This week Josef talks about how energy demand continues to weaken in the US and we can expect Crude prices to roll over in the near term and how energy and energy stocks are overvalued based on current circumstances.

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 newsletter covering the general energy market and 28 energy and energy service companies with regular updates. He holds quarterly subscriber webinars and provides Action BUY and SELL Alerts for paid subscribers. Learn more and subscribe. 

EIA Weekly Data: Wednesday August 5th’s EIA data was mixed with some positive and some negative data. The headline positive number was that of commercial crude stocks which showed a bullish decline of 7.4Mb (forecast of a decline of 3.0Mb). Motor Gasoline inventories rose by 0.4Mb while Distillates fuels rose by 1.6Mb on the week. Overall petroleum stocks fell on the week by 2.1Mb (compared to a decline of 6.5Mb last week). Total stocks are now up 171.6Mb or 8.9% over last year. Refinery runs rose 0.1% to 79.6% from 79.5% in the prior week as summer demand kept refineries busy. Cushing saw a rise of 600Kb to 45.6Mb to 52.0Mb. US production of crude fell 100Kb/d to 11.0Mb/d and is down 1.3Mb/d from last year.

The most bearish part of the report was that total product supplied fell 6% on the week or 1.18Mb/d, to 17.9Mb/d (prior week 19.1Mb/d of consumption) and is down 17% from last year’s level of 21.48Mb/d. Finished Motor Gasoline demand fell by 2% or 193Kb/d, to 8.62Mb/d, and is  down 11% from 9.65Mb/d last year. Jet Fuel demand fell 13Kb/d to 1.01Mb/d.  It is down 801Kb/d lower or 44% less than last year’s 1.81Mb/d as the reticence to fly continues. The pick up in areas requiring stay-at-home procedures and lack of comfort with travel have lowered consumption.

The rise in Covid-19 cases to record levels and the need to close down access to beaches and restaurants in high case areas has lowered consumption. There are now nearly 157,000 deaths in the US from this pandemic. With the US having 4% of the world’s population and 25% of the fatalities this is a deplorable outcome. The next major issue is the reopening of schools and if they will be in person or from at home. Chicago today announced that the first semester would be all at home. Chicago has the third largest school system in the US.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed no change  in the US rig count with 251 rigs working but down 73% from 942 rigs working a year ago. A bottom in activity is now occurring. The Permian had a rig loss of 2 rigs (last week a rise of 2 rigs) but is still down by 72% from a year earlier level of 442 rigs. The US oil rig count fell by 1 to 180 rigs and is down 77% from 770 rigs working last year. Canada’s rig count rose by 3 rigs (last week 10 rigs were added) to 45 rigs working but is still down 67% from 137 rigs working at this time last year. Canada’s improvement is due to the pick up in the liquids rich Montney and Duvernay activity.  With a world-wide crude glut and demand weak due to the ongoing virus, the 2.0Mb/d addition by OPEC starting August 1st may prove detrimental to the industry recovery.

Conclusion: As we write this, WTI is at US$42.09/b for the August contract up modestly on the day after the commercial stock decline information was seen as a positive. The current enthusiasm should wane in the coming days as the weekly US jobs report comes out tomorrow. On Friday we get the July Non-Farm Payrolls report which could also be quite negative. For crude we see a decline below US$38.72/b (last week’s low) as confirming the top. Later when we see a breach of US$34.36/b the sector will fall under heavy pressure. Energy stocks are ahead of the fundamentals and have significant downside risk. The most vulnerable stocks are energy and energy service companies with high debt loads, high operating costs, declining production, current balance sheet debt maturities of some materiality within the next 12 months and those that produce heavier crude barrels. Hold cash and remain patient for the next low risk BUY window. If over-invested hopefully you took appropriate defensive action from our previous warnings.  

The S&P/TSX Energy Index today is at 79.56 and is down over 17% from the early June high of 96.07 when we recommended taking profits in non-taxable accounts from the great upside move from mid-March. We had signalled the Action Alert BUY on March 13th and the stocks since the recommendation have done superbly. We now see significant downside risk again. A breach of 71.76 would set up the next downside target for this index at the 50 level. Further lows are likely in Q4/20 as tax loss selling could be very nasty this year.

We are holding our quarterly webinar for subscribers next week Thursday August 13th at 7PM MT for 90 minutes. Topics will include:

• Overview of the general stock market and why we remain cautious on crude prices in the near term.
• Results for Q2/20 from energy and energy service companies that have reported – some are decent and some have disappointed. We do not cover individual company information in the ‘Eye on Energy’ complimentary product so if you want this company analysis you will need to become a subscriber.
• OPEC cutbacks – have they managed to balance supply and demand.
• If Joe Biden wins the Presidency – what does that mean for the Energy sector in Canada and the US.
• We will have two Q&A sessions for webinar attendees to ask questions about the topics covered as well as issues of their interest.
• For subscribers please send in your questions ASAP so we can prepare detailed responses.

If you would like to join this event please go to our subscriber page and become either a quarterly or annual subscriber to join this timely event.

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