Asia Pacific’s petroleum product demand is projected to grow by 790 MB/D in 2018, moderating from a growth of 1.08 MMB/D in 2017. We expect regional demand to go up by 985 MB/D next year, with Asia’s “Big Four” consuming countries (China, India, Japan and South Korea) contributing to 80% of regional growth, up from 72% over 2017-18. Asia’s dependence on crude oil imports has been rising each year for the past few years, and this trend is expected to continue in 2019. About half of Asian oil consumption will be sourced from the Middle East in 2019 despite lower Iranian imports. Southeast Asia’s key product imports to ease with the ramping up of production from new refineries, but the region will turn into a major net importer of gasoil/diesel by 2020 due to the bunker spec change. China’s gasoil and gasoline net exports will be sharply lower in 4Q18, which should be supportive for regional cracks of the two products if all else being equal. Later in 2H19, diesel cracks will strengthen sharply with the impending IMO 2020 bunker spec change.

Fears of another tight winter have eased considerably over the past month, with wider commodities (oil, coal and carbon) also falling, and the market shedding a great deal of risk premium. The greatest losses have been concentrated in nearer term contracts, with NBP also shedding some premium to TTF. NBP Dec-18 has fallen over 20% from its September peak, with the respective TTF contract losses not far behind. Weather can take some of the credit, as most of the Continent out-turning above normal is certainly helping storages to continue injecting, but the bigger driver has been LNG. The step up in LNG sendouts from September to October was completely unprecedented, particularly in NW Europe (incl. UK) where sendouts almost tripled (from 35mcm/d to 98mcm/d). These are the highest monthly flows seen in the post- Fukishima era (since 2011). Sendouts are set to remain high in November, with other key supply sources (Norway, Algeria, Russia) unlikely to pull back at this point in the season. However, uncertainty remains in Q1, as LNG deliveries are likely to fall (relative to Q4), and a couple of extra bcm in storage stocks won’t be enough to restrain markets in the event of another “beast”.

Spot on-peak energy prices were up year-over-year in October in most eastern markets and ERCOT due to higher weather-driven loads and gas prices. Our forecast is also up from last month’s runs primarily due to higher fuel price forecasts. Weather-adjusted loads across the Eastern Interconnect and ERCOT increased by 1.6% year-over-year, driven largely by growth in the Midwest and ERCOT. The recent gas price rally underscores the asymmetric price risks in play at the moment tied to atypically low total US gas storage. There remains room for Northeast PA gas production to grow further, especially considering the arrival of winter weather in the Northeast. Even that higher production could get used up by Atlantic Sunrise and the increase in installed gas-fired generation. With low fuel stocks and continuing electric load growth, there are upside risks to pricing going into this heating season.

CCA pricing was remarkably stable in Oct even as the triennial surrender approached. Oct trading volumes were lower, although there was increased interest in the V-21s. Delivery spreads continued to grow. Any buying pressure from the Nov triennial surrender has passed – the next large compliance reconciliation is not until Nov 2021. Emissions data for 2017 confirms a large market surplus for CP2 – its release has not affected the secondary market. The full picture of the end-CP2 allowance bank carryover depends on offsets utilization, to be released in Dec. Although annual surpluses are declining, as the market continues to build length, the auction floor continues to be an important pricing indicator for CP3. Inflation to set the 2019 floor will be released the morning of the auction. CARB is still working to finalize Cap and Trade amendments as required by last year’s AB 398 legislation, having postponed the first hearing one month to Nov. Election results were supportive of climate policy in CA and OR, but doubts remain in WA.

China’s latest economic indicators were broadly disappointing. The government has announced a series of pro-growth policies to cope with weaker consumer confidence, but these policies may be moderated with the emphasis on quality growth in the meantime out of concerns over high provincial debt levels, pollution and an overheated property market. Crude runs grew by 368 MB/D to 12.7 MMB/D in September due to higher demand and relatively low product inventories. We expect crude runs will increase by a weaker 208 MB/D in 4Q due to limited export quotas. China’s crude imports surged by 31% year-on-year to 9.6 MMB/D in October, well above expectations given inflows during the month had tended to be seasonality weaker. Despite higher oil prices, domestic output fell 86 MB/D in September due to rising upstream costs and typhoons. We expect imports to average at 8.9 MMB/D in 4Q this year and at a higher 9.4 MMB/D in 2019, as new refineries start up. Total oil demand saw a slower year-on-year growth in September largely dragged by muted growth of gasoline, gasoil and jet fuel on weakening economic fundamentals but greatly offset by robust year-on-year growth of two ends of the barrel including LPG, naphtha and fuel oil.

Global industrial production growth slowed in the third quarter from the first half of 2018 – it is very likely that growth is past its peak. U.S. data on manufacturing shipments and inventories were solid, and they point to solid output gains in the future. But higher inventories appear to be weighing on Europe’s industries, and Germany’s industrial production growth slowed sharply in the third quarter. In the face of escalating trade tensions, the Chinese factory sector has been resilient – this week’s October trade data release surprised positively, as year-on-year growth in exports accelerated from the third quarter. But deteriorating manufacturing sentiments and higher inventories point to a continuing deceleration in industrial production growth.

US propane/propylene stocks continued to increase during the week ended November 2, growing 1.5 million barrels to reach 84.5 million barrels. Front-month non-LST propane lost 9.375 cents/gal, or 11%, ending the week at 72.38 cents/gal. Continued inventory builds have kept propane prices lower than this time last year. At the same time last year, propane was trading around $1/gal and about 71% of crude futures, due to winter supply concerns. High production rates have contributed to builds extending later in the season compared to the previous two years when stocks peaked in September. Inventory levels in PADD 3 are now nearly 6 million barrels above year-ago levels, while stocks in other regions remain closer to last year’s. The late-season build and the drop in Saudi contract price for November both suggest downward pressure on US propane prices in the near term.

U.S. ethanol prices bottomed early last week, but jumped Friday supported by higher corn values and the largest weekly drop in inventories in eight years. The EPA sent the proposed biofuels mandates for 2019 to the White House Office of Management and Budget (OMB) for comments and approval. Renewable diesel remained the largest source of LCFS credits in California in the second quarter. In Brazil, demand for hydrous fuel ethanol in September surged 37% year-on-year to 1.80 billion liters. Phillips 66 and Renewable Energy Group (REG) are planning to construct a large-scale renewable diesel plant adjacent to the Phillips 66’s refinery in Ferndale, Washington.

Stronger crude markets over the past year have reduced the urgency for large oil exporters to reform fuel subsidies. Several other governments suffered setbacks to recent reform efforts, due to higher oil prices and currency depreciation. Ad hoc price relief for consumers becoming increasingly common in traditionally market-based systems. U.S. dollar strength since January presenting a headwind to oil demand growth in many markets. A continuation of modest subsidy reforms in 2019 could place up to 40-50 MB/D of oil demand at risk; 170-200 MB/D in the long term.

After gapping higher at the start of the week, NYMEX futures are extending this week’s gains. Moreover, the upside follow through has lifted the December 2018 contract beyond this year’s high watermark set by the February 2018 NYMEX Henry Hub contract back on January 29. Friday’s rally lifted the contract above $3.80/MMBtu which is about a $0.60/MMBtu increase from last Thursday’s settlement.

The term “Headline Risk” was defined perfectly in the November WASDE as global corn stocks rose 93% month-over-month with Chinese corn stocks up 254% from 58.5M MT in October to 207.5M MT in November. The change was due to the Census data discussed in our WASDE Preview and proved old habits die hard as the WAOB did exactly what it did 10 years ago by taking the data straight to the bottom line of the November report. That said, the only thing we really learned is what the Chinese mean by the word “few”. In the census data it was said that corn production had been understated by “40M MT per year for a few years”. With a gain of 143M MT in beginning stocks, “few” can be defined as ~3.5. While stunning on paper, the gain in ending stocks means nothing to the global markets as China will never become a net exporter of corn and imports so little now (5M MT/year) that it’s of little consequence. Where the stocks could have an effect is on ethanol exporters looking to take advantage of the E-10 mandate. While Chinese ethanol production capacity is very questionable, and ethanol exporters will certainly participate initially, the corn stocks could reduce future reliance on imports, most certainly the ultimate end game. Looking at the global corn balance sheet, ex-Chinese beginning stocks, production was raised by 30M MT (all China) while Ending Stocks gained 8M MT, again ex-China, and that’s not necessarily bearish.

In the most recent batch of earnings releases, some big themes are clearly coming to the surface. First, tightness in LNG shipping is expected to continue for the next several years, with recent strength potentially persisting, as new liquefaction comes online. Second, while many headline projects continue to stall, a lot of enthusiasm in the market is building around plans for Russia’s Arctic 2 LNG, West Africa’s Tortue, and the Qatari expansion plans. Third, projects will continue to suffer on the ground, as new waves of LNG liquefaction construction spread resources thin – just as we saw with the first wave. Lastly, demand from China is making the big headlines, but an undercurrent of new demand is emerging from bunkering, small scale LNG, trucking, and new players that will build and add up in the years to come.

Belgian imports in the past few months have been consistently lower than those of 2015, despite nuclear output being comparable between Jul and Sep, and much lower in Oct and Nov-to-date. This is largely due to Dutch imports, which have dropped since June and become much less responsive to price signals. In this context the timely restart of nuclear reactors is even more critical for the Belgian system, but inspection work at Doel-1 and Doel-2 appears to show increased scrutiny. The risk of price spikes continues until mid-Dec under normal conditions, but can potentially extend to the end of Feb if the maintenance at these reactors is delayed.

CIF ARA forward prices weakened considerably for the second week in a row, as European buying pulled back on concerns over rising stockpiles at ARA and weaker European natural gas and oil prices. FOB Richards Bay prices fell in line with declines in the CIF ARA contract, while the FOB Newcastle forward curve fell only slightly week-on-week, even rebounding slightly in the front of the curve. The global seaborne coal market shows signs of loosening as Chinese import demand is fading and stockpiles at Chinese generators are rising, though coal-fired generation growth surged in India this month, bucking the trend.

EU Carbon Allowance (EUA) prices are expected to increase as we move into the peak winter season, especially if weather moves below normal levels, or if hydro or nuclear gen move lower. Higher demand coincides with lower EUA auction supply with the postponement of German auctions, as well as the far more drastic supply cut with the Market Stability Reserve next year. While current fundamentals can support EUA price gains, increased price volatility means that price gains may not be consistent through the expiry of the December 2018 contract – and downward corrections are possible. We continue to assume that a final Brexit agreement will be reached so that the U.K. will be able to participate in the EU ETS in 2019. However, time is running out, suggesting that if the U.K. does in stay in the ETS, an increasing probability that its 2019 supply will be delayed in coming to market.

The Canadian Syncrude and WCS differentials took large steps downward in October, while the Midland discount strengthened for a second month on increased pipeline capacity. The rail arb from the Bakken to the East Coast was wide open during October. Exports rose again during the month after a large step up during September. Inventories at Cushing built considerably in October, with further builds expected.

The S&P 500 gained another 2% on the week, but credit metrics remain strained. Equity volatility fell 11%, but oil volatility rose 9%. Commodities were lower by 1.2%, but industrial metals fell 2.9% and precious metals declined 2.5%. The energy sub-index bucked the trend and gained 1.1%. Aluminum bounced higher after having set a lower low, but copper fell to below $2.70/lb. Disinflation remains an increasing concern. Financial stocks are still looking weak and that too is a concern, while Italian bond yields and key CDS quotes remain elevated.

U.S. ethanol production increased by 9 MB/D last week to a two-month high 1,068 MB/D. Inventories built by 404 thousand barrels to 23.2 million barrels, recovering a bit from the huge draw the preceding week. Stocks are 1.81 million barrels more than they were at this time last year. Ethanol-blended gasoline production decreased by 187 MB/D to 9,072 MB/D as total gasoline output waned.

The US gas market is finely balanced entering the winter. US storage is forecast to peak at 3.2 Tcf, its lowest mark in the past 10 years. More specifically, Southeast and Texas storage levels, which play a critical role balancing swings in demand around Henry Hub because of their quick cycling ability, enter the winter with deficits well below their 5-year low. As weather forecasts for November trend colder, the market appears to be growing more concerned about having sufficient gas to meet demand this winter, as evidenced by the +25 cent move on Monday. However, this rally may be the start of something bigger. With SE/TX storage limited in its ability to meet sustained, elevated demand given current low stockpiles, and with elasticities in the power sector reduced by structural shifts in the generation stack away from coal to gas, the destruction of LNG exports and exports to Mexico could be the final market balancing mechanism in the event more supply needs to be retained domestically. Shutting off either demand source won't come cheap.

The most notable feature of last week’s EIA report was the sharp upward production estimate by 400 MB/D on the week to 11.6 MMB/D, which was driven primarily by a substantial 415 MB/D baseline adjustment. Some slight gains are expected in the L48 this week, pushing U.S. production to 11.7 MMB/D. Overall commercial stocks built by 4.8 MMB for the latest week, substantially narrowing the deficit to last year to just 3.6 MMB. Most of the build was in crude, which added 5.8 MMB to storage, as total products drew slightly, with a large 3.5 MMB draw in distillate offsetting much of the gain in several other products. Crude runs unexpectedly fell on the week to 16.41 MMB/D, despite a number of units coming back on line, as soft margins in some areas likely led to discretionary run cuts. For this week a significant level of capacity is due back in service and runs have been marked up to 16.64 MMB/D. Imports of crude are expected to fall to 7.4 MMB/D as crude exports drop slightly to 2.3 MMB/D. Fog is partially limiting movements and adding to problems loading ships. Both crude and Cushing stocks have now built for the past seven weeks, with Cushing seeing the highest weekly gain over the period of 2.4 MMB. For this week Cushing is expected to add 2 MMB, with overall crude gaining an additional 5.3 MMB. For this week key light products stocks are expected to decline, led by a 1.8 MMB draw on distillate.

Global equities gained a modest 0.5%, with the U.S. S&P 500 gaining another 2.2%, on top of a similar gain set the previous week. Consumer staples outperformed and gained 3.1%, with utilities gaining similarly. Housing underperformed and lost 1.9%. Internationally, many of the tracking indices lost ground. The weakest was Latin America, which fell 4.6%, with China, emerging markets, and emerging Asia, also slipping.

Crude runs eased slightly and crude imports moved to very low levels such that crude stocks drew 3.5 MMBbls. Finished product stocks built 0.57 MMBbls as aggregate demand remains weak. High retail prices and significant slowing in disposable income and IP are noted headwinds to demand performance. Gasoline demand continues to show signs of significant impairment, with still higher stock length. Gasoil demand continues to hold up comparatively well with corresponding crack strength. Refining margins remain very soft, with strong gasoil and fuel oil cracks unable to overcome the weakness in gasoline. Implied marketing margins have popped as retail prices edged down slightly, against a larger drop in refinery gate prices.

Proposition 112, which intended to increase the setback requirement for new oil and gas development from 500 feet to 2,500 feet from any occupied structure or vulnerable area, was rejected by voters in Colorado yesterday. If approved, it would have rendered 78% of Weld County’s surface land off-limits to new oil and gas development, a county that currently accounts for over 95% of production in the Denver-Julesburg (DJ) basin (currently at about 400 MB/D). We estimate that the setback could have reduced the number of wells drilled by 78% and DJ oil production could have fallen by more than 50% below the forecast, or 300 MB/D, by the end of 2023.