This 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 29 energy and energy service companies with regular updates. He holds quarterly subscriber webinars (next one Thursday May 28th) and provides Action BUY and SELL Alerts for paid subscribers. Learn more and subscribe. 

EIA Weekly Data: Wednesday’s (May 6th) EIA data was mixed. Commercial stocks increased by 4.6Mb (versus a forecast of 7.0Mb) with the difference due to a rise in exports of 244Kb/d to 3.55Mb/d, and was responsible for 1.7Mb of the forecast miss. Overall stocks rose a whopping 19.6Mb on the week with the strategic reserve (SPR) taking in 1.7Mb. The  largest increase was in distillates which rose 9.5Mb. One bright spot was Gasoline inventories which fell 3.2Mb on the week as consumption lifted strongly. Refinery runs rose to 70.5% from  69.6%. US production of crude fell 200Kb/d to 11.9Mb/d and is now down 1.2Mb/d from the peak in mid-March at 13.1Mb/d. Production cutbacks keep on being announced by energy companies as storage fills up with the biggest declines in production in the Bakken and the Permian basins. By summer US production is likely to be under 11.0Mb/d as the high decline shale basins see rapid production declines (voluntary and involuntary). Cushing saw a rise in storage of 2.0Mb to 65.4Mb and may have less than a month left until full (effective capacity 76-77Mb).

On the positive side this week’s finished motor gasoline demand lifted by 14% to 6.67Mb/d as more US States reopened and people began increased movement. Offsetting this was a fall in jet fuel demand of 36% to 515Kb/d from 800Kb/d during the week before. In addition propane usage fell 37% to 826Kb/d from 1.3Mb/d which led to an overall decline in total product supplied of 3% or down 409Kb/d to 15.25Mb/d.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 57 rigs (prior week down 64 rigs) to 408 rigs and down 59% from 990 rigs working a year ago. The Permian felt the largest basin loss with a rig loss of 27 rigs (last week down 37 rigs) or down by 52 from a year earlier level of 459 rigs. The US oil rig count fell by 53 rigs to 325 rigs and down 60% from 807 rigs last year. We expect the US rig count to fall even further than our prior forecast of 400 rigs, with a new lower target of 350 rigs by the end of May. Canada had a rise of one rig as spring break up is over, and the count now is at 27 rigs working but down 56% from 61 a year ago. It is likely that 700Kb/d has been shut in already in Canada during Q2/20 and maybe a total of 1.2-1.6Mb/d may be shut in before the end of Q3/20.

Conclusion: WTI as we write this is at US$23.44/b for the June contract, down US$1.12/b on the day due to the weak EIA data and concern about the shortage of storage developing world-wide.  The bounce in crude prices over the last week won’t last as it is clear that there is inadequate storage and more oil needs to be shut-in The focus on the week is Friday’s jobs report with forecasts ranging from 20-24M jobs lost in April in the US and between 3.5-4.8M in Canada. The higher the number the more negative the markets will take the data.

With storage just weeks away from being full we expect more production to be shut in mostly involuntarily. To show how everyone is searching for more places to store oil, Enbridge has agreed to open an old oil pipeline between Saskatchewan and Manitoba to temporarily store 990Kb starting in June. Another company Total Energy Services has found interest in using its frack fluids tanks as temporary storage. Our target is for crude to fall below US$10/b before reduced supply and reduced demand balance out in Q3/20.The S&P/TSX Energy Index has fallen over the last week by 5% to 72 from 76 as Q1/20 results have started to come out and the poor results, write-downs and more dividend cuts (Suncor) weigh on the sector. There is continuing hope that the Canadian government will do something material to help the industry but so far the support is insufficient to stabilize the sector. We are pessimistic that it will be too little and too late for this leftist environmental focused minority government which wants to get its legislation supported by the NDP and Greens, rather than the Conservatives.

The short covering rally of the last few weeks took the S&P Energy Bullish Percent Index from 0% on March 9^th to 100% last week and has dropped off over the last few days to 96%. In lengthy bull markets this would be a SELL signal but in this instance we see this as a near term overbought indicator. We recommend investors hold off additional buying until we see a meaningful correction. We expect to see the energy sector correct significantly in the coming weeks and that this Index will fall again below 10%, providing the next low risk BUY signal. For the S&P/TSX this means a decline to the 32-36 level.^.

The longer the delay in getting adequate testing kits so that the economy can be reopened, the lower the markets may go as getting back to a new normal requires confidence of citizens. Over the last week the Dow Jones Industrials have fallen nearly 1,000 points and our target for the Index is for it to plunge below 18,000 (now 23,858) and the TSX to below 9,000 (now 14,843 – down 2% over the last week).  Both Canada and the US States want to start extensive testing and tracing and need significant numbers of test kits which are not yet available. The near term plunge could be even uglier and more painful than the one from mid-February to mid-March especially if we see a rise in Covid-19 cases and deaths as some of the reopenings were too fast.

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