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. 

EIA Weekly Data: The EIA data on Wednesday December 16th was mixed. Commercial inventories fell 3.1Mb on the week to 500.1Mb but this was all due to US exports recovering by 793Kb/d or by 5.6Mb on the week. With no change in exports there would have been a gain in inventories again this week. Crude inventories are now 53.3Mb or 11.9% above last year’s level of 446.8Mb. Gasoline inventories rose by 1.0Mb while distillates rose by 0.2Mb. US domestic crude production fell 100Kb/d last week to 11.0Mb/d and is down 1.8Mb/d from last year’s 12.8Mb/d.

Consumption rose last week. Total usage rose by 801Kb/d to 19.3Mb/d with gasoline consumption rising by 375Kb/d. Post the Thanksgiving holiday period Jet Fuel Consumption fell by 160Kb/d to 1.15Mb/d. Total Demand now is 2.48Mb or 11.3% below last year’s level of 21.8Mb/d.  Gasoline Demand is down 15.3% from the 9.4Mb/d consumed last year and Jet Fuel is 44.1% below demand of 2.06Mb/d last year.

Refinery Runs fell 0.8 points to 79.1% from 79.9% in the prior week and down from 90.6% last year. Total Stocks are now 93.0Mb or 7.3% above the 1.27Bb in storage last year. Cushing Oil Inventories rose a modest 0.2Mb to 58.4Mb and are higher compared to 40.2Mb last year at this time. If Cushing inventories exceed 60Mb then there will be concern about excess inventories in the domestic market. In early 2021, this could occur resulting in significant crude price pressure.

OPEC Monthly Report (December 14, 2020): OPEC’s production level increased by 707Kb/d in November to 25.1Mb/d. The largest increase came from Libya which raised its production by 656Kb/d to 1.11Mb/d. They are now at 1.3Mb/d and should be at 1.6Mb/d by early 2021. In addition Iran raised production by 39Kb/d to 1.99Mb/d and Venezuela by 25Kb/d to 407Kb/d. Both plan to add further production for China and India as they see the incoming Biden administration not being as tough on sanctions as Trump’s. With the announcement that OPEC will add 500Kb/d in early January 2021 there is likely to be a glut in Q1/21. If OPEC raises production by 500Kb/d in each of the first few months of 2021, a glut will become a noticeable reality. OPEC lowered demand in Q4/20 by 200Kb/d to 93.47Mb/d, they lowered demand in Q1/21 by 1.0Mb/d to 93.97Mb/d and lowered demand in Q2/21 by 63Kb/d to 95.68Mb/d. Only in Q4/21 do they see demand rising by 200Kb/d from their prior forecast. In Q4/21 they see demand at 97.29Mb/d. Only in 2022 do they see demand returning to over 100Mb/d as last seen in late 2019. OPEC now sees OECD total inventories 262Mb above late 2019 levels (4.74Bb versus 4.48Bb) with 69 days of in the America’s inventories versus a normal 60 days, Europe is glutted with 90 days of inventories versus a normal rate of 67 days,  and Asia/Pacific at 58 days versus a normal 52 days. This last area is the positive for energy.

Baker Hughes Rig Data: Last week Friday, the Baker Hughes Rig Survey showed an increase in the US rig count. It rose by 15 (up three rigs in the prior week) to 338 rigs working, but remains down 58% from 799 rigs working a year ago. The US oil rig count rose by 12 (up five rigs last week) to 258 rigs but is down 61% from 667 rigs working last year. The Permian saw an increase of four rigs to 168 rigs working but remains 58% below last year’s level of 400 rigs working. Over US$45/b for WTI seems to be a price point where producers see economic returns from drilling. Yet, so far there has been no corresponding increase in US domestic production.

Canada saw a big increase in the rig count last week, up nine to 111 rigs working. The rig increase now has activity down only 27% from a year ago when 153 rigs were working. The rig count for oil is now at 52 rigs (up 12 last week) but down 46% from 96 rigs working last year. The natural gas rig count fell by three last week to 59 rigs working but remains up by 4% for the year versus the 57 rigs working last year.

Natural gas prices have recovered significantly as colder weather hits across North America (with the NorthEast particularly hit hard). AECO is now at $2.74/mcf up from $2.10/mcf last week. NYMEX has recovered to US$2.66/mcf from US$2.49/mcf last week. We expect much higher prices over the coming winter months.

Conclusion: We are now back to crude price levels seen in March 2020 just before the pandemic caused lockdowns of worldwide economies. WTI today is at US$47.45/b down 17 cents on the day.

Positive issues for higher crude prices:

• Vaccine deliveries are occurring now in Europe, Canada and the US and should start around the world later this month once approved by the local drug authorities. Anyone who wants one in Canada or the US should have it by Q3/21. The second vaccine from Moderna should see approval shortly and distribution before month end. This one does not have the same cold storage requirements and is likely to go to the northern Territories in Canada, First Nations and smaller communities. A similar approach should be taken around the world.
• While OPEC has lowered the near term demand forecast for crude oil they see demand rising in 2021 to 95.89Mb/d from 89.99Mb/d in 2020. The forecast for Q4/20 is for consumption of 93.47Mb/d and by Q4/21 is forecast at 97.29Mb/d.
• Asian demand remains the strongest in the world and is now above last year’s consumption levels for both China (up 0.6% to 13.3Mb/d) and India (up 2.7% to 4.58Mb/d).
• A war premium is now included in crude prices due to two attacks on oil facilities in the Middle East. Two small Iraqi oil wells were attacked by terrorists in Northern Iraq. In the second and more consequential attack Houthi rebels sent an explosive laden boat that assaulted a Singaporean flagged tanker. The ship may have lost some crude volumes but no one aboard was hurt. The Yemen civil war continues to flow over the border and this is the fourth incident in a month.

Negatives issues for lower crude prices:

• OPEC’s agreement earlier this month was a disaster as instead of delaying any production increases to Q3/21, they agreed to a production rise in January of 500Kb/d. They also plan to review production quotas monthly (next meeting January 4th) with plans to increase production by the same amount each month. Of the January increase the Saudis took 125,000 b/d and the Russians 125,000 b/d, leaving a miniscule amount for the remaining members. Cheating is guaranteed to continue as many of the smaller OPEC players are desperate for funds to run their economies.
• The demand for energy may wane in the coming months as the pandemic spread causes more shutdowns of economies. Lockdowns and early curfews are occurring across the US, Canada and most of Europe with tightened restrictions for the Christmas holiday season. The Netherlands today started a five week lockdown. Hong Kong and South Korea are also tightening social distancing rules and curbs as they see increased caseloads and deaths. There are now 16.8M cases (up from 15.3M cases last week) in the US with 305K deaths (288K last week). Yesterday showed another death rate over 3,000 (3,019 deaths and the CDC is warning that the death rate by early 2021 could be over 350K). Worldwide the caseload is 73.6M and deaths near 1.64M.

World-wide crude and product inventories are now 475Mb over the five year average. If OPEC agrees to add 500Kb/d in February then crude should breach US$40/b and fall to the US$32-36/b area during Q1/21. The next downside near-term support level is US$43.92/b. One will need to keep an eye on crude and product inventory levels to determine how low crude oil prices could fall during the coming months.

Energy and energy service stocks and now very overbought. We see significant downside risk but that the plunge may not occur now until we are into 2021. The most vulnerable companies 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. A breach of US$40/b will hit these stocks hard.

Continue to hold cash and remain patient for the next low risk BUY window which should occur during Q1/21. Traders may want to harvest some of the great gains since the BUY signal triggered in March. OPEC+ production is too high and is rising when it should have been held flat with no cheating.  

Energy Stock Market: The S&P/TSX Energy Index now trades at 93.32, virtually unchanged from last week. The S&P/TSX Energy Index started the year at 146 so it is down 36% year-to-date. Last week the high for the Index was 98.49 and we may see a bounce back to this level or higher into year-end or early 2021 under our revised thesis (as the market facts change then we have and will continue to amend our views). Tax loss selling is not occurring this year as was expected. We now see the decline occurring in Q1/21. We discuss this in our upcoming December SER issue out later this week and go over numerous examples (for the Index and for individual stocks). The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low in late October) during Q1/21. A breach of 84.95 should start this downward trend. In our December SER we start to include monthly articles from a guest contributor (Professional Engineer and oil industry veteran, Ron Barmby) which will cover climate change issues that affect the energy sector. We hope you learn much from this new product offering.

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