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 22nd was initially seen as positive for crude prices. US Commercial Crude Stocks fell 4.7Mb (forecast a decline of 2.75Mb). With high Refinery Utilization at 89.6% (above the 78.0% level of a year ago but below the 89.8% of the prior week) Total Motor Gasoline Inventories rose 5.5Mb on the week while Distillate volumes rose 0.4Mb. US Crude Production declined 100Kb/d to 11.6Mb/d due to weather disruptions from tornado activity across the US Midwest. The key feature of the week was that Total Demand fell by 2.74Mb/d as Distillate heating oil demand fell by 1.074Mb/d and propane usage fell by 866Kb/d. These items can swing around quite widely so these declines are not disconcerting. Gasoline consumption fell 486Kb/d to 8.99Mb/d which is just above the 9.30Mb/d consumed in 2019 at this time. Jet Fuel Consumption fell 147Kb/d to 1.46Mb/d versus 1.54Mb/d consumed in 2019. Cushing Inventories rose 1.5Mb to 33.7Mb/d.

EIA Weekly Natural Gas Data: Weekly withdrawals started four weeks ago as winter demand commenced. Last week, there was a withdrawal of 88 Bcf, lowering storage to 3.417 Tcf. The biggest draws were in the Midwest (37 Bcf) and the East (25 Bcf). The five-year average for last week was a withdrawal of 109 Bcf and in 2021 was 122 Bcf. Storage is now only 1.8% below the five-year average, so the US is not facing a natural gas shortage as is seen in Europe and Asia. NYMEX today is US$3.98/mcf down from the high in early October of US$6.47/mcf. AECO spot is at $4.08/mcf, down >$2.50/mcf from 2021 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 could occur when weekly withdrawals of over 200 Bcf are seen. After winter is over natural gas prices should 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 17th showed the US rig count rose three rigs (up seven rigs the prior week) to 579 rigs last week. Of the total working last week, 475 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 67% from 346 rigs working a year ago. The US oil rig count is up 81% from 263 rigs last year at this time. The natural gas rig count is up a more modest 25% from last year’s 81 rigs, now at 104 rigs. The Permian saw an increase of two rigs last week (three rigs in the prior week) to 288 rigs and was up 66% from 174 rigs last year. The Permian is the hottest basin followed by the Haynesville with 47 rigs working.

Canada had a decline of 10 rigs as activity slows during the holiday season to 167 rigs. Canadian activity is now up 64% from 102 rigs last year. There were six less oil rigs working last week and the count is now 104 oil rigs working, up from 41 last year. There are 62 rigs working on natural gas projects now, up from 61 last year.

The 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’ plans for 2022 support this rising production profile expectation. We expect to see US crude oil production reaching 12.0Mb/d during winter 2021-2022. 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. The US Federal Reserve is ending its bond purchases in March 2022 which will remove 6%+ of monetary stimulus from the economy. Forecasters now expect three increases in rates in 2022 and three in 2023, so that the terminal Federal Funds rate will rise to 2.3% from 0.25% currently. Note, a 1% rise in interest rates adds US$300B of interest costs and with deficits continuing for many years into the future, this will add to deficits and depress the US economy. Removing this stimulus will slow the US economy. The UK and New Zealand are leading the interest rate rise movement.
2. Covid caseloads are growing around the world with Omicron now exceeding Delta in many countries. In the US, 73% of cases are now Omicron. This new variant is impacting both the vaccinated and unvaccinated with the unvaxxed filling the ICU wards. ICU beds are nearing full capacity which may result in triage of patients which will raise the death toll. In the US, the death rate is over 808K deaths (up 8K in just one week). Worldwide, the death count is now 5.36M (up 50,000 in one week). Single case records are rising particularly in Denmark, Norway, the UK (78,610 cases – the highest since the pandemic started and 100,000 are expected in the coming weeks),  South Africa, South Korea, Vietnam, and Zimbabwe. New lockdown restrictions have been implemented in the Netherlands and are being considered in other EU countries. In the US single day case load records are being seen in New Hampshire, New Jersey and New York. President Biden has predicted the ‘winter of death‘ for the unvaxxed. Canadian Provinces are implementing gathering restrictions. Some countries see reduced efficacy from the current three doses and plan usage of a fourth dose for those over 60 years of age (Israel is already administering this new dose). The fast spread of Omicron has impacted driving habits and weaker demand for crude is occurring in many places in the world. 
3. Energy demand (easily seen in this week’s EIA data) 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.
4. China is buying more oil from sanctioned Iran which leaves less oil to be purchased from Saudi Arabia and other OPEC members. The main reason is price, which Iran is offering at US>$4/b less than the ICE Brent price. China imported 600Kb/d in November from Iran or 40% more than in October.

Bullish pressure on crude prices:

1. While approving an increase of 400,000 b/d of new production for January 2022, OPEC has not achieved their target once again as seen from their December Monthly Report.
2. 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.
3. Libya has implemented a force majeure on exports as they face delayed elections (maybe one month) and violence. Four of their ports are closed and over 1Mb/d are impacted for the near term. OPEC reported production of 1.14Mb/d from Libya in November.
4. If Russia invades Ukraine, sanctions will be added to pressure Russia to desist. Russia may face OECD blockages on sales of crude oil. This would be positive for China but would hurt Europe which would need to find other more expensive suppliers. Russia is adding pressure on Europe/NATO as they reversed its major Yamal natural gas pipeline from Germany and other western European countries towards Poland. Is this a short term commercial event as Russia says or more pressure on Germany to approve the Nord Stream 2 pipeline? Natural gas prices have reached the equivalent of US$50/mcf in some places in Europe due to supply shortages, low storage and Russia’s recent maneuvers.

CONCLUSION:

Pandemic fatigue is causing wider gyrations in crude prices. The good news is that the death rate is lower for the vaccinated and we are seeing surges in people lined up for initial or booster shots and crude prices rebound. Tightened restrictions and a rising death toll for the unvaxxed are scary days and the price of crude and the general stock market falter. There have been and will likely continue to be a large number of  400+ points up and down days occurring for the Dow Jones Industrials Index as market emotions react to the data each day.

WTI had a large move over the last week. From a low of US$66.12/b after the release of the EIA report last week to a high of US$73.00 as Omicron fears dissipated. The price as we write this piece is US$71.44/b up 32 cents on the day.

We remain concerned about the health and strength of the US and China economies (the largest two in the world). We still see prices having US$15-20/b of speculative value which should disappear as demand weakens once winter is over. Leveraged speculative longs in crude oil futures are vulnerable to nasty margin calls and this should add momentum to the recent downside pressure. In the next few weeks the price of crude should retreat below last week’s low of US$66.12/b towards US$62-65/b and then bounce around from there (like we have been seeing over the last week). Our target for WTI in Q2/22 once winter peak energy demand is over is US$48-54/b. This should set up an important low before our key signals should turn bullish again.

Energy Stock Market: The S&P/TSX Energy Index currently trades at 160, up eight points from last week as the price of crude recovered from the US$66/b price low of last week. The range last week for the Energy Index was 147-161, so we are near the top of that range currently. The level could reach 165 if the pandemic news is good but we see it breaching last week’s low of 147 during January. As crude prices retreat in the coming months we see downside for this Index to the 95-105 level during Q2/22, implying severe downside. Oil stocks are the most vulnerable (especially those that are now bullish and are unhedged) as are any energy companies in the sector with over-leveraged balance sheets.

On behalf of the team here at Schachter Energy Research Services Inc. we would like to wish you and your family the very best of the holiday season. Merry Christmas and have a very happy, healthy and successful 2022.

Please note that we will be returning to Mount Royal University (MRU) on October 22, 2022 for our ‘Catch the Energy’ Conference if pandemic rules allow. We will be discussing the protocols on attendance, food service, masking and QR code verification with MRU in Q1/22 and will move forward with the event after having cancelled it for the last two years. We look forward to adding more companies and focus the event on attendees having safe and maximum, face to face time with management. More on this in the New Year.

Our next quarterly webinar will be held on Thursday February 24th at 7PM MT. Our first report of 2022 will be our Interim Report which will be released on Thursday January 13th.

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