similarly declined by 5% to 77¢/gal. Natural gasoline registered no week-on-week decline and was flat at $1.10/gal.

Global Equities Exhibit Rotation Near Record Highs

There was noted rotation in the domestic vs. international equity markets this past week. The broad U.S. market was little changed, with housing being the best performing sector. Energy basically matched market performance. International indices were all broadly higher and did very well as noted by the strength in the world, ex-US, tracking index. Performance was led by emerging markets, emerging Asia, and China.

U.S. Ethanol Scorecard and Supply Report

U.S. ethanol production rose 23 MB/D to a 5-week high 1,045 MB/D the week ending March 10, the sixth highest output ever reported. PADD II stocks climbed to a record 8.4 million barrels despite a decline in total U.S. inventories to 22.8 million barrels. Ethanol-blended gasoline manufacture increased to 9,049 MB/D from 8,697 MB/D as total gasoline production increased.

Commodity Liquidation

An extremely slow end to the trading week received a jolt on Friday afternoon as the weekly Commitment of Traders report reflect surprisingly large selling by the Funds in commodities generally, and grains/oilseeds specifically. The 900 million combined bushels of corn, soybeans, SRW, and HRW sold by the Funds was one of the heaviest single weeks in our memory. Combined with large bean oil liquidation, and some meal, Funds sold a record 207.5K contracts during the reporting week which included a WASDE but did not include the Fed’s rate hike.

U.S. Light Products Lead Inventory Lower

Overall commercial stocks declined by 7.8 million barrels on the latest week, led by a steep 9.8 million barrel drop in the four major products. Crude stocks were down just 0.2 million barrels, although Cushing added 2.1 million barrels, given the temporary closure of the Seaway Pipeline. Imports of crude were down to 7.4 MMB/D, 750 MB/D less than the previous week. Refinery runs were flat week-on-week. With planned downtime anticipated to fall in the coming weeks, refinery runs will be increasing.

Gazprom’s Proposal to Alter Contracts May Have Unintended Consequences

Gazprom has offered to settle their longstanding disputes with European antitrust authorities, theoretically in exchange for greater access to European markets and for their bigger ambitions to deliver more gas volumes through a second Nordstream pipe and the Turkstream pipeline. Gazprom offered to remedy issues with 8 Eastern European nations that represent around 15% of Russia’s pipeline gas sales, the biggest of whom is Poland that represents 4.5% of Russia’s total pipeline sales. On the surface, it may seem like Gazprom is sacrificing these sales for the hope of bigger ones when OPAL capacity is freed up and their new pipeline projects are fully operational. However, there seems to be some space for Gazprom to charge similar or even higher prices than before.

Stress Remains Low as Fed Rate Hike Announced
The S&P 500 was modestly changed on the week, but other indicators, such as the Russell 2000, posted more noticeable gains. Volatility (VIX) was lower, while the prices of high yield debt (HYG), and emerging market debt (EMB) moved higher. The Fed raised its target fed funds rate 25 basis points, while long-term U.S. government rates also tended to move higher, along with mortgage interest rates.

Japanese Crude Stocks Build, While Demand Eases Seasonally

Japanese crude runs continue to ease on the week, while crude imports rose sharply and crude stocks built 5.7 million barrels. Finished product stocks drew 1.2 million barrels, with much of the decline being in naphtha. Aggregate major product demand continued to decline seasonally. Gasoline and gasoil demands were lower. Gasoline stocks drew slightly, while gasoil stocks built moderately. Kerosene demand rose marginally, but with much lower yield, and the stock draw rate accelerated.

Australian Supply Tensions Threaten Coalseam LNG Exports

As Australia positions itself to become the world’s largest supplier of LNG, long simmering concerns about domestic supply availability for the key consuming southeast regions within the country have erupted in recent weeks to threaten the short-term viability of export growth from the recently commissioned Queensland export projects in the northeast.

March Weather: U.S. and Japan Cold, Europe Warm

At midmonth, March looks to be 2% colder than the 10-year normal for the three major OECD markets, with a composite net oil-heat demand effect of -41 MB/D. The markets are 6% warmer than the 30-year-normal.

Fire at Syncrude’s 350 MB/D Mildred Lake Upgrading Plant

An explosion struck Syncrude’s 350 MB/D Mildred Lake upgrading site on March 14. A 48 MB/D naphtha hydrotreater as well as piping from the hydrogen plant were damaged. Reports indicate that it could take two months for these units to be repaired and return to full service. Until then, modified production of lower quality, high sulfur syncrude is expected. The Mildred Lake upgrading plant has more than one train, meaning the temporary loss of the hydrotreating facility will not result in a complete shutdown. Expect Syncrude differentials to remain tight during the outage.

75 MB/D “Hidden” Demand Growth in 2017 Due to New Facilities Infrastructure

PIRA sees “hidden” demand associated with the start-up of new petroleum/petrochemical facilities and the Myanmar/China pipeline. 1.5-1.7 MMB/D of new refining capacity and 8-9 MMT/A of ethylene capacity are expected to start up in 2017. These new facilities will require oil for infrastructure needs, such as feed tankage and pipeline line fill. This will add roughly 75 MB/D to 2017 demand.

Asian Demand Growth: Expected Downshift is Unfolding

PIRA's latest update of major country Asian product demand indicates that year-on-year growth in our latest snapshot slowed to 556 MB/D, vs. 1,157 MB/D last month. Data actuals cover the three month period Dec-Feb. for China and India, while Japan, Taiwan, and Korea pick up data Nov-Jan. Much of the slowing was anticipated and relates to timing issues with regard to the Chinese New Year and India’s removal of “small denomination rupee bills” from circulation.

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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