Refining problems continue in Latin America. PIRA expects 3Q17 Latin American crude runs to average 180 MB/D down year-over-year. Salina Cruz restarted in late July but 3Q17 Mexican runs seen 30 MB/D lower year-over-year. Brazilian crude runs are expected to be flat year-over-year in 3Q17 but 150 MB/D higher year-over-year in 4Q17. Colombian crude runs are projected at 15 MB/D lower year-over-year with Barrancabermeja set to undergo a number of planned outages through the end of the year. Latin American gasoline demand is softer year-over-year. Distillate demand is projected to be flat year-over-year in 3Q17 but recover in 4Q17. PIRA expects gasoline imports to stay strong. Similarly, distillate imports are projected to be 115 MB/D higher year-over-year in 3Q17.

Chinese economic activity data for July were mixed. Statistics for the investment and housing sectors turned sharply weaker compared to the first half of the year. Vehicle sales data, on the other hand, were constructive, and suggested strength in consumer spending and industrial activity. All in all, given available information, it appears likely that economic growth in the second half of 2017 will be slower compared to the first half. In the U.S., retail sales for July were solid, suggesting strength in consumer spending. Manufacturing output was sluggish, while housing starts for single-family units were solid.

NGL prices were up last week with the exception of propane. Ethane prices gained on expectations of stronger demand from the ramp-up of Dow’s new steam cracker this fall. Propane prices fell in step with the decline in WTI crude prices and a 1.6 million barrel stock build. Waterborne LPG exports of 757 MB/D met our expectations and are expected to decline to about 650 MB/D for the week ending August 18. Steam cracker margins strengthened with increases in olefin co-product prices outpacing gains in NGL feedstock prices.

The DOE will issue a Notice of Sale in late August for 14 million barrels of SPR sales in Fiscal 2018 (October 2017-September 2018). Judging from the timeline of similar transactions already completed in Fiscal 2017, we can expect the 14 million barrels to hit the market between October 2017 and February 2018. Additional sales are possible on top of this in Fiscal 2018, to help modernize the SPR infrastructure. $375.4 million (~6.3 million barrels) of such sales were already completed in Fiscal 2017. An additional $1.62 billion is permitted through Fiscal 2020, but must be allocated through the uncertain budget appropriations process.

PIRA’s bullish view on long-term price formation (relative to the strip) is fortified by growth in structural demand, with capacity driven expansions expected to appreciate significantly in the coming years. A key component to this view is growth in exports to Mexico — an important demand source for U.S. production. Indeed, net pipeline flows have increased four-fold from the start of the decade — from a 1 BCF/D annual average in 2010 to an annual figure in 2016 just under 4.0 BCF/D. Moreover, PIRA anticipates exports to swell to ~6 BCF/D by the end of the decade. Given this growth, PIRA welcomed the opportunity to attend the inaugural U.S. – Mexico LDC forum held in San Antonio earlier this week — where key trends and insights emerged.

Great expectations persist for India as a potential large scale LNG growth market in the long term. This year those promises have been dashed. With essentially no growth, India has been the weakest performing Asian market in a region that has overall seen extremely robust demand growth across the board from Japan to Pakistan. If this continues, winter balancing will be more difficult than usual.

U.S. coal prices rose on the month across the board, despite the fact that coal-fired generation was 6% lower year-over-year in July and was 13% below five-year average coal burn for the month. U.S. thermal coal exports that ran at elevated levels in June (up 1 MMst year-over-year) and a downward trend in stockpiles kept prices supported.

For the week ending August 11, U.S. ethanol values reached the highest level in 15 weeks. Margins for manufacturing ethanol improved. D6 RIN values jumped after a court vacated the 2016 biofuel requirements. Brazil sugarcane processing in the South-Central region was a record volume in the second half of July. European prices dropped to a 15-week low.

Global stock surplus eased sharply in 2Q17, but declines will be more gradual over the next few quarters despite healthy demand as global supply growth increases. In the Asia-Pacific region, net crude imports increase by ~0.8 MMB/D in 2017 with higher refinery runs and lower local production. Asian refiners will seek to increase their intakes of alternative crudes as OPEC cuts continue to restrict Mideast supply and U.S. exports grow. Asian refining capacity continues to expand with more FCC units added in response to strong gasoline demand growth. Overall, Asian refining fundamentals should generally be constructive through 2018 as demand growth is expected to outpace incremental refinery runs.

Global equity markets generally fell again, though the international tracking indices performed better than the U.S. market. Gains were noted in emerging markets, China, and emerging Asia. The U.S. and Europe both declined about -0.5%. In the U.S., utilities posted a gain of 1.4%, while technology and consumer staples were unchanged and outperformed. Retail, energy, and housing all posted significant declines and underperformed.

Nearly all of Europe, except for Spain, the U.K., and France, are having significantly greater than normal injections this month. Given current curve shaping, these high injections should be set to continue. During the market’s most recent bullish run, spot pricing in the U.K. has gone up 15% and TTF up 10%. Not only is this raising the level of overall pricing, but it is starting to encourage ever more Norwegian gas. Last August and September came with big Norwegian cuts, as spot levels got ever cheaper versus the curve in combination with maintenance. A year ago, front month encouraged significant North Sea cuts with the front month September contract trading as low as 10p/th below Summer 2017 and spot was trading as low as 15p/th below Summer 2017. Fast forward one year, spot and front month September is now around 3p/th over Summer 2018 – this should ensure significant export from Norway.

In response to the 2016 MA Supreme Court ruling requiring declining annual GHG limits to comply with the Global Warming Solutions Act, the MA DEP finalized a suite of GHG regulations (for power, transportation, natural gas distribution, etc.). Key power sector regulations include a new trading program for CO2 and a Clean Energy Standard. PIRA expects the CO2 cap to be binding through 2020, with allowance prices reflecting the cost of incremental generation from neighboring states, putting mild upward pressure on RGGI emissions. The Clean Energy Standard is expected to pressure Class I REC balances and pricing in the medium term, until supply from long-term procurements comes on line. The final solar SMART regulation is ultimately expected to supply the state with 2 TWh annually.

The bullish run for coal prices continued this week, highlighted with physical FOB Newcastle prices for September delivery rising above $100/mt. Persistent labor strike activity at several Glencore-controlled operations in Australia has exacerbated the prevailing tightness in the Pacific Basin, and the release of strong demand data from China added further bullish momentum to pricing. Not surprisingly, FOB Newcastle forward prices rose by the greatest extent, rising by over $3.00/mt at the front of the curve, and over $2.00/mt at the back. Price gains for FOB Richards Bay and CIF ARA forwards were muted by comparison, although they were still considerable. The need for prompt supply in the Asian market is the driving force in the coal market, illustrated by in the $16/mt of backwardation in the FOB Newcastle curve between 4Q17 and 4Q18 prices.

While early last week PIRA had already pointed out the looming uncertainties over the French nuclear outlook, the ASN has now published on Aug. 16 a consultation document requiring EDF to review all the components manufactured in the Creusot-Forge plant and installed across the fleet. Based on this document, EDF would now be required to submit the results of these reviews two months ahead of the planned restart of the reactors scheduled for maintenance, with the review process to be completed by the end of 2018. While irregularities in the quality control of the manufacturing of these components were found a while back in 2016, this formal review has fueled further fears that French nuclear output could remain at levels in proximity of the multi-year lows of 2016.

Overall commercial stocks drew 7.3 million barrels last week, widening the year-on-year stock deficit to 58.5 million barrels, or 4.3%. Gasoline and distillate stocks were relatively flat while crude oil inventories continued their relentless decline, falling almost 9 million barrels and widening the deficit to last year to 24 million barrels, or 4.9%. Cushing crude stocks built 0.7 million barrels for the second consecutive weekly build, but for this week’s EIA data they should show a large decrease as flows to this important regional market sharply decline. Overall crude stocks should continue declining this week, while all three of the major light products are expected to show small stock declines as demand strengthens.

U.S. ethanol production soared last week, rising 47 MB/D to a near-record 1,059 MB/D. This was the largest weekly increase in output since April 2013. Total inventories built by 481 thousand barrels to 21.8 million barrels, despite a 648 thousand barrel draw in PADD I. Imports (37 MB/D) were reported for only the third time this year. Ethanol-blended gasoline production jumped 87 MB/D to 9,383 MB/D.

The second quarter saw continued growth in U.S. shale crude and condensate production as a result of higher rig counts and continued efficiencies. Compared to 1Q17, production in 2Q17 increased by 7% (+280 MB/D) and averaged 4,540 MB/D in the quarter. Horizontal oil rigs in shale plays increased 25% from the previous quarter. Most operators across all major shale oil plays continued to report higher well IPs, longer well laterals, larger frack jobs and new wells exceeding Type Curve forecasts. With the exception of Pioneer, most operators that we follow kept or increased their 2017 production guidance. About half the operators we cover reduced Capex as a result of continued efficiencies (same or better production growth with less investment). Efficiencies appear to be offsetting service cost inflation.

Stresses again moved higher this past week, with the St. Louis financial stress indicator posting a second straight rise and the broad equity market moving lower. Other indicators fared better, with week-on-week volatility (VIX) lower and high yield (HYG) debt modestly higher. Commodities were lower by -0.6%, with energy showing slightly lesser declines. The dollar was, on balance, slightly stronger.

PIRA’s snapshot of Asian oil demand growth continues to show a third straight broad based improvement. Growth in PIRA’s August snapshot reached 1,213 MB/D, an incremental gain of 120 MB/D from last month. The key drivers were faster growth for China and Australia/New Zealand, along with lesser declines in Japan and Taiwan. Growth for India and Korea slowed. Performance has generally been along PIRA’s expectation. At this point, there should be deceleration in the September snapshot and then further slowing in 4Q.