Economic Outlook

Schachter’s Eye on Energy – July 28th

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 (SER) newsletter covering the general energy market and 30 energy, energy service and pipeline & infrastructure companies with regular updates. We hold quarterly subscriber webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more

EIA Weekly Data: The EIA data on Wednesday July 28th was supportive of crude oil prices as  Commercial Crude Inventories fell 4.1Mb (forecast was for a decline of 2.9Mb). The main reason for the decline was that Net Imports fell by 616Kb/d, or by 4.3Mb on the week. Had there been a flat Net Import number then Commercial Crude Inventories would have been unchanged. Refinery Utilization fell 0.3% to 91.1% last week (last year was 79.5% and in 2019 was 93.0%). Gasoline Inventories fell 2.3Mb and Distillate Fuel Inventories fell by 3.1Mb.

US Crude Production declined last week by 200Kb/d to 11.2Mb. We expect this was due to some facility problem and will be reversed in the coming weeks.  Over the coming months we see US crude production continuing to lift and getting close to the 12.0Mb/d level as the rig count continues to rise and companies are increasing field activity with higher cash flows. Private energy companies are the most focused on growth. We expect the majority of public and private energy companies to indicate a go-forward strategy of increased drilling activity with production growth in 2H/21 and much more growth in 2022 than in their prior forecasts.

Total Product Demand rose by 542Kb/d to 21.1Mb/d. However, demand is slightly below late July 2019 when consumption was 21.3Mb/d. Gasoline Demand rose a modest 29Kb/d to 9.33Mb/d (9.56Mb/d consumed in late July 2019). Jet Fuel Consumption rose 248Kb/d to 1.65Mb/d (below the pre-pandemic level of 1.89Mb/d in late July 2019). Cushing Inventories fell last week by 1.3Mb to 35.4Mb compared to 51.4Mb last year.

Baker Hughes Rig Data: The data for the week ending July 23rd showed the US rig count with a rise of seven rigs to 491 rigs (up by five rigs last week). Of the 491 US rigs active, 387 were drilling for oil and 104 were focused on natural gas activity. This overall rig count is up 96% from 251 rigs working a year ago. The US oil rig count is up 114% from 181 rigs last year. The natural gas rig count is up a more modest 53% from last year’s 68 rigs. The Permian rig count rose by four last week to 242 rigs or up 92% from last year’s 126 rigs.

Canada had a modest one rig decrease last week (up by 13 rigs in the prior week) to 149 rigs. Canadian activity is now up 3.5x from the low of 42 rigs last year. The one rig decline  was an oil rig. There were 93 oil rigs working, up from just 10 last year. There are 55 rigs working on natural gas projects now, up from 32 last year.

The material increase in rig activity in both the US and Canada over the last year should continue to translate into rising liquids and gas production.


The recent OPEC agreement resolved their quota and production levels standoff for now. The agreement provided for a rise of 400Kb/d each month from August to the end of the year and would add 2.0Mb/d before year-end. The big concession was to raise quotas for the UAE (by 332Kb/d to 3.5Mb/d) and Russia and the Saudis (by 500Kb/d to 11.5Mb/d each). We do not believe that the chaos in OPEC is over. Cheating by OPEC members desperately needing revenues (like Iraq), may see an inventory build starting this fall. The UAE agreed to the deal for now but still wants to lift their production to 4.0Mb/d as they have invested heavily to increase their productive capacity.

Bearish pressure on crude prices:

  1. The Delta Covid variant is spreading faster around the world and more countries are facing renewed lockdowns as this new variant takes hold and becomes the dominant version. Those not vaccinated are now the main patients in hospitals and some US States are now maxxed out on ICU beds and ventilators once again. Countries such as Argentina, Bangladesh, China, Indonesia, Iran, Japan, Malaysia, Mexico, South Korea, Thailand and Vietnam are seeing rising caseloads and are tightening movement restrictions and putting in curfews. The rate of vaccination in many of these countries is very low and plans to increase vaccination rate are not occurring. Death counts are now up to 4.17M worldwide and are at over 611K in the US. Brazil has the second highest death count at 551K followed by India at a reported 421K (this may be a low number as reported by the government – there is speculation that this number could be over 2 million.
  2. Iran is working to return to the 2015 UN nuclear deal and an accord is likely to be completed in August under the auspices of its newly elected hawkish President. Iran is cash strapped and their economy is imploding, facing rapidly rising inflation and shortages of food and medicine. It needs a deal if they are going to afford necessary imports. They have started to ship crude to China from their new export terminal at Jask in the Gulf of Oman. They should be able to lift production to 4.0Mb/d from 2.47Mb/d produced in June 2021 if a deal is concluded in the coming weeks.

Bullish pressure on crude prices:

  1. Rising vaccination levels of the adult US population toward herd immunity level has lifted summer travel both by air and land. The US now has 49.2% of American completely vaccinated. Worldwide crude demand is rising by 1.5-2.0Mb/d during the summer travel months. This demand increase should last into early September and then we should see a seasonal slowdown of 1.5-2.0Mb/d of consumption and an inventory build to meet winter peak demand.
  2. Weather impacts (hurricane season has started) may necessitate shutting in some of the offshore Gulf of Mexico production.
  3. Extreme heat waves, crippling droughts and shortage of electricity for air conditioning across the US and Canada is aiding consumption of natural gas. It is a big beneficiary of this increase in electricity demand as hydro has in many cases, low water levels. NYMEX natural gas prices are now at US$4.05/mcf. AECO prices are at C$4.00/mcf. These are awesome prices for this time of year.


Between official OPEC+ increases, and some OPEC cheating, US production growth and Iran’s addition of 1Mb/d+ (once a nuclear deal is completed and sanctions removed), the additional product will be in excess of demand and will build global inventories starting this fall. This would endanger the OPEC bullish scenario for crude prices of over US$80/b before year-end.

WTI crude oil prices bounced today by $0.22 to US$71.87/b on the EIA report of today. In the coming weeks after the summer driving season ends we see the crude price decline commencing again. Once we see a close below the intraday low of last Monday at US$65.01/b the next plunge should take WTI down to the US$60/b level and then it should again churn for a while at that level. The price of crude remains above the pre-pandemic price of early 2020, yet demand is 3-4Mb/d less worldwide and OPEC is ramping up production and still has lots of spare capacity. Lower crude oil prices will follow the negative economic impacts of the current rising fourth pandemic wave. If worldwide economic activity stumbles and vaccination hesitancy continues, then the more pessimistic case for demand and crude oil prices becomes more likely.

Energy Stock Market: The S&P/TSX Energy Index trades currently at 123 (down three points from last week’s issue and down 22 points from 145 in mid-June, or down so far by over 15%). The level to watch now is the intraday low of last Monday at 119.02. A close below this level would set up the next support level of the 111 area. A bust of US$60/b for WTI would likely mean a decline in the Energy Index to the 100 level or lower or down by an additional 19%. This is likely to occur in September. Just falling to the 100 level means a nasty decline of over 30% from the mid-June high. Much lower levels are possible later this fall.

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It’s official: The Covid recession lasted just two months, the shortest in U.S. history

The Covid-19 recession is in the books as one of the deepest — but also the shortest — in U.S. history, the official documenter of economic cycles said Monday.

According to the National Bureau of Economic Research, the contraction lasted just two months, from February 2020 to the following April.

Though the drop featured a staggering 31.4% GDP plunge in the second quarter of the pandemic-scarred year, it also saw a massive snapback the following period, with previously unheard of policy stimulus boosting output by 33.4%.

“In determining that a trough occurred in April 2020, the committee did not conclude that the economy has returned to operating at normal capacity,” the NBER said in a news release. “The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession associated with the February 2020 peak. The basis for this decision was the length and strength of the recovery to date.”

The pandemic recession was unique in a number of ways, not least how fast the contraction happened and how ferocious the recovery was.

Conventionally, a recession is defined as two consecutive quarters of negative GDP growth, which this recession met after the first quarter in 2020 fell 5%. But the NBER noted that in normal times, a recession lasts “more than a few months.”…read more.

Airlines race to train pilots as travel demand roars back

Some of airlines’ most in-demand flights this summer don’t even leave the ground.

Flight simulators from Atlanta to Dallas to Miami and elsewhere are humming as airlines scramble to get hundreds of pilots trained to meet a surge in bookings that kicked off this spring as vaccinations rolled out and Covid-era restrictions eased.

Domestic leisure travel has recovered to 2019 levels, while business travel is also rebounding, airline executives said this month.
Airlines have received $54 billion in federal aid since March 2020 in exchange for not laying off workers. But voluntary departures, changed fleets and the rapid rise in travel demand have created a need for pilot training that industry experts say is without parallel. Reduced flight schedules also meant pilots weren’t getting in their minimum takeoffs and landings required to maintain their flying status. Training pilots on new aircraft can take weeks while annual retraining can take a few days.

“What is unique about this experience is the drop-off in business [early in the pandemic] was an existential threat to the business,” said Bryan Terry, managing director and global aviation leader at Deloitte. “Then what came, the unexpected part, the return to travel came faster than expected.”

That “puts a very tight timeline” on the pilot training, he added.

Airline executives urged pilots and other employees to take early retirement and leaves of absence at reduced pay to cut expenses. They parked hundreds of jets, retiring some planes altogether…read more.

Consumer confidence in Canada hits record on vaccine reopenings

Canadians are entering the second half of the year more confident about their economic prospects than they’ve ever been.

Consumer sentiment marched higher to a new record last week, according to polling by Nanos Research Group for Bloomberg News, driven by optimism about the outlook for the economy and growing job security.

The numbers will stoke confidence among economists and policy makers that households will be in a spending mood as pandemic restrictions are lifted, particularly given Canadians are supported by a massive stock of savings accumulated during the crisis. After a rough patch in April and May during a spring surge of COVID-19 cases, the Canadian economy is seen rebounding sharply in coming months to pre-pandemic levels as consumers, and potentially businesses, ramp up spending.

The Bloomberg Nanos Canadian Confidence Index jumped to 66.4 last week, the highest reading since surveys began in 2008. The gauge has historically averaged around 56 and had never broken the 63 barrier until recently.

Separately, the Bank of Canada will release its latest quarterly survey of company managers at 10:30 a.m. Ottawa time, and economists anticipate business sentiment too has risen to near records.

Every week, Nanos Research surveys 250 Canadians for their views on personal finances, job security and their outlook for both the economy and real estate prices. The confidence index represents a rolling four-week average of about 1,000 responses…read more.

During COVID-19, most Americans got richer – especially the rich

Households added $13.5 trillion in wealth – the biggest increase in three decades.

The coronavirus pandemic plunged Americans into recession. Instead of emerging poorer, many came out ahead.

U.S. households added $13.5 trillion in wealth last year, according to the Federal Reserve, the biggest increase in records going back three decades. Many Americans of all stripes paid off credit-card debt, saved more and refinanced into cheaper mortgages. That challenged the conventions of previous economic downturns. In 2008, for example, U.S. households lost $8 trillion.

In some ways, the singularity of the Covid-19 recession—and the recovery—shouldn’t surprise. The scope of the pandemic was unprecedented in the modern era. So was the government’s financial response. The U. S. borrowed lent and spent trillions of dollars to keep the economy from plunging further than it did.

These actions were at the center of the unusual nature of both the recession and the recovery. They have also powered much of the stock market’s unexpected boom. Rock-bottom interest rates lured more investors into stocks; workers stuck at home tried their hand at trading and tech giants gained even more ground during the shutdown.

The stock market, in turn, became the driver of the household wealth gain, accounting for nearly half the total increase.

That has produced a lopsided distribution of the wealth gains, since well-off households are more likely to own stocks. More than 70% of the increase in household wealth went to the top 20% of income earners. About a third went to the top 1%. Click here for full article.

Is Inflation “Transitory”? Here’s Your Simple Test


The Federal Reserve has been bleating that inflation is “transitory”–but what about the real world that we live in, as opposed to the abstract funhouse of rigged statistics? Here’s a simple test to help you decide if inflation is “transitory” in the real world.

Let’s start with some simple stipulations: price is price, there are no tricks like hedonics or substitution. Nobody cares if the truck stereo is better than it was 40 years ago, the price of the truck is the price we pay today, and that’s all that matters.

(Funny, the funhouse statistical adjustments never consider that appliances that used to last 30 years now break down and are junked after 3 years–if we adjusted for that, the $500 washer would be tagged at $5,000 today because it has lost 90% of its durability over the past 30 years.)

Second, inflation must be weighted to “big ticket” nondiscretionary items. The funhouse statistical trickery counts a $10 drop in the price of a TV (which you buy every few years at best) as equal to a $100 rise in childcare, which you pay monthly. No, no, no: a 10% rise in rent, healthcare insurance and childcare is $400 a month or roughly $5,000 a year. A 10% decline in a TV you buy every three years is $50. Even a 50% drop in the price of a TV ($250) is $83 per year–absolutely trivial, absolutely meaningless compared to $5,000 in higher big-ticket expenses.

You can forego the new TV but not the rent, childcare or healthcare. That’s the difference between “big ticket” nondiscretionary and discretionary (meals out, 3rd TV, etc.).

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