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K. Spector - January 2014 1 Katherine Spector Head of Commodities Strategy CIBC World Markets [email protected] Outlook For Energy Markets January 2014
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K. Spector - January 2014 1

Katherine SpectorHead of Commodities Strategy

CIBC World [email protected]

Outlook For Energy MarketsJanuary 2014

K. Spector - January 2014 2

1. Crude Price: Rangebound with an upside bias...Ongoing supply outages versus mediocre demand growth have kept pricesrangebound, but we have more confidence in the floor than the ceiling.

2. US energy landscape: What a difference five years makes!Time to think about ‘second order’ impacts of the boom...

3. Natural gas: Rangebound again, but this time with a bearish bias...For now, both supply and demand are extremely price elastic. The marketwill really turn a corner when utility demand for gas becomes price inelastic.

Key Themes In Today’s Energy Markets

K. Spector - January 2014 3

1. Rangebound Outlook for Crude Flat PriceOngoing supply outages versus mediocre demand growth

K. Spector - January 2014 4

Oil Prices Reflected Fundamentals

CIBC Commodities Strategy, Petrologistics, IEA, Company and Govn’t Reports

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14

Market Call on Saudi Crude (3-mo. avg)

Actual Saudi Crude Production

mbd

Pretty orderly market...

Lesson learned: AsIran sanctions hit and

SPR talk heats up,Saudi opens thepumps in 1H’12.Stocks rebuild.

In 2011, Saudi make upfor some of the Libyashortfall but not all ofit. Commerical stocks

fall and the US/IEArelease SPR.

... But genuinelytight in Aug’13

K. Spector - January 2014 5

25

30

35

40

45

50

55

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

mbd

Pre-Recession Trend

Post Recession Trend

OECD

Non-OECD

Oil Demand Growth is in the Emerging World(Before the recession, during the recession, after the recession)

CIBC Commodities Strategy, EIA, IEA, country & govn’t sources

K. Spector - January 2014 6

Global Supply Outages Pile Up

CIBC Commodities Strategy, EIA

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13

OPEC TotalNon-OPEC Total

kbd

K. Spector - January 2014 7

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Non-OPEC OPEC

US + Saudi Bail Out Market Single-Handedly

CIBC Commodities Strategy, IEA, EIA, Petrologistics, other company and gov’t sources

August’13 Versus August’11, mbd

Saudi +Kuwait + UAE

UnitedStates

Other Non-OPEC Other OPEC

K. Spector - January 2014 8

Macro Fundamentals Summary....• Status quo oil demand...not a new story, likely marginal improvement in 2013.

• Supply was the story in 2011-12, and is very much the story again in 2013thanks to a persistantly high outage rate in both OPEC and non-OPEC.

• Saudi has done a really good job of balancing the market.

• But the bullish take on this story? During a period of weak oil demand growthand unprecendented supply growth in the US, it still takes record Saudi productionfor months in a row to balance the market, and global oil prices never go muchbelow $90.

• What would that last three years have looked like without US growth?Remember... it doesn’t come cheap. What are the implications for the investmentcycle?

K. Spector - January 2014 9

2. The US Energy Landscape:What A Difference Three Years Makes! Time to ThinkAbout ‘Second Order’ Implications of the Boom

K. Spector - January 2014 10

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

Coal (Dry) NaturalGas

Crude + NGL Nuclear Biofuels OtherRenewables

Total Energy

quadrillion Btu

What A Difference Three Years Makes!US Energy Production & Consumption, 2012 Versus 2008

Prod

uctio

n

Con

sum

ptio

n

Prod

uctio

n

Con

sum

ptio

n

Con

sum

ptio

n

Prod

uctio

n

Con

sum

ptio

n

Prod

uctio

n

Con

sum

ptio

n

Prod

uctio

n

Con

sum

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n

Prod

uctio

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CIBC Commodities Strategy, EIA

Prod

uctio

n

Con

sum

ptio

n

K. Spector - January 2014 11

Impact On WTI Term Structure

• The front of the WTI curve is a different story... we’ll get to that.

• Beyond the front six months though, we think spreads will stay very well bid, inlarge part because, going forward, an increasing percentage of new crudeproduction will be hedged in the forward market.

• North American producers hedge more than producers in other regions, andthat’s where virtually all incremental crude production growth is coming from.The type of companies most active in shale plays are even more inclined to bedisciplined hedgers.

• At the same time, we would argue that deferred liquidity from hedge funds andbanks has deteriorated.

K. Spector - January 2014 12

CIBC Commodities Strategy, IEA, Industry Reports*Majors here include BP, CVX, COP, XOM, RDSA, TOT

Crude Growth Not From the Majors* In the US

4000

4500

5000

5500

6000

6500

7000

7500

8000

'06 '07 '08 '09 '10 '11 '12 '13

kbd

15%

17%

19%

21%

23%

25%

27%

29%

31%

33%

35%Liquids Production By Non-Majors (left)

% US Production By Majors (right)

K. Spector - January 2014 13

2500

2750

3000

3250

3500

3750

4000

4250

'06 '07 '08 '09 '10 '11 '12 '13

kbd

10%

11%

12%

13%

14%

15%

16%Liquids Production By Non-Majors (left)% Canadian Production By Majors (right)

...Or In Canada

CIBC Commodities Strategy, IEA, Industry Reports*Majors here include BP, CVX, COP, XOM, RDSA, TOT

K. Spector - January 2014 14

CIBC Commodities Strategy

Long-dated WTI Spreads Outpace Flat Price$/bbl

$20

$40

$60

$80

$100

$120

$140

$160

'09 '10 '11 '12 '13

$(15)

$(10)

$(5)

$-

$5

$10

$15

Mth 1 WTI (left) Mth 6 - Mth 24 Spread (right)

$/bbl

K. Spector - January 2014 15

Cushing Stocks Are Falling Rapidly

CIBC Commodities Strategy, EIA

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

Oct'10 Apr'11 Oct'11 Apr'12 Oct'12 Apr'13 Oct'13

%

10

15

20

25

30

35

40

45

50

55

mb

Cushing Storage Utilization (left)Cushing Storage Volume (right)

K. Spector - January 2014 16

$(5)

$-

$5

$10

$15

$20

$25

$30

Nov'10 Mar'11 Jul'11 Nov'11 Mar'12 Jul'12 Nov'12 Mar'13 Jul'13

Average All Major US Grades

Light Louisiana Sweet

CIBC Commodities Strategy

Cash Crude Premiums to WTI ShrinkDifferential to WTI, $/bbl

K. Spector - January 2014 17

$(1.00)

$(0.50)

$-

$0.50

$1.00

$1.50

Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

$/bbl

M1-M2 WTI SpreadOn Expiry

CIBC Commodities Strategy

Backwardation? Not On Expiry Days

K. Spector - January 2014 18

31

32

33

34

35

36

37

'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4Domestic API (left) Domestic Sulphur Content (right)

CIBC Commodities Strategy, EIA

US Crude Production Gets Lighter and Sweeter

K. Spector - January 2014 19

29.5

30.0

30.5

31.0

31.5

32.0

32.5

33.0

33.5

'86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6API Gravity (left) Sulphur Content (right)

CIBC Commodities Strategy, EIA

US Refiners Tweak Their Slate... To A Point

K. Spector - January 2014 20

US Crude Production / Import Quality Shift

26

27

28

29

30

31

32

33

34

35

36

37

'91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13

Refinery RunsImportsDomestic Production

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

'91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13

Production Gets Lighter, Imports Heavier Production Gets Sweeter, Imports More SourVolume Weighted Average API Gravity

CIBC Commodities Strategy, EIA CIBC Commodities Strategy, EIA

Volume Weighted Average Sulphur Content

K. Spector - January 2014 21

CIBC Commodities Strategy, EIA

US Sharply Trims Light, Sweet Crude Imports

-1000

-800

-600

-400

-200

0

200

400

600

Chg Versus 2008(YTD)

Chg Versus 2012(YTD)

Current FromCanada

Current From FarAbroad

kbd

K. Spector - January 2014 22

0

50

100

150

200

250

300

350

400

PADD 1 PADD 2 PADD 3 PADD 4 PADD 5

kbd Light Sweet Canada

Light Sweet Far Abroad

CIBC Commodities Strategy, EIA

How Much Imported Light Crude To Back Out?

K. Spector - January 2014 23

million bbl

380 52

223

14

33

0

50

100

150

200

250

300

350

1 Cushing Other P2 3 4 5

Tank/Terminal StocksRefinery Stocks

CIBC Commodities Strategy, EIA

Crude Capacity At Tanks/Terminals vs Refineries

K. Spector - January 2014 24

million bbl

1

4811

49

110

0

50

100

150

200

250

1 Cushing Other P2 3 4 5

Non-Exclusive UseExclusive Use

CIBC Commodities Strategy, EIA

Exclusive / Non-Exclusive Crude Storage Capacity

K. Spector - January 2014 25

WCS Handicapped By More Than Infrastructure

CIBC Commodities Strategy

$(70)

$(60)

$(50)

$(40)

$(30)

$(20)

$(10)

$-

Jan'12 May'12 Sep'12 Jan'13 May'13 Sep'13

$/bbl

Bakken-LLS WCS-Mars

K. Spector - January 2014 26

Just 6 US Refiners Take Half of Canada’s Exports

Top 6 offtakers of Canadian Crude: Bayway, Whiting, Joliet, Lemont, Pinebend, Wood RIverCIBC Commodities Strategy

0

50

100

150

200

250

300

350

400

'08 '09 '10 '11 '12 '13 '14

kbd

Refinery Capacity Offline

K. Spector - January 2014 27

3. North American Natural GasDon’t Get Too Excited Yet...

K. Spector - January 2014 28

Not Out Of The Woods Yet...• The US gas balance looked marginally price supportive in 2013, but in the short-run (24months) both gas supply and gas demand are still very price elastic. That meansrangebound prices.

• In the medium- to long-run, gas production will continue to be price sensitive. It is whengas demand — specifically utility demand for gas — is no longer price elastic that themarket will truly turn the corner. The 2015-16 period will be key.

• Last summer gave us a taste of what coal-to-gas substitution can do to the market.This year will pale in comparison, but eventual coal retirement will make that shift to gaspermanent. One implication is that gas prices will reflect a steeper summer pricing.• Production of gas liquids has been phenomenal, and prices have come off sharply.What will it take to see a shift back to dry gas production?

• LNG will matter at the margin, but won’t be the game changer for the US supply/demand balance. Alberta may be a different story... maybe.

K. Spector - January 2014 29

Is the Liquids Subsidy At Risk...?

$/bbl

-$100

-$90

-$80

-$70

-$60

-$50

-$40

-$30

-$20

Aug-10 Aug-11 Aug-12 Aug-13

NGL Basket - WTI

Ethane - WTI

$(160)

$(140)

$(120)

$(100)

$(80)

$(60)

$(40)

$(20)

$-

$40 $90 $140 $190WTI Price

NG

L B

aske

t Dis

coun

t to

WTI

$4 gas break evenCurrent$6 gas break evenToday's NGL Discount / $80 WTI

NGL Prices Continue Their Collapse NGL Subsidy At Risk At $90 Crude

CIBC Commodities Strategy CIBC Commodities Strategy

K. Spector - January 2014 30

Natural Gas Competes With CAPP Coal

CIBC Commodities Strategy

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

$5.5

Mar-12 Aug-12 Dec-12 May-13 Oct-13

$/MMBtuCompeting Fuels - Past 12 Months

CCGT: PRB Coal Efficiency Band

CCGT: CAPP Coal Efficiency Band

NYMEX Henry Hub

K. Spector - January 2014 31

• It is not clear to us that LNG will make or break the US gas balance... Themarket will ultimately cap export volumes, not policy.

• But there will be interesting seasonal implications. The US will be theone place in the world that can both import and export LNG. The US alsohas significantly more gas storage capacity than Europe does.

• LNG will matter more for AECO, but not for a while.

LNG Now Seems Like a Reality

K. Spector - January 2014 32

-2

-1

0

1

2

3

4

5

6

7

8

2000 2002 2004 2006 2008 2010 2012

Michigan / Minnesota New England / New YorkVolumes on TRP Mainline Total Net

Bcf/d

CIBC Commodities Strategy, EIA

Net ‘East of Mississippi’ US Imports Of CAD Gas

K. Spector - January 2014 33

Bcf/d

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2013 2014 2015 2016 2017 2018 2019 2020

Potential Decline In US/Canadian Demand For AB Gas

Potential Growth in LNG Exports West From AB

Net

CIBC Commodities Strategy, EIA

Alberta Gas Balance Looks Heavy...Until 2020** MAYBE

K. Spector - January 2014 34

This communication, including any attachment(s), is confidential and has been prepared by the Macro Strategy Desk within the Fixed Income, Currencies and Commodities Group at CIBC World Markets Inc., wholly-owned subsidiary and wholesale banking arm of Canadian Imperial Bank of Commerce. The contents of this communication are based on macro and issuer-specific analysis, issuer news, market events and generalinstitutional desk discussion. The author(s) of this communication is not a Research Analyst and this communication is not the product of any CIBC World Markets Inc. Research Department nor should it be construedas a Research Report. The author(s) of this communication is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentioned in the communication. The commentary andany attachments (other than any attached CIBC World Markets Inc. branded Research Reports) and opinions expressed herein are solely those of the individual author(s), except where the author expressly states themto be the opinions of CIBC World Markets Inc. The author(s) may provide short-term trading views or ideas on issuers, securities, commodities, currencies or other financial instruments but investors should not expectcontinuing analysis, views or discussion relating to the securities, securities, commodities, currencies or other financial instruments discussed herein. Any information provided herein is not intended to represent anadequate basis for investors to make an informed investment decision and is subject to change without notice. CIBC World Markets Inc. or its affiliates may engage in trading strategies or hold positions in the issuers,securities, commodities, currencies or other financial instruments discussed in this communication and may abandon such trading strategies or unwind such positions at any time without notice.This communication,including any attachment(s), is confidential and has been prepared by the Macro Strategy Desk within the Fixed Income, Currencies and Commodities Group at CIBC World Markets Inc., wholly-owned subsidiary andwholesale banking arm of Canadian Imperial Bank of Commerce. The contents of this communication are based on macro and issuer-specific analysis, issuer news, market events and general institutional deskdiscussion. The author(s) of this communication is not a Research Analyst and this communication is not the product of any CIBC World Markets Inc. Research Department nor should it be construed as a ResearchReport. The author(s) of this communication is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentioned in the communication. The commentary and any attachments(other than any attached CIBC World Markets Inc. branded Research Reports) and opinions expressed herein are solely those of the individual author(s), except where the author expressly states them to be the opinionsof CIBC World Markets Inc. The author(s) may provide short-term trading views or ideas on issuers, securities, commodities, currencies or other financial instruments but investors should not expect continuing analysis,views or discussion relating to the securities, securities, commodities, currencies or other financial instruments discussed herein. Any information provided herein is not intended to represent an adequate basis forinvestors to make an informed investment decision and is subject to change without notice. CIBC World Markets Inc. or its affiliates may engage in trading strategies or hold positions in the issuers, securities,commodities, currencies or other financial instruments discussed in this communication and may abandon such trading strategies or unwind such positions at any time without notice.The contents of this message are tailored for particular client needs and accordingly, this message is intended for the specific recipient only. Any dissemination, re-distribution or other use of this message or the marketcommentary contained herein by any recipient is unauthorized. If you are not the intended recipient, please reply to this e-mail and delete this communication and any copies without forwarding them.The contents of thismessage are tailored for particular client needs and accordingly, this message is intended for the specific recipient only. Any dissemination, re-distribution or other use of this message or the market commentarycontained herein by any recipient is unauthorized. If you are not the intended recipient, please reply to this e-mail and delete this communication and any copies without forwarding them.Distribution in Hong Kong: This communication has been approved and is issued in Hong Kong by Canadian Imperial Bank of Commerce, Hong Kong Branch, a registered institution under the Securities and FuturesOrdinance (the “SFO”) to “professional investors” as defined in clauses (a) to (h) of the definition thereof set out in Schedule 1 of the SFO. Any recipient in Hong Kong who has any questions or requires further informationon any matter arising from or relating to this communication should contact Canadian Imperial Bank of Commerce, Hong Kong Branch at Suite 3602, Cheung Kong Centre, 2 Queen’s Road Central, Hong Kong (telephonenumber: +852 2841 6111).Distribution in Hong Kong: This communication has been approved and is issued in Hong Kong by Canadian Imperial Bank of Commerce, Hong Kong Branch, a registered institution under theSecurities and Futures Ordinance (the SFO) to professionalinvestors as defined in clauses (a) to (h) of the definition thereof set out in Schedule 1 of the SFO. Any recipient in Hong Kong who has any questions orrequires further information on any matter arising from or relating to this communication should contact Canadian Imperial Bank of Commerce, Hong Kong Branch at Suite 3602, Cheung Kong Centre, 2 Queen’s RoadCentral, Hong Kong (telephone number: +852 2841 6111).Distribution in Singapore: This communication is intended solely for distribution to accredited investors, expert investors and institutional investors (each, an “eligible recipients”). Eligible recipients should contact DannyTan at Canadian Imperial Bank of Commerce, Singapore Branch at 16 Collyer Quay #04-02 Singapore 049318 (telephone number + 65-6423 3806) in respect of any matter arising from or in connection with thisreport.Distribution in Singapore: This communication is intended solely for distribution to accredited investors, expert investors and institutional investors (each, an eligiblerecipients). Eligible recipients should contactDanny Tan at Canadian Imperial Bank of Commerce, Singapore Branch at 16 Collyer Quay #04-02 Singapore 049318 (telephone number + 65-6423 3806) in respect of any matter arising from or in connection with thisreport.


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