Each week Josef Schachter gives you his insights into global events, price forecasts and the fundamentals of the energy sector. Josef offers a twice monthly Black Gold  newsletter covering the general energy market and 30 energy, energy service and pipeline & infrastructure companies with regular updates. We also hold quarterly webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more. 

EIA Weekly Oil Data: The EIA data of Wednesday December 8th was mixed. US Commercial Crude Stocks fell 0.2Mb (forecast a decline of 1.71Mb). A key component was a decline in Exports of 434Kb/d. Refinery Utilization Rose by 1.0 points to 89.8% from 88.8% in the prior week. With the pick up in refinery activity Total Motor Gasoline Inventories rose 3.9Mb while Distillate volumes rose 2.7Mb. Overall Storage rose by 4.2Mb. US Crude Production rose by 100Kb/d to 11.7Mb/d, to a new yearly high and nearing our 12.0Mb/d target for late 2021 or during winter 2021 – 2022. Total Demand fell by 385Kb/d to 19.84Mb/d. Gasoline consumption rose by 167Kb/d to 8.96Mb/d which is just above the 8.88Mb/d consumed in 2019 at this time. Jet Fuel Consumption fell 507Kb/d to 1.22Mb/d versus 1.58Mb/d consumed in 2019. Cushing Inventories rose 2.4Mb to 30.9Mb/d.

EIA Weekly Natural Gas Data: Weekly withdrawals started two weeks ago as winter demand picked up. Last week, there was a withdrawal of 59 Bcf, lowering storage to 3.564Tcf. The five year average for last week was a withdrawal of 31 Bcf. Storage on a five-year basis was 3.650Tcf so storage is only 2.4% below the five-year average. NYMEX today is US$3.84/mcf down from the high in early October of US$6.47/mcf. AECO spot is at $3.48/mcf, down over $3/mcf from recent highs. As to be expected, natural gas stocks have retreated from their 2021 highs. With the two key months for natural gas demand ahead of us (January and February) we should still expect large price moves to the upside on very cold days. Spikes over $6/mcf should be seen on both sides of the border in the coming months when weekly withdrawals over 200 Bcf on a cold week occur. After winter is over natural gas prices will retreat and if the general stock market decline unfolds as we expect, then a great buying window could develop at much lower levels for natural gas stocks in Q2/22.

Baker Hughes Rig Data: The data for the week ending December 3rd showed the US rig count unchanged at 569 rigs last week. Of the total of 569 rigs working last week, 467 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 76% from 323 rigs working a year ago. The US oil rig count is up 90% from 246 rigs last year at this time. The natural gas rig count is up a more modest 36% from last year’s 75 rigs, now at 102 rigs. New Mexico saw an increase of five rigs last week to 88 rigs and was up 49% from 59 rigs last year as energy companies focused on the Permian potential in their state.

Canada had a rise of nine rigs to 180 rigs. Canadian activity is now up 76% from 102 rigs last year. There were seven more oil rigs working last week and the count is now 113 oil rigs working, up from 40 last year. There are 67 rigs working on natural gas projects now, up from 62  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 over the coming months, especially with the DUC count (drilled but uncompleted well count) at very low levels. The data from many companies on their plans for 2022 support this rising production profile expectation. We expect to see US crude oil production reaching 12.0Mb/d this winter. Companies are taking advantage of attractive drilling and completion costs and want to lock up experienced rigs and crews as staffing issues are getting tougher for the sector.

Conclusion:

Bearish pressure on crude prices:

1. A coordinated effort by consuming nations to lower rising gasoline prices by opening their strategic reserves (SPR’s) with total releases in the range of 100-120Mb (US 50Mb) is being offset by OPEC. OPEC is not fully adding their planned 400Kb/d each month. The US is also considering a renewed ban on crude exports which was allowed to start in 2015 by President Obama after a 40-year ban. The US is also considering restricting all buying from OPEC+ members.
2. Covid caseloads are growing around the world. In the US, the death rate is over 790K deaths. Worldwide, the death count is now 5.26M. Deaths are rising in Europe particularly in Austria (imposing full lockdowns on the unvaccinated). Belgium and Germany (which has now over 58K new daily cases) plan to tighten restrictions next week. New York is planning to require all private-sector workers to be fully vaccinated. Many may quit their jobs if they don’t want to vaccinate and opposition to this will mean lots of court cases.
3. Energy demand is under pressure as high prices for most food, rent, taxes, child care, health expenses, auto costs and other daily necessities make spending decisions tougher for consumers. This gouge in prices will surely impact consumers’ buying behavior in the coming months. The spending pie of consumers is shrinking and some spending habits of the past will have to be dropped. Demand destruction is on the way. Recent US economic releases indicate that we may already be in the early stages of a recession.
4. China has seen a rising wave of new infections in 19 of its 31 provinces. Many industrial plants in China have been closed due to the high cost of fuel and the Government’s plan to lower emissions in the Beijing area for the upcoming 2022 winter Olympics from February 4th to the 20th. Clean air is needed for the event and China wants to show it is making progress on its climate initiatives. They are importing large amounts of LNG to meet their electricity needs.

Bullish pressure on crude prices:

1. While approving an increase of 400,000 b/d of new production for January 2022, OPEC may not achieve this target once again. It is an issue of following what they say versus following what they are doing. In October they only brought on an additional 217Kb/d versus the 400Kb/d announced. Preliminary reports show that in November they may have added just over 200Kb/d of real new volumes.
2. The Omicron new Covid-19 variant does not appear to be more deadly, just more transmissible and vaccine manufacturers expect that with the booster shot individuals will be adequately protected. Most people in hospital ICU’s with this variant were not vaccinated at all.
3. The Iran deal is not seeing progress as the Iranians continue to want removal of sanctions to sell oil but do not want to slow down their nuclear weapons program or allow intrusive UN inspections. The bulls are rejoicing that the 1-2Mb/d of new Iranian oil that could come on is now more unlikely.
4. If Russia invades Ukraine, sanctions will be added to pressure Russia to desist. Russia may face OECD blockages of sales of crude oil. This would be positive for China but would hurt Europe which would need to find other more expensive suppliers.
5. JP Morgan and other US investment banks see world demand exceeding pre-pandemic levels in Q2/22. Their fearless forecasts see US$80/b in early 2022 and US$100/b in 2H/22.

CONCLUSION: 

WTI fell on Friday November 26th by US$10.24/b (down over 13% on the day) to US$68.15/b as the fear of Omicron spreading around the world hit the markets. The Dow Jones Industrials closed down that day by 905 points to 34,899 and was down the largest point amount for 2021. With some reassurance about Omicron, the price of crude has rebounded back upward. The low intraday bottom was US$62.42/b (four days ago) and now stands at US$71.86/b (down US$7/b from our last report two weeks ago). With our concern about the strength of the US and China economies we still see prices having US$20-25/b of speculative value which should disappear as demand weakens once winter is over. Leveraged speculative longs in crude oil futures were vulnerable to nasty margin calls and this added to the recent downside pressure. Our target for WTI in Q2/22 is US$48-54/b implying much more downside for the sector. 

Energy Stock Market: The S&P/TSX Energy Index currently trades at 164, down five points from our last issue. During the crude price decline of the last two weeks the Index fell to 152 and has since rebounded as crude prices recovered. As crude prices retreat in the coming weeks we see downside for this Index to the 95-105 level implying some severe downside. Oil stocks are the most vulnerable as are any companies in the sector with over-leveraged balance sheets.

Our December Joint Monthly Report comes out on Thursday December 16th. We go over the history of bear markets and why we see us entering another one. The magnitude of the decline is discussed in comparison to other overvalued markets since 1900 and we project potential downside targets for the overall stock markets and the energy sector during this market decline/plunge. A key section is our 2022 Fearless Forecasts. Once this bear phase exhausts itself, a lengthy and powerful new bull market will arise and energy will be a prime beneficiary. We intend to send out multiple Action Alert BUY ideas once the next low risk entry point arrives.

Our next quarterly webinar will be held on Thursday February 24th at 7PM MT.

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