U.S. shale crude and condensate production grew by 9% in 3Q18 (Q/Q), a substantial gain driven by rapid production growth primarily in the Permian, but also the Eagle Ford, Bakken, and Niobrara. Production averaged 6,410 MB/D for the quarter, with the Permian accounting for 2,830 MB/D. While takeaway constraints will increasingly hamper production growth going forward, total U.S. shale production is still forecasted to average 6,140 MB/D for the year — 1,440 MB/D greater than 2017.

Natural gas price moves have been anything but orderly these last days, as bullish fundamentals led to hyper-volatility and a peak December contract price of more than $4.90/MMBtu — a high not seen since 2014. While rooted in fundamentals, the accelerated price appreciation at work since mid-September was also assisted by non-fundamental influences.

Electricity is a special focus of this year’s IEA World Energy Outlook, which highlights the impact of a profound transformation in electricity markets as a result of growing renewables generation. In this note, we focus on the capacity mix underlying the IEA scenarios. Solar emerges as largest gainer, as reflected in recent data on capacity additions and consistent with our outlooks. Platts Analytics’ long term view on renewables falls between the IEA’s “Current Policies” and “New Policies” scenarios. The IEA sees gas-fired capacity growing substantially across all scenarios, although gas-fired generation declines in the greenest scenario (IEA’s “Sustainable Development”), highlighting the downside risk for natural gas under a constrained emissions regime. Coal plants continue to be built under all scenarios – even in the ”Sustainable Development”, which sees coal capacity peaking as early as the mid-2020s. Our data indicate about 200 GW of coal projects are currently in some stage of construction globally.

Cap and Trade regulations call for the CA auction reserve price to escalate each year by 5% plus the rate of inflation. The November 14th U.S. BLS 12-month Oct-Oct inflation release (the inflation indicator used for this calculation), came in at 2.52% -- implying a 2019 reserve price of $15.62. This compares to the 2018 floor of $14.53. The official CARB announcement is due the first day of December (although that falls on a Saturday this year). Inflation indicators so far from 2018 implied a wide range for the 2019 floor of $15.56 to $15.68, with highs from last summer and Aug/Sep lower. Inflation became known in advance of the final allowance auction of the year, held later the same day.

U.S. ethanol production declined by 1 MB/D to 1,067 MB/D, falling slightly from a two-month high. Inventories built by 364 thousand barrels to 23.5 million barrels, which is up over 2.0 million barrels from this time last year. Approximately 10.9 million gallons of imports were received in PADD V, presumably California. Ethanol-blended gasoline production increased by 117 MB/D to 9,189 MB/D. December ethanol futures were up 0.5¢ today to $1.263 per gallon last Thursday, following corn higher.

The overall small 1.4 MMB decline in total commercial stocks masks the large drop in products of 11.7 MMB, with a significant offset by the crude oil stock gain of 10.3 MMB. This week is expected to see a further large crude stock build, as crude field production continues at 11.7 MMB/D, exports moderate to 1.9 MMB/D and crude runs don’t pick up sharply, tempered by relatively weak refinery margins. Refinery runs were up slightly for the week to 16.43 MMB/D, despite indications of a significant return to service of over 300 MB/D crude capacity. This week sees even more capacity returning but we have tempered runs to 16.51 MMB/D. Distillate storage drew by 3.6 MMB this past week as reported demand surged to over 4.6 MMB/D. For this week distillate storage should fall by a further over 3 MMB. Gasoline inventory fell by 1.4 MMB but stocks continue well ahead of the year ago level by 16.2 MMB. Storage is expected to fall by around 2.5 MMB for this week. As with crude Cushing storage has been building for eight weeks in a row adding 1.2 MMB for the latest week. With PADD II runs increasing as units come back online the pace of the gain is expected to moderate to 0.4 MMB for this week.

The latest Chinese economic data delivered four broad messages: consumer spending is in slump; high-tech industries are experiencing contractions; fiscal policy easing is starting to spur infrastructure spending; and monetary policy easing has not yet brought about a large expansion in borrowing. In the U.S., a combination of healthy economic growth and benign inflation continued. A contraction in German GDP during the third quarter reflected temporary distortions – but electricity demand’s weakness in November was potentially worrisome.

US propane/propylene stocks saw a small pullback during the week ended November 9, falling 770,000 barrels week over week to 83.8 million barrels. Despite the low stock withdrawal this week, propane prices increased by 4.1 cents/gal today to settle at 76.25 cents/gal, or 57% of WTI oil prices. Total US stocks ended last week 9.1 million barrels above the same period in 2017. Production averaged 1.94 million b/d for the week, or 18,000 b/d below the prior week, though volumes remain higher year over year, and are keeping inventories well above the start of previous winters. Year over year, production was up 50,000 b/d, or 3% for the week ended November 9. US propane exports averaged 668,000 b/d, or 316,000 b/d below the week prior, according to the EIA, though Platts’ ship-tracking software shows a week-over-week increase of 121,000 b/d, to 1.1 million b/d. US Gulf Coast propane outpaced crude futures again Friday, strengthening 2 percentage points to a one-month high of 59% of front-month crude futures. Front-month non-LST propane gained 6.875 cents/gal, or 9%, ending the week at 79.25 cents/gal.

The Chinese central government has been forthright that it wants road transportation to increasingly be comprised of New Energy Vehicles (NEVs). In late 2017, Beijing finalized the NEV mandate, the most recent move in a strategy to become the global leader in electrified road transportation. This report: 1) summarizes China’s NEV strategy, how it works and interacts with other Chinese transportation regulation, and 2) quantifies the impact of the NEV policy on China’s EV adoption, electric VMT, and oil demand in the short and long term. We forecast that China will have 10 million NEVs on the road by 2023, approaching 200 million by 2040. Such adoption will displace an estimated 29 MB/D, 684 MB/D, and 2,225 MB/D in 2020, 2030, and 2040 respectively.

Chicago ethanol closed at $1.23 per gallon last Friday, the lowest since June 7, 2005. Domestic ethanol production rose by 9 MB/D to a two-month high 1,068 MB/D during the week ending November 2. Ethanol manufacturing margins decreased as average ethanol prices were lower despite higher corn costs. Valero’s Board of Directors has approved the expansion of its Diamond Green Diesel plant in Norco, Louisiana to 675 million gallons of renewable diesel per year. In Europe, RME biodiesel prices continue to soar, reaching a record high last Friday.

Dry weather in the Midwest this week as producers in the western Belt continue to struggle with wrapping up the 2018 harvest. Next week bitter cold will settle in for many, possibly closing the door on any further advancement barring an early-December thaw. As of last Sunday, Iowa producers still needed to harvest 430 million bushels of their anticipated corn production with Nebraska not far behind at 415 million. The Dakotas, where weather has turned wintry-like in a hurry, as well as Minnesota, were all behind pace. At this point soybeans are the most vulnerable. Last week’s 5% lag against the 5-year average left ~1/2 million soybean bushels in the fields theoretically, although the I states are all close to done, making that lag a bit of a misnomer. Whether it was due to the soybean subsidy being paid out on verified production, or just a concerted effort to get the soybeans harvested first, producers in the major states are mostly in the 90th percentile, except for Ohio at 85% last week. There is little doubt in our mind that the late harvest, especially in soybeans, will be a yield drag come the January Crop Production report.

For the first time since last January, Henry Hub cash traded above $4/MMBtu this week. The rally in cash underscores the vulnerability of the market this winter to below-normal temperatures — particularly if cold weather emerges early this heating season. Clearly, low storage levels places increased importance on managing storage capabilities. As such, storage operators (namely utilities and LDCs) will be inclined to husband inventories for later in the season due to their obligation to serve. As a result, abnormal temperatures in in November and December stand to force greater reliance on the physical market.

A cold snap in Europe and continued warmth in Asia is making for the worst reload economics since February 2015 from Europe to Asia. Not only is this an incredible about face from last winter and the reent summer, but this is also happening on the cusp of a major new injection of supplies for the Atlantic Basin and Europe. This is creating a situation where if current spreads persist, Europe could receive a flood of new LNG. Let’s not forget that this is in addition to the Nordstream 2 pipeline that is expected to begin at the end of next year.

Crude runs surged 306 MB/D in Japan last week as restarts from maintenance began. Crude imports rose strongly, such that crude stocks still built 2.8 MMBbls. Finished product stocks built 1.56 MMBbls, as higher aggregate demand lagged the run increase. Other than fuel oil, all the major product stocks posted moderate builds. Product stock length has grown and is weighing on refinery margins. Cracks are bi-modal with fuel oil and middle distillates strong, and gasoline and naphtha abysmally weak. Implied marketing margins remain very strong, particularly gasoline.

Above normal temperatures and strong supply have allowed injections to continue late into the season, with total NWE injections peaking at 115mcm/d on 11th. Temperatures are forecast to drop this week, as LNG sendouts also started to fall from their Nov 2nd peak (173mcm/d), spelling an end to the record storage stock build that started in early October.

As a cold front is set to hit Europe, ongoing dry conditions add further upside to German power prices, primarily through their impact on coal deliveries. Three of the plants along the Rhine River, with combined capacity of 2.5GW, have displayed a substantial drop in their combined output this month. This is the result of availability being reduced to zero for multiple days at a time, as well as low dispatch when available. The dispatch of the rest of the fleet is still in line with the previous two months, suggesting a negligible impact from the drought to-date. However, low precipitation could make a cluster of plants along the Lippe River also at risk and potentially affect 5.5GW of capacity.

Global coal prices fell for the third week in a row. Buyers are grappling with historically high ARA stockpiles and turmoil in Pacific Basin markets as China appears to be pulling back from seaborne trade amid Chinese policy uncertainty. S&P Global Platts physical assessments led the declines last week, even as prompt quarter forwards fell by more than 4% for major contracts in both the Atlantic and Pacific Basins. There may be further downside to prices, particularly for the FOB Newcastle contract, as high-cv prices remain elevated relative to low-cv Australian coal.

Canada continues to develop its federal Clean Fuel Standard (CFS) to reduce GHGs by 30 million metric tons (MT) annually by 2030. The program has a similar structure to the California Low Carbon Fuel Standard, but will set separate Carbon Intensity (CI) requirements for different fuel streams, and extends beyond transportation to industry and buildings. The revised timeline calls for proposed regulations for liquid fuels in spring 2019, with final regulations in 2020 to take effect by 2022. Regulations for gaseous and solid fuels will follow. Efforts are currently focused on the upcoming Regulatory Design Paper that will provide concrete details for liquid fuels, and a cost-benefit analysis is also expected this fall. Recommendations and modeling were recently presented at a Stakeholder Meeting held November 13th, with comments due November 30th. Modeling indicates most liquids stream reductions will come from oil sands operations and use of biofuels. Increased blending of biofuels gets at least half of the way to the 30 MT CFS goal while electric vehicles would play a minor role. Requests were made for the release of the full abatement curve, while the potential role of aggregators and the appropriate recipients of EV credits were some top issues identified by Stakeholders.

The S&P 500 lost 1.6% on the week, with equity volatility (VIX) gaining about 6%. Oil volatility (OVX) gained about 16% on the week, but surged on Tuesday and then eased, while WTI lost about $3/Bbl (Dec) for the week. As expected, oil related energy metrics worsened, but strong natural gas prices lifted the energy commodity index to a strong 1.7% gain, with industrial metals gaining similarly. Overall commodities also gained 1.2%. The U.S. dollar was lower by 0.4%. Copper gained back to about $2.80/lb, but aluminum slipped to a “lower low”.

U.S. ethanol production declined by 1 MB/D to 1,067 MB/D, falling slightly from a two-month high. Inventories built by 364 thousand barrels to 23.5 million barrels, which is up over 2.0 million barrels from this time last year. Approximately 10.9 million gallons of imports were received in PADD V, presumably California. Ethanol-blended gasoline production increased by 117 MB/D to 9,189 MB/D. December ethanol futures were up 0.5¢ today to $1.263 per gallon last Thursday, following corn higher.

In its 3Q2018 earnings statement, Cheniere Energy indicated an opportunity to optimize existing liquefaction trains at Sabine Pass and Corpus Christi for a cost around $300 per additional ton. This figure is well below the cost of incremental liquefaction capacity from proposed greenfield and brownfield liquefaction plants, which breakeven at around $450/ton at the low end. The estimated debottlenecking opportunity would provide an incremental 0.5 mtpa (~70 mmcf/d; 11%) capacity increase per train, or a total of 4 mpta (~0.5 Bcf/d) across all eight trains. Platts Analytics estimates suggest that further debottlenecking of Cameron, Cove Point, and Freeport could support a total US liquefaction capacity increase upwards of 1.1 Bcf/d by the mid-2020’s, if further optimization projects are undertaken.

Three acquisitions worth $13.4B announced in past three weeks resulted in a new record of $49.4B in U.S. shale M&A activity for 2018 and we still have six weeks remaining before the end of the year. This is a retreat from the recent assurance by most operators to focus on returns to shareholders by exercising capital discipline and keeping away from more acquisitions. We will not know for a few years about how economic the acquisitions were. However, since mid-2014, Wall Street has not been sympathetic to most E&P companies due to perceived lack of capital discipline. Since 2014, the S&P500 Index has done significantly better than the Energy Index. Nevertheless, we do not expect the recent acquisitions to materially change our growth forecast that calls for U.S. shale oil production to average 6 MMB/D in 2018 (+ 1.3 MMB/D year-over-year) and 7 MMB/D in 2019 (+1 MMB/D year-over-year).

Global equities slipped 0.8%, with the U.S. S&P 500 losing 1.5%. Retail and consumer discretionary did worse, and lost 3.3-4.4%, with energy dropping by 2%. Internationally, while Europe and Japan lost ground too, there was strength in China, emerging Asia, Latin America, and emerging markets.

At midmonth, November looks to be 7% colder than normal on the 10-year-normal basis for the three major OECD markets. On a 30-year-normal basis the markets are 3% warmer. The November forecast takes into account first half actual weather and the current forecast for the rest of the month.