Each week Josef Schachter will give you his insights into global events, price
forecasts and the fundamentals of the energy sector. Josef offers a twice monthly
Black Gold (SER) newsletter covering the general energy market and 30 energy, energy
service and pipeline & infrastructure companies with regular updates. We hold
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EIA Weekly Data: The EIA data on Wednesday August 18th was mostly negative for crude oil
prices as Commercial Crude Inventories fell by 3.2Mb (forecast was for a decline of 1.6Mb). The
main reason for the decline was that Exports rose by 768Kb/d, or by 5.4Mb on the week and
Net Imports fell by 813Kb/d, or by 5.7Mb on the week. Had there been a flat Net Import number,
Commercial Crude Inventories would have risen by 2.5Mb on the week. Refinery Utilization rose
0.4% to 92.2% last week (last year was 80.9% and in 2019 was 95.9%). Gasoline Inventories
rose by 0.7Mb while Distillate Fuel Inventories fell by 2.7Mb. US crude oil production rose by
100Kb/d to 11.4Mb/d last week and is heading towards 12.0Mb/d, which we see as likely in
Q4/21.
Total Product Demand reversed last week’s data and rose by 1.95Mb/d to 21.5Mb/d versus the
1.65Mb/d decline of last week. Overall demand is now above mid-August 2019 levels when
consumption was 21.0Mb/d. Gasoline consumption fell 97Kb/d to 9.33Mb/d (9.63Mb/d
consumed in mid-August 2019). Jet Fuel Consumption rose by 396Kb/d to 1.67Mb/d (below the
pre-pandemic level of 1.9Mb/d of mid-August 2019). Cushing Inventories fell last week by 0.8Mb
to 33.6Mb compared to 52.7Mb last year.
Baker Hughes Rig Data: The data for the week ending August 13th showed the US rig count
with a rise of nine rigs to 500 rigs (up by three rigs last week). Of the 500 US rigs active, 397
were drilling for oil and 102 were focused on natural gas activity. This overall US rig count is up
105% from 244 rigs working a year ago. The US oil rig count is up 131% from 172 rigs last year.
The natural gas rig count is up a more modest 46% from last year's 70 rigs.
Canada had an eight rig increase last week (versus a three rig increase in the prior week) to
164 rigs. Canadian activity is now up 3.0x from 54 rigs last year. There were 100 oil rigs working
last week, up from 19 last year. There are 63 rigs working on natural gas projects now, up from
35 last year.
The material increase in rig activity in both the US and Canada over the last year should
continue to translate into rising liquids and gas production. The data from the companies that
have reported Q2/21 results are supporting this rising production profile.
Conclusion:
OPEC+ has turned on the spigots and there should be increasing amounts of crude oil arriving
in the market over the coming months (Russia even shipped 193Kb/d to the US last week
versus nothing for the past two years). Starting in September when the summer driving season
is over there should be weekly builds in Commercial Crude Stocks around the world as
inventories build to meet the winter 2021-2022 needs. If we see repetitive weekly rises of some
significant volumes to US storage levels, WTI crude should decline below US$60/b this fall.
A new more virulent Covid variant ‘Kappa’ is now occurring around the world. This originated in
both Belgium and Colombia and has now reached the US. This and other new variants may
have a viral load 1,000 times higher than the Alpha variant. They are reported to have high
capability of transmitting and also may be more severe to those infected. The worry is that as
the virus mutates this fall and winter that more severe strains will break out and the current
vaccines may be insufficient. This fourth wave is now feared to become worse than the third
wave.
Bearish pressure on crude prices:
1. The CDC says travellers should avoid France, Iceland, Israel and Thailand due to very
high levels of Covid-19. International travel is again being impacted, meaning lower
consumption of Jet Fuel. Flight capacity within China is down sharply as well. Imports of
crude into China fell from 10.4Mb/d to 9.7Mb/d in July as demand declined. This is now
the fourth month of imports below 10.0Mb/d and overall refining levels are at their lowest
in 14 months. China’s new lockdowns will surely impact world supply chains. China has
closed the third largest port due to an outbreak of the Delta mutation.
2. Low vaccination rate countries in Asia are imposing new growth-sapping restrictions due
to the fast rise in the new more lethal and faster spreading variants.
3. Australia has locked down two-thirds of the country, lowering consumer spending by
15% since the new lockdowns started. The worst caseloads are in the big cities of Sydney and
Melbourne. New Zealand is on a full lockdown again.
4. Countries such as Argentina, Australia, Bangladesh, Central African Republic, China (14
of 32 provinces seeing spikes – including Wuhan where the outbreak started, as well as in the
capital Beijing), Cuba, Guatemala, Greece, Honduras, Indonesia, Iran, Iraq, Japan, Malaysia,
Mexico, Morocco, New Zealand, Saudi Arabia, South Africa, South Korea, Sri Lanka, Thailand
and Vietnam are all seeing rising caseloads and are tightening movement and putting in
curfews. This list is up four countries from last week. Death counts are now up to 4.37M
worldwide and are over 622K in the US.
5. The US is seeing a rapid rise among both the vaccinated and unvaccinated. Intensive
care beds are now being rationed as caseloads reach last winter’s wave. Five US States
(Oregon, Hawaii, Louisiana, Mississippi and Florida) set new records for Covid cases and
hospitalizations. The US plans to offer a third, ‘booster’ shot to all Americans starting on
September 20th. It will be offered eight months after second vaccines have been given. On the
economic front, US retail Sales fell 1.1% in July versus a forecast of a decline of 0.3%. US
Consumer Sentiment fell to 70.2 from 81.2 last month (the forecast had been for 81.0). This was
the lowest reading since December 2011.
1. The IEA cut their demand forecast by 550Kb/d and expects a surplus of crude in 2022.
Bullish pressure on crude prices:
1. Rising vaccination levels of the adult US population toward herd immunity level has lifted
summer travel both by air and land. The US now has 50.9% of Americans completely
vaccinated but only 56.6% with an initial dose.
2. Weather impacts (hurricane season has started) may necessitate shutting in some of the
offshore Gulf of Mexico production. The most severe part of the hurricane season starts next
month. Tropical storm Grace (the seventh hurricane event of 2021) is heading towards the Gulf
Coast.
3. Extreme heat waves, forest fires, crippling droughts and shortage of electricity for air
conditioning across the US and Canada is aiding consumption of natural gas. It is a big
beneficiary of this increase in electricity demand as hydro has, in many cases, low water levels.
NYMEX natural gas prices are now at US$3.86/mcf. AECO prices have drifted lower but are still
at an attractive C$2.99/mcf.
CONCLUSION:
WTI has fallen over 13% from an early June high of US$76.98/b to US$66.63/b today (down
US$2.26/b from last week’s report) as the ‘Delta’ variant spreads and ‘Kappa’ rears up, slowing
down many economies around the world. A breach of the low of US$65.01/b (the mid-July low)
should set up a decline to the US$60/b level during September/October. We see even lower
crude prices in Q4/21 if worldwide economic activity slows more materially. Our downside WTI
crude case is for US$48-54/b if the pandemic worsens and the two largest economies of the US
and China are under health duress.
Energy Stock Market: The S&P/TSX Energy Index trades currently at 117 (down five points
from last week) and is down 28 points from 145 in mid-June, or down so far by over 19%. The
level to watch was the low of 118.46 from last week, which has now been breached. Our next
downside target is the 111 area. A bust of US$65/b for WTI would likely mean a decline in the
Energy Index to the 100 level or lower, or down by an additional 14%. This is likely to occur in
September. Just falling to the 100 level means a nasty decline of over 31% from the mid-June
high. Much lower levels are possible later this fall. The energy sector will face attacks (becoming
the climate battle punching bag) by the Liberals, NDP and the Green Party as the Federal
election cycle is underway. Canadian energy stocks may face more pressure than energy
stocks in the US during our election cycle.
If WTI breaks US$60/b then the S&P/TSX Energy Index is likely to breach 80 resulting in a
painful 45% decline from the peak in mid-June. Over-invested bulls are likely to get hurt pretty
badly. We recommend caution and holding cash for the next low risk entry point on that portion
of one's portfolio which is energy focused. The energy and energy service companies with the
most downside are those with stretched balance sheets, and have missed production, revenue or EBITDA forecasts. Some of the hardest hit energy and energy services companies are down
40-50% so far from the 2021 highs.
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in our reports. Our August SER Monthly Report comes out next Thursday and continues the
review of Q2/21 results with the coverage of ten companies. The next Interim Report will focus
on the remaining results of Q2/21 for the final 10 companies on our Coverage List. If you want
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I will be on holiday next week so there will not be an issue of ‘Eye on Energy’. Our next
weekly publication will be out on Wednesday September 1st.
