Midcontinent production in both the U.S. and Canada increased during May. The WCS price weakened considerably during July, while lower production caused the Syncrude price to strengthen. Inventories at Cushing took another large step down, but draws are expected to moderate in August. The Midland discount weakened considerably over the past month as the Permian basin becomes increasingly constrained. U.S. commercial crude oil inventories are expected to fall in August.

Higher California/Quebec carbon prices reflect the market's emergence from a period of uncertainty associated with Ontario's exit from WCI. The August auction is poised to clear above the other auctions this year. A significant build of the market surplus is expected for 2018, but the Nov 1st compliance surrender could prompt late buying and further boost interest in offsets. Inflation indicators (to set the 2019 auction floor) continue to increase, and pricing will be influenced by the floor price in the near term. Cap and trade amendments under development this year are critical for pricing expectations. Meanwhile the CA legislative session is winding down, with potential for passage of bills impacting market balances. CARB will fight the Trump administration's rollback of vehicle standards. ON has also released more details on the wind-down of its cap and trade, including limited compensation for certain allowance buyers.

Stresses have again grown in emerging markets, particularly for Turkey. The S&P 500 was lower by 0.25%, but credit metrics performed poorly, particularly for emerging markets. Energy has held up well, as have industrial commodities, to a lesser extent. The dollar (DXY) surged 1.3% on the week, but was far stronger against the weaker EM’s. Disinflation picked up, despite the U.S. CPI inflation report released today, and the Cleveland Fed inflation expectations series for August, which showed another move higher.

Front-month non-LST propane gained 1.0% week-on-week to close at 96.9 cents/gal. Ethane prices remain high ending the week at 38.5 cents/gal, and market sources continue to point to fractionation constraints on the USGC in combination with rising demand as the reason. US propane/propylene stocks were roughly flat through the week ended August 3, increasing by just 105,000 barrels from the previous week to 66.4 million barrels, according to EIA data. Propane stocks continue to closely track year-ago trajectories. The EIA reported exports of 945,000 b/d for the week ended August 3, compared with Platts Analytics’ estimate of 987,000 b/d based on ship tracking data. cFlow data show total US LPG exports have averaged over 1 million b/d since May, as arbitrage margins to Asia have remained mostly favorable over that time. Platts Analytics expects LPG exports to be 1.05 million b/d for the week ending August 10. Steam cracker feedstock margins remain weak.

Most U.S. ethanol prices reached the highest level in over two months on July 31. Acting EPA Administrator Andrew Wheeler indicated that that the EPA will make the small refinery waiver process more transparent. Hydrous ethanol in Southeast Brazil averaged about 60%, the lowest level in about eight years. The T2 ethanol price rally in Europe extended into August, boosted by high grain costs, strong demand and logistical problems.

With market expectations for end-October US storage now below 3.4 Tcf, winter premiums are re-widening. Indeed, the 2018/19 NYMEX winter strip reached $3.08 yesterday — notably above its $2.87 low set on July 18. Despite the recent NYMEX futures rally, the 2019 summer strip remains rather subdued. More specifically, this strip at ~$2.70/MMBtu — while at the upper end — remains within the narrow range of $2.55-2.70 in effect since the start of the 2018 injection season.

China's 2Q GDP came in at 6.7%, weaker vs. prior quarters on lower contributions from the secondary sector. Industrial output continued to show weakness in June, driven by ongoing credit deleveraging and the environmental crackdown. Crude runs increased by 4.1% year-over-year to 12.15 million b/d in June, driven by the start-up of new SOE refineries and lower turnarounds. These factors will play out by 4Q and along with lower growth in available product export quotas, should weigh on the country's refinery runs in 2H18 relative to 1H18. Crude oil imports fell 5.0% year-over-year to 8.38 million b/d in June because of lower deliveries to Shandong refineries. Gasoline demand remained strong in June despite longer-term structural changes posed by passenger car sales favouring more efficient vehicles. Gasoline exports were cut in June to feed domestic demand and the prospect for 2H18 exports slowing down on tight gasoline export quotas.

As is typical with August Crop Production reports, emotional reactions range from “no way” to “I told you so”. As analysts it’s our job to stay away from the emotions and understand the thinking of both NASS and the World Board in order to better prepare for the remainder of the calendar year as it pertains to both production and demand. While no one may want to admit it, there’s plenty of subjectivity in the August report, especially in production. After reading and re-reading the crop production report over the weekend, we have a much better understanding of where our differences lie, although the key takeaway this month in our opinion had little to do with yield estimates even though those garnered the most headlines.

EU Carbon Allowance (EUA) prices will find support from rising implied CO2 prices (based on power sector coal-gas switching), should gas prices remain strong and coal prices continue to weaken. Lower auction volumes for the remainder of August will also support prices. With higher temperatures set to remain through at least end-August, weather-related power demand will continue to play a role as well. At the same time, Platts Analytics continues to flag the possibility of more dramatic price swings as market participants digest news of Brexit negotiations in the coming months. The lack of clarity over Brexit will increasingly raise questions as to whether U.K. emitters will be covered by the program next year, and if they are, whether there will be any delays to their share of EUA supply coming to market.

European thermal coal forward prices rebounded notably last week, with stronger oil and gas prices (early in the week), strong weather-related coal burn, and a wide spread between CIF ARA and Asia, all combining to send 4Q18 CIF ARA over $2.50/mt higher week-over-week. The wide spread between Pacific and Atlantic, or to be more accurate, high-cv FOB Newcastle and everything else, is certainly a dynamic that will drive the market over the coming weeks, and the price action this week illustrates that this transition could take time and be a bumpy ride. India’s coal-fired generation increased by 5.4% year-over-year in July, although this was a modest deceleration in growth. India’s coal stockpiles remain low, although they did increase month-over-month in July.

In response to FERC's 2017 NOPR, PJM is in the process of bringing forth market reforms to address price formation. PJM has developed a variety of solutions, including the calculation of fast-start pricing and the methodology behind how to properly value reserves. The proposed changes are expected to be voted upon in early 4Q 2018, with implementation beginning in early 2019. Platts Analytics estimates the proposed reforms could result in an overall increase in pricing in the range of $1/MWh-$1.20/MWh.

Even though China is threatening to add tariffs to U.S. LNG production, it will still be a growing demand center with all the associated knock on effects to LNG pricing - but also LNG shipping rates. Teekay LNG highlighted in their recent earnings release how closely shipping rates have been tied to Chinese demand – the higher the Chinese imports, the higher the shipping rates.

Total hydrocarbon inventories increased by 4.6 MMB last week, driven in particular by a surprise build in gasoline (+2.9 MMB) and in “other products” (+2.3 MMB). As expected, crude stock drew (-1.35 MMB), but the extent of the drop was tempered by another large positive reported number in DOE’s production “adjustment” (+524 MB/D). While it’s difficult to forecast this variable, we expect it to remain in positive territory in the next few weeks as a result of increasing amount of crude moved by rail. Also as anticipated, inventories at Cushing fell 590 MMB to reach a historically very low level of 21.8 MMB. With the first coker having restarted at the Syncrude facility in mid-July, incremental barrels from Canada are likely to reach the Cushing storage hub in the near term. Additionally, very low volumes at Cushing will reduce the efficiency of the pipeline system, which should slow outbound flows. As a result, we anticipate inventories at Cushing to increase by 0.4 MM barrels. This implies that WTI backwardation should weaken. On the production side, the EIA made a 115 MB/D downwards “re-benchmarking” to baseline production, which resulted in the 10.8 MMB/D estimate. However, a 70 MB/D recovery in Prudhoe Bay (Alaska) should bring the rounded volumes back to 10.9 MMB/D for this week.

Global equities eased slightly on the week, but many of the emerging markets lagged notably. The U.S. S&P 500 fell 0.2%, though retail gained 2%, while energy was unchanged, and consumer staples fell 1.9%. Internationally, world, ex-US fell 2.1%, while emerging markets fell 2.3%. Latin America was particularly weak, down 7.4%.

U.S. ethanol production jumped by 36 MB/D the week ending August 3last week to 1,100 MB/D, the second highest ever. Ethanol stocks increased for the second straight week, with a huge 956 thousand barrels build. This was led by an 875 thousand barrels on the Gulf Coast reaching a record 5.113 million barrels. Ethanol-blended gasoline production declined slightly to 9,337 MB/D.

So, what exactly happened to the "Shale Renaissance" for US manufacturing? Gas-intensive industries appear to be growing at a slower pace than the rest of the US manufacturing sector. One reason behind their sluggish performance is that these companies have been prone to more competitive challenges — with the balance of trade (exports versus imports) actually turning negative for a few key industries. As we newly assess the competitive landscape, it is abundantly clear that opportunities for demand from this sector to accelerate are still intact. Indeed, more favorable economic conditions (including an improvement in the balance of trade) could have a relatively profound impact on growth. Still, the relatively disappointing plant additions that occurred during the first shale decade and the possibility of slower investment amidst a backdrop of heightened global trade risks, have cooled some of our initial enthusiasm for this sector. In this first part of a two-part series, we take stock of the sweeping changes that have occurred since record demand was achieved more than 20 years ago.

Tight LNG and Algerian pipeline flows are the two most significant drivers of high PSV prices amid a heatwave that seems unwilling to relent. PSV DA rallied into August, reaching a new summer high of €25.4/MWh, with the equivalent PSV-TTF spread at €2.78/MWh last week (7th). Italy’s saving grace is its stringent storage regime, which essentially forces it to make up any storage deficit (to normal) in Q2, and is seeing injection demand relatively low in Q3-18. Despite this, and plans implying an easing of current supply constraints, prompt PSV and its premium to NW Europe will remain well supported in the near term on demand, high oil-indexed Algerian prices, and tight global LNG balances.

Preliminary data shows that Italian demand has reached a summer peak of 57.4 GW on Aug 1, the second highest level of the past 10 years. Despite limited import flows at the time, 3.5 GW, the PUN price came at €77/MWh, barely reflecting any tightness. The characteristic bottlenecks in the Italian transmission system are much less frequent this summer, and the price convergence among zones prevents the use of re-dispatching actions and limits the dispatch of fuel oil plants. This was the case on Aug 1, but applied throughout the heatwave. This development is expected to add bearish risk for prices in the winter months, when demand might not reach the peak of the year but the share met by domestic plants is likely to rise to high levels more frequently.

NEPOOL Class I REC prices have declined significantly this year, while the spread between the V-19s and V-18s has widened. Trading volumes for MA/CT Class I RECs have been mixed year-over-year; MA SRECs have seen increased interest. Although the MA Clean Energy Standard increases Class I REC demand in the near term, the existing REC bank and load exemptions in 2018-19 mute its effect. Higher RPS requirements and clean energy procurements play a large role starting in 2020 – and balances tighten in 2020-21. The new CT and MA legislation increase Class I demand, and REC balances are expected to be tightest before offshore wind is scheduled to come online (2025). Our updated long term fundamental modeling for binding RPS targets indicates Class I REC prices tied to incentivizing incremental solar build.

Runs in Japan rose a modest 12 MB/D on the week, with a slight build in finished products and a modest crude stock draw. Finished product stocks remain on the lean side, which is supporting an improvement in refining margins from low levels seen in July. Marketing margins remain relatively strong and above statistical highs. The upcoming holiday will hype gasoline demand resulting in expected moderate stock draws, while weaker gasoil demand will result in noticeable stock builds over the holiday period.

Recent news related to how Mexico’s President-elect Andres Manuel Lopez Obrador (AMLO) will shape oil policies and events have been mixed. On the positive side, finance minister-designate said existing contracts would be honored (if everything was in order), his intended chief of staff has supported energy reform, and there is a plan to increase Pemex upstream spending by $4 billion in 2019. On the negative side, the new head of the Energy Ministry is reported to have very nationalistic views and the deputy head has been critical of oil reforms. In addition, AMLO has declared a ban on fracking. Our short-term forecast includes a flattening of the base decline as a result of Pemex’s plans to boost production in 2018 and the additional spending planned by AMLO in 2019. Our long-term forecast assumes that shale production will not be developed before 2030 and by then fracking will most likely be allowed.