This week Josef talks about how the pickup in Covid cases in the US is weakening US demand for crude oil and products and that the S & P/TSX Energy Index is already down 20% in the last three weeks and has significantly more downside.

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 27 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 July 1st’s EIA data was mostly bearish and included a large accounting adjustment. The headline number of commercial crude stocks showed a bullish  number of a decline of 7.2Mb (forecast of a decline of 700Kb). This was due to net imports falling 506Kb/d or 3.5Mb on the week and a rare accounting adjustment of -577Kb/d or 4.0Mb on  the week. If not for these items there would have been a rise on the week in crude storage. Motor Gasoline inventories rose by 1.2Mb on the week, The Strategic Petroleum Reserve added 1.7Mb and now stands at 655.4Mb or nearly 38 days of current demand (30 days or sufficient). Overall stocks rose this week by 2.8Mb (compared to a rise of 5.9Mb last week). Total stocks are now up 159.9Mb or 8.2% over last year. Refinery runs rose 0.9% to 75.5% from 74.6% in the prior week. Cushing saw a decline of 200Kb to 45.6Mb (forecast 990K decline) as refinery run activity consumed more crude. US production of crude was flat last week at 11.0Mb/d.

The most bearish part of the report was that total product supplied fell 5.4% or 995Kb/d on the week to 17.35Mb/d (prior week 18.35Mb/d of consumption) and is down 16% from last year’s level of 20.76Mb/d. Finished motor gasoline demand fell by 47Kb/d to 8.56Mb/d, and is  down 10% from 9.49Mb/d last year. Jet fuel demand reversed from prior weeks increases and fell 217Kb/d to 588Kb/d.  It is  down 1.27Mb/d lower or 60% less than last year’s 1.86Mb/d as the reticence to fly continues.

The rise in Covid-19 cases to record levels and the need to close down access to beaches and restaurants in high case areas for the fourth of July long weekend is dampening demand. There are now nearly 130,000 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. There is now a record high of over 40,000 new cases daily.  At a Senate hearing on Tuesday June 30th Dr. Fauci mentioned in the Q&A that the US could see over 100,000 new daily coronavirus cases and over 170,000 fatalities in the coming months; if greater testing, face mask use and distancing did not occur.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 1 rig (prior week down 13 rigs) to 265 rigs and down 73% from 967 rigs working a year ago. The Permian had a rig loss of 1 rig (last week down 5 rigs) or down by 70% from a year earlier level of 441 rigs. The US oil rig count fell by 1 to 188 rigs (down 10 rigs last week) and down 76% from 793 rigs working last year. Canada’s rig count fell 4 rigs (down by 4 rigs last week) to 13 rigs working and is down 90% from 124 rigs working at this time last year. We are near the end of the plunge in drilling as we saw a one rig rise in activity in Texas last week and the number of frac crews bottomed at 45 crews in May and is up now to 78 crews. Many US companies have announced that they will restart production this month given current economic prices. With a current world wide crude glut and demand waning due to the ongoing virus, any production returns at this time would be very detrimental to the hoped for industry recovery and high crude prices.

Conclusion: As we write this, WTI is at US$39.11/b for the August contract (down $0.16/b on the day) after the details of the report came out. Initially, crude oil prices rose on the headline crude inventory decline number, but then reversed. The Dow Jones Industrials which was initially up 200 points is now down 29 points to 25,784. A decline below 24,800 will start the next serious plunge in the stock markets. We expect to see lower lows (below March) before this rout is over. For crude we see a decline below US$30/b as the line in the sand for crude oil bulls (US$34.36/b next breakdown level). The breach of US$30/b should start the next phase of worry for energy bulls and restart aggressive selling of energy and energy service stocks. Much lower levels are expected once we get into the fall and the wage support programs by the governments end. Layoffs should pick up and we expect to see more corporate bankruptcies. In addition, this fall will likely be the window for the second Covid-19 wave. The energy and energy service companies with the most downside are those with high debt loads, high operating costs, declining production, have current balance sheet debt maturities of some materiality over 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 Energy Bullish Percent Index peaked at 100% in early June. This is the only such reading ever. It has fallen over the last three plus weeks to 34.6% as energy stocks corrected. Last week this index was at 69.2% so it has had a material decline following the falling energy stock prices. The Energy Bullish Percent Index is likely in this situation to fall to below 10%, providing the next low risk BUY signal. The S&P/TSX Energy Index closed June 30th at 76.45 and is down over 20% from the early June high of 96.07. The next downside target for this index is the 50 level. For the S&P/TSX we see a decline to the 32-36 level at the next important low, or a two for one sale over the coming months. Downside for the Dow Jones Industrials in the near term is 22,800 with much lower levels thereafter in Q3/Q4, 2020.

We expect the market may see lower crude price lows below US$20/b before the risk tolerant speculative ownership of crude oil futures reverses. Last week speculative positions rose to a net long of 569Mb up from 554Mb the week before. Commercials are adding to their bearish positions and are now short 608Mb up from 590Mb the week before. Speculators are usually wrong and we expect them to get smacked hard once the forthcoming stock market decline has massive intermarket margin calls. At the next bottom in crude prices it is possible that commercials will move to net long position.

Our July Interim Report will come out next week on July 9th. We go over the why and how deep this stock market plunge is likely to go and what to look for at the potential end of this stock market rout. As we get closer to the bottom we will profile our Table Pounding best energy and energy service BUY ideas to consider owning by subscribers. So far the key black swan event is the pick up in Covid-19 cases in the US (Florida, Texas and Arizona facing the largest increases). The next worry for the market will be Q2/20 financial results which will start in about two weeks. The bad comparables and the outlook guidance will be of particular interest.

We will update our Insider Trading Report in this issue (last run in April).We are working on a new international investment idea and may launch coverage of this exciting growth story in our July 23rd SER Monthly.

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