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 quarterly subscriber webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more.
EIA Weekly Data: The EIA data on Wednesday September 9th was heavily impacted by Hurricane Ida. Demand and production both fell with crude prices remaining high as the return of the majority of the offshore oil production is delayed. On the Commercial Crude side Inventories fell by only 1.5Mb (forecast was for a decline of 4.6Mb). The big decline was in Gasoline Inventories which fell 7.2Mb as refinery activity fell by 9.4 points to 81.9% from 91.3%, as Gulf Coast refineries remain closed. US crude oil production fell by 1.5Mb/d to 10.0Mb/d as 1.75Mb/d of offshore production was shut in. It may take into late September for the refineries and offshore facilities to return to normal operating levels. Some of the refineries still remain without electricity. We still see US production rising and reaching 12.0Mb/d before year end, with volumes returning to 11.5Mb/d+ once this Hurricane impact is over.
Demand for Jet Fuel, Distillates, Fuel OIl and Propane fell sharply as Hurricane Ida reached landfall. Total Product Demand fell 2.87Mb/d to 19.95Mb/d. Gasoline consumption rose a modest 30Kb/d to 9.61Mb/d with Jet Fuel Consumption falling by 176Kb/d to 1.62Mb/d. Cushing Inventories rose last week by 1.9Mb to 36.4Mb compared to 54.4Mb last year and 39.3Mb two years ago.
Baker Hughes Rig Data: The data for the week ending September 3rd showed the US rig count falling by 11 rigs (up five in the prior week) as Hurricane Ida forced 14 rigs to shut down in Louisiana. Of the total of 497 rigs working last week, 394 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 94% from 256 rigs working a year ago. The US oil rig count is up 118% from 181 rigs last year at this time. The natural gas rig count is up a more modest 42% from last year’s 72 rigs. The Permian saw an increase of one rig to 250 rigs and is up 100% from 125 rigs last year at this time.
Canada had a five rig rise last week to 152 rigs. Canadian activity is now up 2.9x from 52 rigs last year. There were 92 oil rigs working last week, up from 19 last year. There are 60 rigs working on natural gas projects now, up from 33 last year.
The material increase in rig activity over a year ago in both the US and Canada should continue to translate into rising liquids and gas production over the coming months. The data from the many companies that reported Q2/21 results support this rising production profile expectation.
Conclusion:
Starting in the next few weeks of September, now that 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 3-5Mb to US Commercial Crude storage levels, WTI crude should decline below US$60/b. Normal fall builds are 2-3Mb per week but if we see any builds over 5Mb in any week, that would put meaningful downward pressure on crude prices.
Bearish pressure on crude prices:
1. The EU is recommending that non-essential travel to the US be halted due to the rapid rise in US caseloads. This will lower air travel and the demand for Jet Fuel, and as a result lower crude oil will occur. Cancellations of passenger flights in the US have caused many US airlines to lower capacity by 8-10% starting this month. The recent Labour Day holiday season may increase case counts in the coming weeks.
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. Vietnam has the most aggressive lockdowns announced this week. Supply chains from Asia are impacting the global supply chains and making the economic recovery difficult. Those industries most harmed are those that need electronic chips which may be in short supply for a year according to recent reports.
3. 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) are having rising caseloads. Death counts are now up to 4.59M worldwide and are over 651K in the US. The total worldwide caseload is now 221.9M people of which the US has 40.3M cases. Recent US single-day caseload records have occurred in Hawaii, Oregon, South Carolina, and Alabama. Florida has the highest Covid hospitalization rate then anywhere in the US. The US now has 53.2% of all eligible people fully vaccinated and 60% with an initial dose. President Biden is pushing now (mandating) all federal employees and contractors to get vaccinated.
4. The Mu Variant is spreading around the world. This variant started in Colombia and now is impacting 39% of those infected with the pandemic disease. This variant is now seen in more than 40 countries and in 49 US States. A London immunologist at the Imperial College in London says “that the early research indicates it appears to be highly effective at evading immunity”.
5. The Saudis are pricing crude oil for October delivery to Asia at US$1/b lower than previous months as the fight for market share in the patchy economies in the area.
Bullish pressure on crude prices:
1. Hurricane Ida (a Category 4 Hurricane) shuttered in most of the offshore Gulf of Mexico oil and gas production. Over 1.7Mb/d of crude was shut in which equates to over 90% of offshore production. It may take weeks for all this production to be reinstated.
2. Hurricanes, extreme heat waves, forest fires, crippling droughts and shortage of electricity for air conditioning across the US and Canada are all 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$4.97/mcf. AECO prices have drifted but are still at an attractive C$3.49/mcf.
3. Libya is facing disruptions in crude supplies again as two large export ports are closed by protestors. Libya produced 1.165Mb/d in July 2021, the last data point on their production levels.
CONCLUSION:
WTI has lifted from US$61.74/b three weeks ago to US$69.36 (up 6 cents today) due to Hurricane Ida and the shutting in of most of the US offshore crude production. With the summer driving season over and the normal fall build season starting shortly, we expect WTI crude oil prices to start to go down again. We had forecasted that WTI would decline below US$65/b in August (which it did) and now see a breach of US$60/b as likely in the next few weeks. How low we go will depend upon the health of the largest economies (the US, China and the EU) and how large the seasonal crude oil storage builds are. Our worst case scenario is for downside for WTI crude to US$48-54/b during Q4/21.
Energy Stock Market: The S&P/TSX Energy Index trades currently at 125 and is down nearly 14% from the high of 145 in mid-June. The recent low for the Energy Index was 109.72 when crude fell to US$61.74/b. Once WTI breaches US$61.74/b later this month, we should be heading towards 100 for the Energy Index.
The energy sector is facing attacks and becoming the climate battle punching bag by the Liberals, the NDP and the Green Party as the Federal election cycle is now underway. Canadian energy stocks are likely to face more pressure than energy stocks in the US during the September election cycle.
When, not if, WTI breaks US$60/b 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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