Brent prices stay strong over the summer as crude supply is still tight despite higher US shale and expected increased OPEC production due to high runs over the summer and lower supply from Venezuela. Iranian sanctions start to bite later in the year. WTI discount to Brent will stay wide as Cushing drawdown slows, with greatest risk for higher stocks and wider spreads after the summer. With strong global demand growth for refined products and poor refinery operations in Latin America pulling on Atlantic Basin product supply, European refinery margins and runs will stay healthy. Diesel stock coverage will be very low in the Atlantic Basin while gasoline stock coverage will not be as tight as diesel but still in the lower half of the historical range. Gasoline cracks will strengthen above the forward curve but underperform versus last year. Middle distillate cracks stronger than last year and the forward markets. Residual fuel oil cracks generally firm in 2018. Outlook for 2019 shaped by lead up to IMO regulations tightening global bunker specs in 2020 with much weaker HFO and stronger diesel in 2H19. Forward markets are catching on for HSFO cracks and sulfur spreads, but not as much for diesel and not at all for gasoline.

Spot on-peak energy prices in most PJM, MISO and SPP locations were higher year-over-year during May with higher loads despite weaker gas prices. Weather-adjusted load declined across the Eastern Interconnect and ERCOT in May, marking the first decline in real load since last September. The modest 0.35% year-over-year decline comes in spite of a sharp spike in raw load, which increased more than 8.5% year-over-year. Henry Hub gas price forecast has been raised this month as weaker than expected injections in May have led to tighter fundamentals and a higher trading range. PJM’s 2021-22 capacity auction cleared 83% higher year-over-year as a large portion of nuclear capacity did not clear. This again raises questions about survival of nuclear capacity as policy efforts at state as well as federal level are coming from various angles.

With U.S. Eastern coal export margins rising and upside risks present in the seaborne thermal markets, we have revised up near-term Eastern coal prices, though we believe that modest backwardation over the remainder of CY18 is justified. In the PRB, we have also revised prices up modestly on the back of bullish developments in natural gas markets and a higher injection season gas price forecast.

WCI carbon allowance prices (including California, Quebec, and Ontario) posted a monthly increase this May, following six months of declines. Pricing moved higher after a fully sold-out quarterly auction in May, though June pricing has been affected by the June 7th Ontario elections. Prices fell after the Progressive Conservative party victory, but recovered briefly afterwards. An Ontario exit from WCI would remove a likely net allowance buyer from the market, potentially lowering allowance pricing expectations. Assuming that Ontario does not participate in upcoming allowance auctions, additional California auction allowances could remain unsold and would subsequently be moved to an allowance reserve. California and Quebec entities must also surrender compliance instruments in November 2018 to cover 2014-2017 emissions, which could impact spreads for allowance deliveries through 2020. Pricing will also be affected by the ongoing California market reform process.

At this week’s policy meeting, the Fed raised the policy interest rate, as anticipated. Economic projections from policymakers suggested that they have become more willing to let the economy run hot, as long as inflation behaves benignly. In the euro area, the ECB updated its forward guidance. The main result was that the expected timing of the first rate hike was pushed back even further into the future. China’s May activity data were mixed. U.S. data pointed to fast economic growth during the second quarter.

Front-month non-LST propane lost 5.0 cents/gal, or 5.5%, ending the week at 85.75 cents/gal. For a second consecutive week, a larger than expected inventory build pushed prices down. Ethane prices gained 1.0 cents/gal with strong USGC demand, but butanes and natural gasoline prices trended lower. Propane/propylene inventories grew by 3.7 million barrels to 50.8 million barrels. Propane exports dropped off from the previous week and were the lowest level since the first week of May. U.S. steam cracker feedstock margins remain depressed, and normal butane is the economically preferred feedstock. The tight feedstock margins may be relaxing the timeframe for the expected startup of both ExxonMobil’s Baytown and Indorama’s Lake Charles steam crackers.

While Platts Analytics still has Illinois and other critical sections of Iowa to cover in the next week, our 3,500 mile “road trip” so far has resulted in very little obvious concern with this year’s corn and soybean crops. While a lot can obviously change once pollination comes about over the next month in corn, and beans are not “made” until late August, the only trouble area remains that southern Minnesota/northern Iowa acres we covered last week.

The July contract remained relatively well bid last week, as prices continued to stalk the $3 mark. Moreover, the NYMEX response to the outsized storage injection on Thursday suggests that market participants are hesitant to take the market lower, given recent production weakness, power burn strength, and low storage levels. Henry Hub cash prices for June have averaged $2.89/MMBtu month-to-date (MTD), up 4% relative to May’s average. Given expectations for seasonally growing heat, it would not be a surprise to see cash prices clear $3/MMBtu in the coming weeks.

With constant headlines about upcoming projects from the likes of the United States and Australia, who’d have ever thought that we’d be facing a headline about year-over-year drops in supply from the LNG market’s top 5 producers – Australia, United States, Nigeria, Malaysia, and Qatar?

Coming after the large build the previous week, overall commercial stocks drew by 1.8 million barrels for the week ending June 8th. The product increase of 2.4 million barrels was more than offset by a 4.1 million barrel decrease in crude stocks. Product demand bounced back sharply from the Memorial Day holiday weakness, with significant increases for both gasoline and distillate. With turnaround season largely over, runs reached a new high for the year of 17.51 MMB/D. Runs are expected to increase to 17.82 MMB/D this week. Crude storage is anticipated to decline this week by 5.9 million barrels given the high runs and firm exports. Cushing stocks were down by 0.7 million barrels for the latest week and are expected to drop once again this week, also by 0.7 million barrels. Gasoline and distillate stocks are expected to build this week, more than offsetting the reported decline last week.

After a brief lull in April we’ve seen LNG prices rally strongly into summer, accelerating upwards this past week to drive a further disconnection between JKM™ and North West European gas pricing. Generally speaking, this LNG premium presents greater upside to Southern European hubs which are more exposed to and dependent on LNG, and over the past two years we’ve found tight LNG market conditions translating to tight S European hubs. A JKM premium tends to open up the potential for Spanish PVB prices to similarly move away from their northern counterparts. The key question now is if S Europe and Spain in particular can avoid this fate, and the answer will depend on Algeria, French imports, and demand.

While gas and carbon prices have been softening, stronger hydro output has been the most likely driver of declining 3Q Spanish power prices. In fact, the latest data shows particularly strong output this week and, quite unusual for this time of the year, stock levels still on the rise.

Despite a notable downward adjustment last Friday, seaborne coal prices again moved higher last week, although the increase in prices was mild compared to the surge in LNG prices, as reflected by Platts JKM rising to approximately $11.50/MMBtu last week. For 3Q18 prices, CIF ARA forwards increased by the largest extent week-over-week, although FOB Newcastle generally exhibited more strength in deferred pricing. The market remains very tight overall, with stockpiles in India (and to a lesser extent China) at concerning levels. With demand in dual peaking markets rising seasonally, the market is looking to build up a supply buffer ahead of the more significant winter peak season.

The June 2018 RGGI quarterly carbon allowance auction clearing price was higher than the prior two auctions in March and December. Auction clearing prices have yet to return to recent highs from September 2017 levels, but the June auction cleared slightly above the secondary market prices (for June delivery) on auction day. Secondary market pricing increased on the day following the auction, though pricing has been relatively low in recent months. Auction participation was higher than previous auctions in 2017-2018. Speculative buying increased this auction, and entities with compliance needs won the lowest percentage in the history of RGGI auctions. Meanwhile, Massachusetts legislation that would impose an economy wide carbon price and raise the state’s renewables requirements cleared the State Senate this week, but may face opposition in the House.

U.S. ethanol production increased last week, rising by 12 MB/D to a four-week high 1,053 MB/D. Total ethanol inventories built by 277 thousand barrels to 22.2 million barrels, including a huge 576 thousand barrel jump on the Gulf Coast. Midwest stocks fell to an eight-month low. Ethanol-blended gasoline soared 432 MB/D to a 2018-high 9,369 MB/D as overall gasoline manufacture climbed.

We are still in the period of max maintenance, while runs fell 66 MB/D. Major product demand did rise on the week, but is underperforming expectations and seasonal patterns. While crude imports fell, runs also fell, and crude stocks had a limited build of only 0.67 MMBbls. Finished product stocks built marginally, despite good draws on gasoline and naphtha. Refining margins fell back again and remain weak. Retail margins spiked still higher as pump prices flattened out, but refinery spot prices have continued to ease back.

It was generally a very neutral week. The S&P 500 was unchanged, while credit conditions remain constructive. There are, however, continuing stresses in certain emerging markets (Argentina, Brazil, Turkey), while European stresses in Italy, Spain, etc., remain somewhat elevated. Commodities were again lower with industrial metals and agriculture leading the complex down. The St. Louis financial stress indicator moved modestly higher, but overall stress levels remain low.

Although quarter-over-quarter growth lagged slightly behind Q4 2017, US production continues to set new records as longstanding Appalachian gains are now being reinforced by contributions from the Permian, Haynesville, and others. US total volumes increased incrementally Q/Q by 2.4%, and are now 7.7% above year-ago levels. In this quarter, sequential growth from the surveyed companies was somewhat muted, coming in at just 1.0%. Appalachian and liquids-focused producers alike reported strong results — no surprise given the substantial growth seen in the previous quarter. More notable, producers outside the surveyed group delivered strong (implied) growth yet again, highlighting the success of private equity-backed E&Ps. All told, US production achieved a second consecutive record-breaking quarter thanks to volumetric gains from a variety of sources.

One of the shining stars of U.S. oil demand growth in recent years has been jet fuel. Jet demand grew 133 MB/D since 2015 through 2017 vs 342 MB/D growth for the entire product barrel even though it represents only 8.5% of total demand. And yet, Revenue Passenger Miles traveled (RPMs) and therefore jet demand should have grown even faster based on their past correlation with business confidence. As recently as May, year-over-year jet fuel demand growth slowed to 41 MB/D and June is coming in even weaker. This is due to a combination of higher ticket prices and lower growth in business confidence. Yet, this slow patch is temporary. Based on the models presented in this note, we are projecting jet demand to pick up again to 3.2% in 2019 (from 2.0% this year) thanks to a combination of higher business confidence and personal disposable income, in spite of significantly higher ticket prices.

Global equities were down modestly, but emerging markets were notably lower. In the U.S., the S&P was unchanged, but energy lagged badly, down 3.7%, with banking lower by 3.2%. Consumer discretionary was higher by 2%. International tracking indices were led lower by Latin America (-2.9%), emerging Asia (-2.4%), and emerging markets (-2.3%).

An interview with CFEnergia’s Gulliermo Turrent indicated that the 670 MMcf/d Topolobampo pipeline could be completed before the end of the month, which would effectively provide much needed incremental natural gas takeaway capacity for rising Permian Basin producers. However, an analysis of downstream demand suggests that initial utilizations of the pipeline will only be in the 140-180 MMcf/d range, until further power capacity is built and generation demand matures in the Sonora and Sinaloa markets.