Japanese fall maintenance continues to gear up and will reach a peak over the next two weeks. Crude imports rose an incremental 286 MB/D, which combined with the lower runs, built crude stocks 4.3 million barrels. Finished products built 1.6 million barrels, largely from higher jet-kero stocks. Gasoline demand kicked up 169 MB/D, as the Health-Sports Day holiday provided uplift. Gasoil demand was surprisingly strong, despite the holiday. Exports, however, plunged from record levels and stocks built. Kerosene demand fell back sharply and was more in keeping with underlying demand. Refining margins eased slightly on the week, but remain good.

U.S. inflation has stayed benign, as consumer inflation data for September came in on the soft side of expectations. For now, U.S. central bankers appear wedded to the established historical method of conducting monetary policy, so another rate hike in December remains the base case. But the minutes for the September Fed meeting, released this week, showed policymakers stepping outside of traditional economic theories in search of answers for the low inflation puzzle. Meanwhile, activity data released by major economies were encouraging. Specifically, U.S. retail sales rose solidly, European industrial production expanded at its best pace in years, and growth in Chinese trade continued.

After three weeks of propane stock draws, inventories rose 925,000 barrels last week. The propane stock level is 78.9 million barrels, which is 8% below the five-year average. Propane exports dropped to 886,000 b/d for the week ending October 6th but are expected to return to the one million barrel level for the week ending October 13th based on heavy ship activity at USGC ports. US raw mix production dipped to just under 3.8 million b/d as Hurricane Nate forced a brief shut-in of all US Gulf Coast production facilities, which caused a 140,000 b/d or 4% reduction in raw mix production. NGL prices rose last week but did not keep pace with the increase in WTI/Brent crude prices. The combination of increasing inventories and reduced exports suppressed NGL prices last week, but NGL fundamentals remain strong and are price supportive going forward.

Margins for manufacturing ethanol in the U.S. and Europe worsened the week ending October 6. The EPA noted that it is considering reducing mandates for advanced biofuels and biomass-based diesel in 2018 and 2019. After declining temporarily, RIN values gained as fears over lower mandates subsided due to strong opposition. U.S. biodiesel prices and manufacturing margins declined for the third straight week. In Brazil a greater percentage of the sugarcane is being devoted to ethanol manufacture. In Western Europe the expiration of sugar quotas will mean more ethanol on the market.

Momentum for fuel pricing reform slowed over the past twelve months, as higher oil prices reduced the urgency for the world’s largest oil exporters to lower their subsidy bills. The trend supports PIRA’s view that the threat to future oil demand from subsidy removal is overstated. The vast majority of oil consumption is concentrated in countries that price fuel at or above market levels, while political constraints and stronger oil markets will cause oil exporters to implement subsidy reforms at a deliberate pace. Separately, currency appreciation versus the U.S. dollar had a marginally supportive impact on oil demand in the past year, but not nearly enough to offset the headwinds from widespread depreciation when oil prices collapsed between summer 2014 and January 2016.

French nuclear output has been dominating energy headlines this year - most recently with an EDF announcement of “significant” earthquake risk at 29 reactors just as winter is set to begin. Certainly this is not an ideal time to bring up this issue in France adding to balancing risks in not only the power sector, but with real knock on effects to gas markets. Major looming risks in France at the moment include low storage heading into winter, higher power demand, and LNG supplies that are average-to-low. For gas and power, France is very important for balancing its Mediterranean neighbors, which have also been the cornerstone for higher LNG imports in 2017. Any regional spikes tied to global LNG levels will be a significant risk across the whole winter.

With an average of some 20 LNG transits per month to date this year according the Panama Canal Authority data, the complaints, concerns and downright fears on the part of some LNG buyers, sellers, shippers and traders vis a vis Panama Canal access is mounting.

Credit conditions again remained highly constructive, with the S&P 500 continuing to set new records and volatility falling back on the week. High yield credit (HYG) was fractionally lower, but investment grade debt, emerging market debt, and the energy debt indictors all posted gains of 0.36-0.63%. The commodity space was strongly higher while the dollar weakened -0.8%. The St. Louis financial stress indicator was fractionally changed after five straight weeks of lessening stress.

U.S. ethanol production rebounded the week ending October 6, increasing by 14 MB/D to 1,010 MB/D as some plants resumed normal operations following scheduled maintenance. Total inventories rose by 805 thousand barrels to 21.5 million barrels, with East Coast stocks experiencing the largest weekly build ever reported, 933 thousand barrels. Ethanol-blended gasoline production continued to rebound from a six-month low, rising 177 MB/D to 9,231 MB/D as overall gasoline output increased.

On October 15, the Iraqi military launched an assault on disputed Kirkuk, which Kurdish Peshmerga forces have effectively controlled since dislodging ISIS in 2014. In addition to taking control of the city with little Kurdish resistance, the Iraqi army also claimed to take over the Baba Gurgur oil field (from which current production of ~100 MB/D is already allocated to NOC). A larger concern is the fate of ~280 MB/D from the disputed Bai Hasan and Avana fields, of which the Kurds gained physical control in 2014. At the time of writing, reports indicate the Kurdish government shut operations at the two fields, amid threats from Iraqi forces to target them next. The Kurds also refine up to 60 MB/D of NOC oil under recent agreements, raising PIRA’s estimated near-term disruption risk to at least 340 MB/D. The situation is fluid, but PIRA expects imminent negotiations and any near-term outage to be short-lived. But longer term, deep-rooted tensions over the status of Kirkuk will persist.

First signs of tightness have been emerging in the French market. Although RTE data shows that temperatures were in line with those typical for the period at the beginning of the week, spot prices reached an hourly peak of €75/MWh on Oct. 9, the highest value since mid-February, at a time when demand was only 55.8 GW, or 0.7 GW below the average demand during October on-peak periods since 2012. Poor nuclear output is the main driver of these high settlements, with the average month-to-date being 37.9 GW, lower than the 40.1 GW average of September and even below the level recorded in the same period of October 2016, when the steam generator probe was being implemented.

Seaborne coal prices largely moved higher this week, with CIF ARA and FOB Richards Bay forward prices leading the way, rising between $2.00-$5.00/mt W/W. Additionally, the back of the forward curves moved higher than prompt pricing, flattening out the prevailing backwardation in market forwards. The prevailing tightness in the coal market is looking like it will persist well into 2018, particularly if market bulls’ expectation of a colder-than-normal winter in Asia comes to fruition.

Global equity markets continue to set broad based record highs in a host of countries and across a host of market indices. In the U.S., the S&P 500 gained a modest 0.2%, but pushed further into record territory. The best performers were consumer staples +1.4%, utilities +1.4%, the defensive indicator +1.1%. Retail and banking were the weakest performers and lost ground. Internationally, all the tracking indices outperformed the U.S, with emerging markets, emerging Asia, and Japan doing the best.

The new heating season is off to a very warm start in the U.S. and Europe while Japan is cold. With half the month completed and a second half forecast, October is expected to be 1% warmer than the 10-year normal and 13% warmer on a 30-year-normal basis.