Total hydrocarbon inventories increased by 10.1 MMB last week. Crude stocks dropped by 5.3 MMB, which was very closely aligned with our expectations, while aggregate clean products’ inventory built by 9.8 MMB (slightly above our forecasts). “Other products” stocks built by a massive 5.1 MMB. Crude stocks at Cushing decreased by 1.2 MMB, as higher outflows to US Gulf Coast and lower inflows from Canada more than offset reduced local demand. Strong refinery maintenance during September and October is expected to significantly reduce local demand in the weeks to come, which will soften the impact of strong outbound flows. However, another week of muted inflows is forecasted to drive stocks lower again this week, causing Cushing inventories to decrease by 1.1 MMB. EIA reported 10.4 MMB/D for the L48 and 452 MB/D for Alaska (from 446 MB/D during the previous week). The large fluctuation in L48 volumes was driven primarily by evacuations of offshore platforms ahead of Tropical Storm Gordon. We expect a partial recovery in offshore volumes in the week ahead, bringing L48 to 10.5 MMB/D. Along with 475 MB/D from Alaska, this will result in a rounded U.S. total of 11.0 MMB/D. We forecast refinery runs to decrease significantly to 17.33 MMB/D, as a result of increased planned outages in PADDs 2-3.

US propane production fractionators rose to an all-time high of 1.997 million b/d for the week ending September 7, according to EIA data. PADD 3 production rose to a record high of 1.087 million b/d, while production in PADDs 2 and 3 also increased, but fell short of all-time highs. Stocks built by 177,000 b/d, a decrease of 38% week over week, bringing total US stocks to 74.6 million barrels. Propane exports fell again, down 4% to 693,000 b/d for the week, with reported exports coming in lower than VLGC traffic through LPG terminals would suggest. Enterprise Product Partners plans to expand its Enterprise Hydrocarbon Terminal (EHT) by 175,000 b/d, according to a company press release. The incremental capacity is expected to become available in 2H 2019. This expansion brings EPD's export capacity on the Houston Ship Channel to 720,000 b/d and increases total US LPG export capacity to 1.63 million b/d.

Record production levels continue to weigh on winter premiums, with the 18/19 heating strip once below the $2.90/MMBtu mark. Interestingly, the winter strip is now trading below Henry Hub cash — providing little incentive to inject into high turn storage facilities. Natural gas producers have had a less lucrative price signal in 2018, with the 2019 NYMEX strip trading at ~$2.75/MMBtu on average this year. In comparison, during 2017, the 2018 NYMEX strip averaged $3.02/MMBtu. This could have a bearing on capital spending, above and beyond the influence of cost inflation — an added risk that seems to explain in part why rig counts in key dry gas basins are already off from their 2018 highs.

Although PSV DA has lost 8% of its value between 10th and 13th September, the Italian fundamentals will stay tight in the week ahead, on the basis of continued high CCGT demand due to low wind generation and high temperatures, whilst storage capacity owners need to match a minimum stock level before Tarvisio enters maintenance on 25th September, which will further tighten the market despite the prospect of storage injections slowing as Stogit hits capacity, although absolute prices may come off on the recent reversals in carbon and technical adjustments.

Platts Analytics recently highlighted how JKM, at points this winter, will move up to or above Brent equivalency. Part of what has helped spur that strength is the increasing strength of European winter pricing that will have knock on effects to supply availabilities in the Pacific. There has been a recent reversal in cross basin pricing. Through a combination of a tightening shipping market, strengthening European currencies, and stronger European gas pricing, reloads are being discouraged reloads and Europe is potentially clawing back some volumes for peak winter with current pricing.

The data last week reflected some residual impacts from super typhoon Jebi and the recent 6.7 magnitude Hokkaido earthquake, which occurred September 7. Runs dropped an additional 150 MB/D on the week. A very low crude import figure drew crude stocks 3.5 MMBbls, while finished product stocks built 1.5 MMBbls, driven by builds in the jet-kero complex and fuel oil. Demand performed largely as expected, though aggregate demand slipped back 258 MB/D, and the four-week average fell 95 MB/D. Refinery margins have continued to ease, and are again acting weak, while marketing margins have also been softer.

Chinese economic activity in August was resilient, as key data (such as trade and industrial production) recorded solid gains. But vehicle sales declined year-on-year for the second consecutive month. This was potentially worrisome, since rising trade tensions with the U.S. may be starting to impact consumer behavior in China. There were no clear signs yet in investment and credit creation data that Chinese economic policy has become more accommodative. In the U.S., consumer spending and manufacturing activity were solid in August. By pointing to recent job and wage growth, the European Central Bank strongly hinted that its quantitative easing purchases will soon end.

After gaining a bit immediately following the Labor Day holiday weekend, U.S. ethanol prices resumed their recent decline. Ethanol manufacturing margins declined for the eighth consecutive week as the increase in corn costs was greater than the slightly higher average ethanol price. The U.S. exported 95.7 million gallons of fuel grade ethanol in July, down from 138.9 million gallons in June. Brazil exported 266.1 million liters (70.3 million gallons) of ethanol in August, up from 183.2 million liters (48.4 million gallons) in July. Over 99% of the fuel was sent to three destinations: the U.S., South Korea and Japan. The cash margins for Platts Analytics’ model soybean-based biodiesel plant fell below 10.0¢ per gallon last week.

In its September oilseeds report, USDA’s Foreign Agricultural Service (FAS) ran the headline “Share of Brazil’s Exports to China Spikes in August”, and that was before the White House signaled that another $200 billion of tariffs on Chinese goods will be implemented shortly. While the “new” tariffs are expected to be of a lower percentage (10%) in order “not to disrupt the flow of goods in front of the holiday shopping season”, rumors have already begun that the Chinese will “shut off” exports of goods, including iPhones, to the U.S. in an apparent high stakes game of chicken. And to think that just last week Platts Analytics referenced the Mnuchin-driven headline that the U.S. was proposing a new round of talks with China.

The latest Platts cFlow tracking data shows Iranian losses accelerating faster than we previously expected. Crude and condensate exports averaged 1.9 MMB/D in August, 0.3 MMB/D below our forecast, and 0.8 MMB/D below the recent highs in April/May. Our Reference Case forecasts a further 0.5 MMB/D reduction by October loadings, but risks are skewed toward even higher cuts. Indications from Europe, India, China, and elsewhere, show that companies have very little appetite to risk exclusion from the U.S. market and financial system, while waivers are likely to be few and far between. Floating storage volumes offshore Iran surpassed 13 MMBbl in recent days, pointing to greater difficulty finding buyers of Iranian oil than shown in the loadings data. Some modest relief could come when ~110 MB/D of condensate refining capacity comes online by April 2019. Higher runs would largely eliminate gasoline imports, currently over 60 MB/D, while allowing higher crude or condensate production with no net impact on export volumes, all else equal.

Pakistan’s Prime Minister Imran Khan on Tuesday gave a go-ahead for increasing natural gas rates by an average of 46% as determined by the Oil and Gas Regulatory Authority (Ogra) in June and ordered steps to control annual gas theft of Rs50 billion ($400-million). Presiding over a briefing on gas sector, the prime minister asked the petroleum division to get it approved from the forum concerned and clear the backlog of issues which have piled up when he was explained about the need for gas tariff increase.

Despite average carbon prices approaching €22/mt month-to-date, German coal output has reached daily averages of 12-14GW, consistently dispatching the less efficient plants. This happens in the absence of strong exports and with coal supply still characterized by surcharges due to low river levels. The reason is the rally in gas and, through a feedback loop, carbon prices, as storage deficit issues, reduced flows from NCS and Russia and limited availability of LNG deliveries to Europe lead to continental hubs chasing LNG prices. As a result, German power prices for 4Q have diverged from the Nordic ones after tracking them until the end of August. Forecasts of relatively warm weather to the end of the month, a recovery in Russian flows and the end of maintenance at some NCS pipelines could ease gas prices as we move to 4Q, but the coal-gas fuel spread is comfortably favoring coal over gas dispatch for the balance of the year and, despite the increased volatility in carbon prices observed this week, any coal-to-gas switching in Germany might be difficult to materialize.

Weather driven loads and strong gas prices year-over-year during August resulted in higher spot on-peak energy prices in most eastern markets and ERCOT. Weather-adjusted loads across the Eastern Interconnect and ERCOT increased by 0.9% year-over-year. Warmer than normal weather led to a raw load increase of 6.9% year-over-year. ERCOT raw loads increased 7.7% year-over-year but loads did not reach the highs set in July. Production gains have been weighing on gas price expectations. The 2018/2019 winter strip has once again fallen below $3.00/MMBtu, with prices now oscillating around $2.90/MMBtu even as expectation for end-October stock levels is a mere 3.26 Tcf. Uncertainty around Northeast production remains the biggest risk to Platts Analytics regional forecast in balance of 2018.

The global seaborne thermal coal market continued to exhibit strength over the past week, with FOB Newcastle again proving to be the strongest pricing point. While the CIF ARA and FOB Richards Bay forward curves shifted higher by between $0.25/mt-$1.00/mt, FOB Newcastle jumped by between $2.00-$3.00/mt. Coal demand fundamentals in Europe have certainly been bullish with strong gas and power prices combined with a notable downshift in carbon prices pushing coal-fired generation higher, particularly in Germany. As expected, China’s electricity demand remained extremely strong in August, buoyed by temperatures that were considerably hotter than last year and normal levels, forcing approximately 6% growth in coal-fired generation.

CA carbon pricing, trading volumes and OI gained momentum in Aug, particularly post-auction, with Sep higher still. No auctions remain before the most significant physical milestone for this market to date – the Nov 1st CP2 (2015-17) compliance surrender. Offset usage levels will drive the surplus/carryover to CP3. Rising inflation has increased expectations for the 2019 auction reserve price - actual inflation will be released the morning of the Nov allowance auction. The latest Cap and Trade amendments proposal, to be finalized by end of year, provides clarity on CARB’s thinking for the cost containment price tiers to take effect in 2021. The price tier levels have been adjusted downward, as we expected. The large bank carryover provides a buffer and limits the upside for near term pricing, though wildcards include offsets usage and EIM retirements and compliance obligations. CA annual balances are expected turn negative in the years after 2020 as reductions from complementary policies/Scoping Plan measures and other abatement measures also come into play.

An increase in the percentage of child wells to parents, reaching 50% in the Midland Basin, has raised many questions about the Permian and whether it is starting to lose productivity. Even though we have started to see some flattening of the well productivity in the Midland area, we do not see this as a reason to panic. The well productivity of the Delaware basin is still growing, the technically recoverable resources of the Permian are very large (greater than 70 billion barrels) and the (half-cycle) well breakevens are still very favourable (less than $40/Bbl WTI). In addition, it is too early to judge since many operators have not fully optimized Permian well spacing (distance between child well and parent) and we could have an engineered solution in the near future. We expect growth in the Permian to resume once the pipeline takeaway issues have been resolved in the latter part of 2019. Our forecast calls for the Permian shale crude production to average 2.6MMB/D (+0.9MMB/D year-over-year) in 2018 and 3.2MMB/D (+0.7MMB/D) in 2019.

Last week was fairly positive, with the S&P 500 again reclaiming the 2,900 level. Many credit metrics performed well, including high yield debt (HYG) and emerging market debt (EMB). The market appears to be reflecting that the contagion risks from emerging markets have diminished and such stresses appear to be lessening at the margin. Commodities were modestly lower, but energy performed the best, higher by 0.54%. The dollar weakened 0.5%, with strong performance by the Russian ruble, Mexican peso, and Turkish lira.

U.S. ethanol production plummeted by 67 MB/D last week to a 4½-month low 1,020 MB/D as several plants went off line for maintenance. Stocks grew for the first time in three weeks, increasing by 191 thousand barrels to 22.9 million barrels, with all of the build occurring on the Gulf Coast and East Coast. Ethanol-blended gasoline production dropped sharply during the holiday-shortened week, decreasing by 240 MB/D to 9,076 MB/D.

While the scorching Arabian summer sends demand for power soaring, a tighter crude oil market is making Saudi Arabia's stab at diversifying its power supplies away from crude a more pressing issue. With the commissioning of a substantial number of large gas and HFO plants now in sight, the Saudi crude burn within the power sector is set to come off within the next few years. However, this story will initially be an oil-for-oil substitution event, in addition to high gas burn. Over 10 GW of high sulfur fuel oil (HFO) capacity is slated to come online by 2020, bringing Saudi's fuel oil burn up substantially. Crude displacement will also occur as a result of changing IMO regulations, which works well for Saudi given the emerging global surplus of HFO. The fuel oil burn increases are concentrated in the Western and Southern regions. Gas burn will be increasing more widely across the country, especially in the Central and Eastern regions.

Hurricane Florence made landfall Thursday along the Carolina coast. Hurricanes have historically reduced demand for electricity as a result of the damage they leave in their wake, as well as the temperature impacts that come along with the storms. First, there is a major nuclear facility – Brunswick - located on the coast near where Florence was supposed to make landfall. The category 2 storm will likely bring a large storm surge of up to 13 feet or higher and could drop as much as 40 inches of rainfall. The storm surge will likely stay below the storm walls located at the Brunswick plant, which are designed to repel surge up to 26 feet according to the NRC. The Shearon Harris plant is located in an area most likely to be impacted by severe flooding. There are another 10 nuclear plants that are located near the coast along freshwater sources which could be at risk. Between the storm surge and expected rains, inland fresh waterways which supply the nuclear plants in the Carolinas with water for reactor cooling could become flooded which could impact operations at those plants as well.

Even with last week’s large single-day drop in EU Carbon Allowance prices, fundamentals indicators on both the demand- and supply-side suggest continued support for EUA prices ahead of the upcoming cuts in 2019 supply arising from the Market Stability Reserve. This includes strength in gas prices, and reduced EUA auction supply vs. previous assumptions. However, a downward price correction, from lower EUA demand due to above-normal weather this winter or stronger wind gen, remains a possibility. Platts Analytics also continues to flag the possibility of more dramatic price swings as market participants digest news of Brexit negotiations, including an EU Council meeting on September 20.

While U.S. shale, and especially the Permian, has taken much of the limelight for the better part of a decade, production in the Gulf of Mexico has quietly achieved a notable 8% CAGR over the past five years, with a handful of new projects supplemented by tiebacks to existing fields. Despite some interruptions earlier in the year, a strong production rally is set to occur in the second half of the year, with further gains in 2019. Aside from new projects since 2013, producers have been successful in using tiebacks to arrest base declines on older fields, effectively reducing average annual decline rates to low single digit percentages. Moreover, lower half-cycle break-evens ($45-50/Bbl WTI) as a result of service provider concessions and efficiencies are helping projects move forward. We estimate crude production in the GOM to reach new highs this year, with an exit rate just shy of 1,900 MB/D, up 310 MB/D year-over-year.

Global equities gained 1% on the week, while U.S. market gained 1.2%, with the S&P 500 regaining the 2,900 level. In the U.S., the best sectorial performers were energy (+2%), and industrials (1.9%), while banking fell 1.8%. Internationally, the world tracking index, ex-U.S., outperformed by gained 1.7%, while Japan and Europe did particularly well and gained 1.9-2.5%.

Refinery gain is a key factor in volumetric refinery balances. Based on EIA data, U.S. refinery gain has been essentially stagnant in volumetric terms over the last several years. In fact, with higher U.S. runs, it has declined in percentage terms. Using a simple correlation developed from these U.S. data, we estimated the potential refinery gain for several other key regions. Overall, refinery gain outside the U.S. is expected to increase somewhat faster than in recent years, adding 400 MB/D from 2018 to 2021 as a result of planned conversion facilities outpacing crude runs. High utilization rates for conversion facilities are expected post 2020 as the change in global bunker specs will provide incentives to destroy resid.