PIRA PROVIDES THE TOTAL VIEW OF THE ENERGY MARKET

Midcontinent production increased in November, with most of the gain coming from the Permian. In January, US crude stocks increased, with the largest gain taking place in PADD 2. Larger builds are expected in February at Cushing, while further draws are expected in Western Canada following a sharp decline in January. WTI averaged $52/Bbl in January, and is expected to strengthen slightly in February, while Canadian WCS and Syncrude differentials continued to strengthen in January.

Aggregate demand soared 257 MB/d, while the four-week level also spiked higher, but has room to run. Finished product stocks drew for the third straight week and are about halfway through their seasonal draw pattern and very close to seasonal norms. The next several weeks of demand performance is critical to balances. So far, things look constructive to supporting a rebound in refining margins, particularly gasoline. Gasoline stocks, which had been long, have tightened up, while gasoil demand performance remains solid. The refining margin indicator remains very weak, but should turn higher, while the implied marketing margin remains strong, but has fallen back a bit.

Total commercial stock decline was led by distillate (-2.3 MMB) and “other products” (-2.8), while crude and gasoline stocks built (+1.3 MMB and 0.5 MMB respectively). These movements were directionally aligned with our expectations. Crude oil storage added 1.26 MMB for the latest week, which is lower than we anticipated due to particularly strong crude exports (2.87 MMB/d). For this week, we anticipate a robust crude stock build (+6.3 MMB) driven by substantially lower crude imports (6.9 MMB/d), which have been affected by US sanctions on Venezuela’s PDVSA, higher crude production (12.0 MMB/d for the first time) and significantly lower crude runs (16.25 MMB/d), which have been impacted by a series of unplanned outages in both PADDI and PADDV. Crude stocks at Cushing increased by 1.4 MMB, in line with our expectations. For this week, net flows and refinery runs in the area are expected to be flat, likely resulting in a very similar stock build. Total US crude production came in at 11.9 MMB/d for a fourth consecutive week. We predict that recent growth in the Permian will push total production to a rounded 12.0 MMB/d next week, for the first time in history. The port of Houston has experienced severe delays due to fog. As a result, we expect gasoline and distillates exports to drop significantly (600 MB/d and 580 MB/d respectively) this week. Meanwhile the polar vortex has negatively impacted the demand for gasoline, but less so the distillate demand. Overall, this week we expect gasoline and distillate stocks to build sharply with jet stocks building moderately.

Saudi Arabia released their pricing for March last week. Price adjustments reinforce the cuts in production that have already taken place. Saudi production peaked in November at 11.3 MMB/d, fell in December to 10.7 MMB/d, while January fell to 10.2 MMB/d. Saudi output is expected to remain near that level through April. US pricing was left unchanged, with Saudi crudes remaining overpriced vs. competing domestic grades. In Northwest Europe and Asia, price differentials vs. pricing benchmarks were lowered and reflect weak light-end product prices (gasoline and naphtha). Pricing on Arab heavy for both regions was raised reflecting stronger fuel oil cracks. The key driver for Asia, Dubai structure, saw its backwardation rise $0.08/Bbl between the two pricing windows, which justified no change to Arab light. In Northwest Europe, Arab light was left unchanged, but pricing on Urals vs. Dated Brent saw a widening in its discount. Continued delays through the Turkish Straits have tightened the Med sour crude market, with large Urals volumes out of Novorossiysk delayed, and justified a broad increase to pricing offsets for Saudi crude sold into the Med.

As a result of the partial government shutdown, some key US economic data have not been updated for more than a month. Specifically, December data for consumer spending, business investment, housing, and trade are not yet available. But these holes can be filled to some extent by looking at weekly data and timely survey results. The likelihood is that US economic growth during the fourth quarter (which will be reported at the end of February) was constructive. German industrial production for December was disappointing. A recent slump in European economic activity likely continued into January, as electricity demand during the month was underwhelming.

The S&P 500 was close to unchanged on the week and successfully held the 2,700 level after noted intra-day dips below it. Most of the other metrics (equity and oil volatility, and high yield) were little changed. Commodities fell back 1.1%, with energy falling back 2.8%. The leveraged loan indicators continue to show lessening stress, while the St Louis financial stress indicator extended its improvement to five straight weeks.

Global equities were modestly lower on the week. The S&P 500 was unchanged, but all the international tracking indices lost ground. Among the domestic tracking indices, utilities, technology, and industrials all posted solid gains of 1.-2.1%, while energy fell back 3%. Internationally, Latin America did the poorest. Due to the mining disaster in Brazil, their equity market fell 2.4% (USD terms) and was among the weakest, but Australia gained 2.6% (USD) and was the strongest.

US propane/propylene stocks fell by 2.6 million barrels to 57.5 million barrels during the week ended February 1, according to EIA data. Total stocks are 8.6 million barrels above year-ago levels, with the surplus to last year increasing by 1.5 million barrels week-over-week. Inventory draws occurred across all regions for the second week in a row, as US population-weighted temperatures averaged 6 degrees below normal and gave uplift to demand. EIA reported exports fell roughly 450,000 b/d from the previous week to 647,000 b/d, and Platts Analytics estimates exports for the current week are averaging mostly flat to those levels at 635,000 b/d. US Gulf Coast NGLs followed crude futures higher for the week ending February 10. Front-month non-LST propane lost 8.25 cents/gal, or 12%, ending the week at 61 cents/gal. The February/March roll flipped to contango and was assessed at 0.25 cent, with March higher than February. A regional market source said March was stronger than February due to weak demand this winter and port closures. The Houston Ship Channel has experienced occasional closures over the past week due to foggy weather.

Ethanol prices in the US increased last week due to complications caused by the frigid weather. US ethanol inventories have risen to 24.0 million barrels, up 935 thousand barrels year-on-year. Last year, hydrous ethanol demand in Brazil was 19.4 billion liters, up 42% from 2017. Chicago biodiesel prices rallied last week, supported by rising heating oil prices, higher feedstock costs, and logistical disruptions caused by the polar vortex. In Europe, RME prices plummeted, dropping to an average of $1,027/mt from $1,070/mt in the preceding week.

Frigid weather and weak manufacturing margins disrupted the US ethanol industry last week. Domestic ethanol production tumbled for the third consecutive week, dropping by 45 MB/D to a 14-month low 967 MB/D. Stocks fell for the first time in over a month, by 33 thousand barrels to 23.9 million barrels. Despite the decline, total inventories are still at the fifth highest level ever. Ethanol-blended gasoline production rose by 195 MB/D to 8,824 MB/D, up 2.2% from this time last year.

Albeit a month late, another production year came to a close Friday with the release of the “final” Crop Production report of 2018. While Platts Analytics has very little argument with the production numbers given our previously published forecasts, the demand side of the ledgers indicated to us that the WAOB was looking for a “soft landing” coming off the 35-day government shutdown. The largest change in corn demand, a reduction of 135 million bushels, came from Feed and Residual, a segment known for its lack of transparency. The World Agricultural Outlook Board claimed that the reduction was due to the smaller than expected crop as well as the Quarterly Stocks Report. That QSR showed 12 billion bushels in US stocks, the same number as our forecast which contained higher feed demand. The change to F&R seems more likely due to the relationship between demand and supply rather than true data in our opinion. The previously mentioned “soft landing” was clearly evident in soybeans as a 25 million bushel reduction in exports to 1.875 billion, in spite of public comments from the WAOB’s Chairman, was not enough to reflect current import/export demand. Of note in the narrative section of the report, the WAOB specifically mentioned lower crush demand in China as a reason an import cut while previously blaming the Trade War exclusively. The 2M reduction in Chinese global import demand (88M mt) was a step in the correct direction in our opinion, but both global and US soybean exports will remain the most at risk in the coming months as China’s appetite for beans shrinks to under 85M mt.

The prompt month NYMEX March contract slipped below $2.60/MMBtu on Thursday as a bearish EIA storage report weighed on sentiment. The contract is now within a few pennies of the 12+ month intra-day low of $2.53/MMBtu set on February 15, 2018 (based on the front month rolling continuous chart). The massive erosion in winter pricing has driven a sharp decline in the winter premium, with the Mar/Apr spread essentially flat as of Thursday. NYMEX summer pricing has also seen a considerable downturn, with the strip slipping below $2.70/MMBtu on Thursday – off ~10% relative to the heating season intra-day peak set on December 10. Declining summer pricing has occurred despite end March inventories remaining relatively static.

Despite milder-than-normal conditions, market expectations still point to end-March inventories settling at 1.3-1.4 Tcf. While Platts Analytics’ base case for summer injections of 2.2 Tcf is already below some market forecasts due to higher power and lower production forecasts. We see downside risks to the 2.2 Tcf. Production momentum is set to slow dramatically, with Appalachian output most at risk for underperformance. Power burn in 2019 is likely to surprise to the upside, as too much weight seems to have been given to the hot temperatures in effect in 2018 relative to structural changes to the market. Potential end-March 2019 storage inventory of 1.4 Tcf will put a bid under prices — as significant structural gains in the third and fourth quarter, alongside more tepid US production gains, should require larger inventory cushion than the market was comfortable with this year.

Top Northeast producers signal significant slowdown in growth, perhaps as little as 1-2 Bcf/d YEAR-ON-YEAR. It seems unlikely smaller operators will grow to meet expected 3.8 Bcf/d YEAR-ON-YEAR growth forecast for the region. Should production growth out of the NE equal only 2-2.25 Bcf/d YEAR-ON-YEAR, it’ll put a drag on injections, resulting in US natural gas storage inventories of around winter 3.4 Tcf end-October 2019. Such a carryout would likely support the summer 2019 Henry Hub strip, which has dipped as low as $2.70 the past week, while also boosting strip pricing next winter.

DA to Q3-19 market prices are relatively flat, not incentivizing strong withdrawals and not reflective of the looseness we expect this summer. LNG and storages still at a y-o-y surplus are the elements that explain our bearish outlook, even with some reaction from supply (Russia) and demand (Power). Our view of W-19 is especially bearish to market as full storages will be combined with continued high LNG imports and continued availability of NCS and Russian gas.

Prompt markets experienced a short spell of support at the start of January, a rare event in W-18, as temperature forecasts pointed lower for the back of the month. This was short-lived, and with temperatures and the near forecast moving above normal across Europe in February we’ve seen prices resume their downward trend. With Russian gas into NW Europe, NCS and LNG sendouts all at multi-year or all-time highs, it’s hardly surprising prices continue to fall. What’s new is the dramatic shift in the shape of the curve, as the market starts to submit to our long-held view of an incredibly long Summer-19 balance. Not only has the TTF Summer-19 discount to Winter-19 opened up to €3/MWh (7.6ppth), as wide as we’ve seen it in recent years and almost three times its width at the start of winter, we have also seen backwardation finally fall out of the longer-term curve. Summer-19 NBP, TTF, and NCG all gave up their long held premiums to Summer-20 last week, as the market starts to test just how soft the floor really is. Higher LNG sendouts since October have largely been accommodated by offsetting winter-to-date storage withdrawals. However, as storages start looking close to full again early in Summer-19, something else will need to give.

With spot JKM plunging 39% from winter highs, the market is hunting for new potential demand. Some of the most flexible and price sensitive demand comes from power generation in Europe, which is appearing more and more key to JKM summer price formation. However at lower levels, South Korea also has the potential for significant switching given its carbon market and recent taxes changes on fuel burn. The recent changes do make a big difference, however, for the moment it doesn’t seem like enough to impact the current market.

Several plants that Platts previously classified at the highest risk for retirement have announced the intention to retire despite an apparent trend in falling costs. Based on our updated analysis, we estimate that 16 GW of nuclear generation is at risk of early retirement between now and 2025 (including ~10 GW of announced retirements). Assuming all 16 GW were to be replaced by gas-fired generation, an incremental 2.7 Bcf/d of power burn would be required to replace these retiring generators, increasing annual carbon emissions by approximately 54 million metric tons by 2025, or 3% of 2016 levels. Several states in the Northeast, including New Jersey and Connecticut, have implemented policies to aid at-risk nuclear generation, while other states like Pennsylvania continue to discuss the possibility of providing aid. Additionally, New Jersey and Virginia have announced they will be joining RGGI in 2020, providing another benefit for nuclear generation.

French nuclear output averaged 53.7GW in January, the lowest level for the month since 2001. This was largely due to an intra-month decline in availability close to 3GW, twice as high as expected. Intra-month adjustments to nuclear availability have shown a regular pattern in the past two years, increasing in a linear fashion throughout the year with the trend reversing only at the beginning of the winter. Given the large capacity still under ASN review and the one going through license renewal, we don’t expect major changes from this pattern in 2019.

Global coal prices fell across the curve this week, continuing their downward slide. In Europe, CIF ARA prices were dragged 7.4% lower week-on-week by easing European gas prices, higher carbon prices and increased wind generation that capped European coal demand. Pacific Basin prices fell as well. Chinese coal stockpiles remain more than adequate, which meant that news this week of a train derailment in the Hunter Valley, heavy rain in Queensland, reports of slowed ship loading in Indonesia, and a lack of buying activity due to the Lunar New Year holiday failed to move prices higher.

December 2018 light duty EV sales saw double-digit year-on-year growth in China, EU, and the US, resulting in the single highest month of global sales to date at 284,000 units. China, despite a retraction in their auto market, still accounted for the majority of December’s global passenger vehicle EV sales. Prices of pure-electric vehicles sold in the US have continued to drop year-on-year in December, although the pace of declines has slowed. EV charging infrastructure uptake is soaring in the EU and China, with the US lagging. EV Essentials assembles data and resources that support Platts Analytics’ transport electrification outlook. This collection of vetted historical data tracks the progression of EV sales growth, related trends, prices, and impacts in key and emerging auto markets around the world.

The Trump Administration is nearing completion of its reversal of key Obama methane regulations. EPA expects to roll back New Source emission standards for oil & gas in mid-2019, though regulatory work may have been delayed by the Government shutdown. Advocates of stricter regs at the state and local level have suffered setbacks in CO (defeat of Proposition 112, adverse decision in a civil suit vs. the state permitting agency), though recent compromises led to a required buffer zone between drilling and school properties. Newly-elected governors are pushing for lower emissions from oil & gas – with a new Executive Order calling for action in NM. WY passed stricter rules for monitoring and reporting methane emissions. NM is working with EPA on water recycling, and Texas enhancing its relevant state policies. November saw the first-ever transaction involving certified “frack-free gas”, while PRI recently released recommendations for oil & gas sector company methane disclosure, as shareholder meetings loom.