Brent prices are effectively range-bound but are forecast to average over $50/Bbl for next few months. We see a relatively firmer near-term price for Brent, weaker for WTI. The U.S. stays in export parity. Narrow crude quality differentials to persist. Hurricane Harvey will cut U.S. crude runs by cumulative 60-70 million barrels resulting in strong refinery margins which will boost European runs. Product stocks will tighten for the next couple of months. Harvey pushed light product cracks higher similar to previous storms (e.g., Katrina) with high a sharp peak that eases in days/weeks. But some lingering strength will remain, particularly for diesel due in part to import pull by Latin America.

In the U.S., the latest consumer price data showed a faster-than-expected increase for the first time in six months. The recent behavior of the so-called “sticky” CPI suggests a fading in the disinflationary pressure for the coming periods. Consumer spending disappointed in August. Industrial production also came in below expectations, but this was essentially due to distortions from Hurricanes Harvey and Irma. In China, manufacturing output has remained resilient, while growth in investment has increasingly become slower. Data on vehicle sales and credit were supportive of the growth outlook.

Propane prices remain robust at 74% of the crude price. Natural gasoline, butane and ethane prices also had healthy gains last week. Propane storage volumes have grown by over eight million barrels the past two weeks to bring propane stocks in line with the five-year average. NGL raw mix production continues to rebound from the effects of Hurricane Harvey in PADD 3, and total US raw mix production set a new all-time record at 3.9 MMB/D. Gulf Coast petrochemical plants continue making progress in returning to normality, and all but two plants are expected to be back in operation by the end of this week with one of the two plants remaining down scheduled for planned maintenance.

Manufacturing margins in the U.S. rose. D6 RIN prices fell. U.S ethanol exports rose in July. Brazil remained a net exporter of ethanol in September. European ethanol prices bottomed. U.S. biodiesel prices reached a six-month high. Biodiesel manufacturing margins improve for the eight straight week.

In addition to a strong Real, Brazilian soybean producers might be holding onto last year’s supplies as a sort of insurance policy against continuing dryness in the states of Parana, Goias, and slightly less so Mato Grosso. While both Uruguay to the south and Argentina to the southwest have more than adequate moisture, central Brazil is still waiting for “normal” mid-September rains which have failed to materialize so far and show little sign of arriving anytime during the month of September according to 2-week forecasts.

The Trump administration issued oil sanctions waivers for Iran, as expected, despite President Trump’s clear displeasure with the agreement. But whether Trump will certify Iranian compliance with the JCPOA to Congress in mid-October (required by U.S. law every 90 days) remains the bigger question. Judging from his recent comments, a decertification looks likely. However, this alone would not end the nuclear deal. It would simply give Congress the option to reimpose sanctions, during which time Trump could continue to issue waivers. At this point, we do not believe either Trump or Congress will breach the JCPOA by reinstating nuclear sanctions, given IAEA verification of Iranian compliance and widespread international support for the agreement. But medium-term risks to the JCPOA (and Iranian oil sales) would rise if the U.S. attempts to renegotiate deal terms.

The product deficits of Indonesia and the Philippines will provide a much needed outlet for surplus refined products in the Asia-Pacific region well into next year, but product imports into Vietnam should be lower in the latter half of 2018 with the start-up of the Nghi Son refinery. In Taiwan, key product exports eased in 1H17, but should increase with ramp up at CPC’s Talin refinery. Global kero/jet demand growth is forecast to remain robust in 2018, and Asia will account for half of the increase. Asia-Pacific net regional exports of gasoline, jet fuel and gasoil/diesel are expected to ease over 2017-18 after a surge last year. Regional refining margins should remain healthy through 2018.

Domestic production continued to trend upwards in the second quarter, albeit at a decidedly muted pace relative to strengthening drilling activity during the period. Although production finally eclipsed the year-ago volumes in June, year-over-year comparisons remained negative for the quarter. Still, the surveyed operators grew production by ~0.6 BCF/D during the period, the largest Q/Q gain for the group since 1Q16. It appears that, for now, producers have cleared any residual hurdles to bringing their byproduct to market, as gas production essentially kept pace with oil growth during the quarter. With both Appalachian and associated gas production growth taking shape in the second quarter, further — and greater — gains may soon take hold in the latter half of 2017.

The revolution of LNG buyers against the historic status quo is heating up on a triumvirate of fronts this summer: commercial, regulatory and political. Nowhere is the carnage as great as on the commercial front, of which pricing is a critical component.

Exxon recently renegotiated its LNG supply deal with Petronet, an Indian LNG Importer. The deal not only involved a price cut, but added an extra 1 million tons per year to 2.5 million tons. The price cut seems to put India in a strong buying position relative to the rest of Asia as measured by DES LNG deliveries as a percentage of Brent oil (a common price benchmark for LNG). This is especially true as it has been released that incremental volumes will be sold at 12.5% of Brent. There is a twofold issue here for European markets – a step towards more balanced global markets and a show of how even with price cuts, Asian buyers still have a significantly higher price tolerance. Placing extra volumes in Asia through price cuts will bring regional markets ever closer together, as it represents a reaction to growing oversupply that will further compresses global spreads. Some sellers are more concerned with securing market share than protecting traditional premiums in Asia, as releasing too much unsold volume into the spot market is considered a graver threat to LNG markets in the years to come.

China’s National Development and Reform Commission (NDRC) announced that effective September 1 non-residential gas prices will be lowered by CNY100/Mcm ($0.42/MMBtu). The price has been justified by lower pipeline transportation costs as well as a change in VAT calculations for natural gas. The price reduction is around 5% which still leaves prices high by international standards – most city prices are $8+/MMBtu.

Aggregate product demand plunged 244 MB/D, with sizeable declines in gasoline and gasoil demand. Runs eased modestly, while a surge in crude imports, which was expected, built crude stocks 5.8 million barrels. Finished products built 0.75 million barrels on the weaker demand. Kerosene demand surprised to the upside and yield fell sharply to only 3.8%. Stocks posted a first contra-seasonal draw of 0.2 million barrels (27 MB/D), while the 4-week build rate eased slightly to 73 MB/D. Refining margins were slightly softer, but remain good.

Credit conditions remained highly constructive on the week, with the S&P 500 moving to a new record at the 2,500 level. Volatility (VIX) declined and high yield credit prices rose. High yield energy credit did particularly well and driven by a solid gain in the energy commodity space. The dollar generally strengthened. The St Louis financial stress indicator again moved lower after four straight minor weekly increases.

The Chinese government plans to expand the use of biofuels, requiring that all gasoline contain 10% ethanol (E10) by 2020, though it has yet to announce a formal policy. China’s neighbor Vietnam previously announced its intent to replace RON 92 gasoline with E5 next year and with E10 in 2019. If achieved, these goals would displace billions of liters of hydrocarbon fuel. PIRA believes, however, that these attempts to adopt E10 by 2019 (Vietnam) and 2020 (China) will fall short of their targets. Nevertheless, ethanol consumption will increase in these countries, but not as rapidly as desired.

Despite a relatively wet August and normal rainfall month-to-date, Spanish hydro reservoir levels continue to decline, adding further upside risks ahead for Spanish prices. With Spanish nuclear set to move down in October, Spain will need to import from France in the next month. While we have France still pricing below Spain in October, risks of a further deterioration in French nuclear availability cannot be ruled out. EDF press release of Sep. 14 is bearish for prices. Despite a large number of new irregularities, EDF has confirmed that all the affected components can be used safely, a statement that will have to be confirmed by ASN, before receiving official clearance. This is the only unclear factor at this point, or to what extent, the operation of the plants could be affected by these additional anomalies.

Spot on-peak energy prices in Eastern-Grid and ERCOT were unanimously lower year-over-year. Eastern Interconnect average raw loads declined 8.1% year-over-year in August as cooling demand fell from the warmer than normal prior year. Despite declines in raw loads during the last few days in August due to Hurricane Harvey, total ERCOT raw loads in August were about flat year-over-year. The earlier than expected transition into the shoulder season has helped color deteriorating cash prices – with suppressed seasonal demand keeping Henry Hub pricing below the $3.0/MMBtu mark. The return to normal weather during the fourth quarter this year would likely usher in dramatically tighter fuel supply/demand balances. PIRA’s power price forecast though mostly lower than last month, is still above market, driven by higher (than market) gas price forecasts.

Domestic U.S. coal demand fell on August weather and mild September temperatures signal another fall in coal burn, but elevated exports are keeping prices supported for now. However, slipping seaborne coal prices will hit Appalachian and ILB markets by year end.

European carbon (EUA) prices soared in early September on French nuclear uncertainty (impacting the wider European energy complex as well) and progress with post-2020 market reform talks. However, these drivers may not continue to sustain EUA price gains. With no immediate safety concerns, a new regulatory consultation may not lead to new delays/outages to French nuclear gen. Recent substantive developments in market reform talks may limit the upside potential of a final agreement, expected later this year. Parliament’s proposal to protect the EU ETS from Brexit has introduced new market uncertainty. Ultimately, EUA prices may have recalibrated above €6, but with lower potential for gains later this year.

Crude runs fell almost 400 MB/D this past week to 14.1 MMB/D which should be the low from Hurricane Harvey as refiners come back online. Next week, runs are set to increase, reducing the extent of light product draws and the crude inventory build. This past week both gasoline and distillate inventories fell sharply for a combined 11.6 million barrel stock decline. Crude stocks built 5.9 million barrels and Cushing crude stocks built 1.0 million barrels this past week. Both are forecast to increase again in next week’s EIA data as flows continue to back up, waiting on the full return of Gulf Coast refining.

The breakout this week might signal a willingness on behalf of the market to put the injection season in the rear-view mirror and focus once again on emerging structural tightness ahead. At a minimum, net increases in price this week appear at odds with the gas demand destruction that has unfolded in September — first, driven by Hurricane Harvey losses in Texas and Louisiana and more recently in Florida, with power outages related to Hurricane Irma. Overall, the storm-related losses have inflated our end-season projection to 3.751 TCF, a notable increase from last month’s 3.695 TCF guidance. For now, our October balances, which assumes 10-year normal temperatures return this year, support upwards of 2.5 BCF/D in year-over-year demand gains in the R/C and industrial sectors. The higher inventory levels likely to be in hand by end-September, however, leave less room for October to underperform, particularly with respect to heating loads next month. With this in mind, we have tempered our Reference Case price forecast for the heating season from ~$3.75 to $3.65/MMBtu.

The bullish run in the coal market that has prevailed since early July continued this week, with Atlantic Basin forward prices rising by the largest extent. The demand side continues to support coal balances and pricing, with colder temperatures in Europe and ongoing concerns regarding nuclear and hydro generation pushing CIF ARA higher. Low stockpiles in both China and India have kept Asian coal buying activity relatively strong of late. Despite the fact that coal demand has faded from the summer peak, concerns regarding supply adequacy in the upcoming winter are no doubt at the forefront of buyers’ minds. Forecasts of a colder European winter than last year, following such a strong summer for global coal demand, will prevent sizeable price declines over the very short-term. However, PIRA continues to assume that China’s thermal coal import demand will contract notably over the balance of the year, which should set the table for considerable price weakness throughout 2018.

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 closed right at 2,500 for the first time. The best performers were banking, retail, and energy (+2.3%), while utilities was the lone decliner. Internationally, the best performing tracking indices were China, Latin America, and emerging Asia.

U.S. ethanol output declined by 13 MB/D to 1,047 MB/D last week as some manufacturers reduced production during the extended Labor Day weekend. Total inventories increased by 16 thousand barrels to 21.1 million barrels despite a large decline on the Gulf Coast. The West Coast received approximately 10.6 million gallons of imports. Ethanol-blended gasoline production plummeted for the second consecutive week, dropping to a 27-week low 8,932 MB/D from 9,132 MB/D in the preceding week.

Hurricane Harvey brought a number of refinery operations to a standstill, much as occurred in years past such as due to Hurricanes Katrina and Rita. The overall extent of the drop in crude runs ranks with previous events in 2005 and 2008 when overall U.S. downtime exceeded 3 MMB/D during September of those years – average outage of 3.35 MMB/D for the U.S. Hurricane Harvey is expected to lead to a similar average adverse impact on overall U.S refinery operations of around 3.37 MMB/D, with 2.33 MB/D of that in PADD III.

Our snapshot of Asian oil demand growth has begun to slow as expected, with further easing likely through year-end. Growth in our September snapshot was 956 MB/D, an incremental fallback of -257 MB/D from last month. The key drivers were slower growth in China and India, though better performance was noted in Korea, Taiwan, and Australia/New Zealand, along with a lesser decline in Japan. At this point, we expect further deceleration in the October snapshot.