Energy & Commodities

Investors are suddenly obsessed with ‘supercycles’

 

A surge in commodity prices has Wall Street banks gearing up for the arrival of what may be a new—an extended period during which demand drives prices well above their long-run trend. A major impetus is the massive stimulus spending by governments as they juice up their economies following pandemic lockdowns. The evidence includes surging copper and agricultural prices and oil back at pre-COVID-19 levels. One theory is that this could be just the start of a yearslong rally in appetite for raw materials across the board, but the reality is more complicated.

1. What is a supercycle?

A sustained spell of abnormally strong demand growth that producers struggle to match, sparking a rally in prices that can last years or in some cases a decade or more. For some analysts, the current rally is rekindling memories of the supercycle seen during China’s rise to economic heavyweight status beginning in the early 2000s. Commodities have experienced three other comparable cycles since the start of the 20th century. U.S. industrialization sparked the first in the early 1900s, global rearmament fueled another in the 1930s and the reindustrialization and reconstruction of Europe and Japan following the Second World War drove a third during the 1950s and 1960s.

2. What did the last one look like?

From around 2002, China entered a phase of roaring economic growth, fueled by a rollout of modern infrastructure and cities on an unprecedented scale. Suppliers struggled to fulfill surging demand for natural resources. In commodities, there’s often a time lag to get the product where it’s wanted since adding capacity, such as opening a new mine, doesn’t happen overnight. For more than a decade, materials including iron ore were in tight supply. Copper, priced below $2,000 a ton for much of the 1990s, broke $10,000 and oil jumped from $20 a barrel to $140.

3. Who says this is another supercycle?

Among the bulls are analysts at JPMorgan Chase & Co. and Goldman Sachs Group Inc. The commodities rally will be a story of a “roaring 20s” post-pandemic economic recovery as well as ultra-loose monetary and fiscal policies, according to JPMorgan. Commodities may also jump as an unintended consequence of the fight against climate change, which threatens to constrain oil supplies while boosting demand for metals needed to build renewable energy infrastructure and manufacture batteries and electric vehicles, it said. Those include cobalt and lithium. Furthermore, commodities are typically viewed as a hedge against inflation, which has become more of a concern among investors.Play Video

4. Why might this not be one?

Longer-term trends point to a cooling down for some materials. For example, the energy transition that heralds a bright new age for green metals such as copper would be built on the decline of oil. Even producers of iron ore, the biggest market of mined commodities, expect prices to weaken over time as Chinese demand starts to decline and new supply comes online. It’s an even bleaker outlook for coal, with producers looking to exit the market altogether as the world switches away from the heavy-polluting fuel. Iron ore, coal and oil were the chief beneficiaries of China’s industrial expansion. Those markets dwarf copper in scale.

5. What’s been happening with oil?

Prices collapsed in 2020, even turning negative at one point, but have recovered as demand rebounded more strongly than many had expected. Early in 2021, the Organization of the Petroleum Exporting Countries and its allies were holding back crude equivalent to about 10% of current global supply. Market fundamentals have shifted, especially in the U.S. with the emergence of shale oil. Haunting traditional producers is the prospect that a prolonged period of high prices would trigger a new flood of supply beyond OPEC’s control. Even so, some oil bulls aren’t ruling out the eventual return of prices above $100 a barrel.

6. Which other commodities are rising?

Copper was on a tear in early 2021 thanks to rapidly tightening physical markets as governments plow cash into electric-vehicle infrastructure and renewables. Goldman Sachs, BlackRock Inc., Citigroup Inc. and Bank of America Corp. saw the metal moving toward all-time highs. While agricultural commodities have their own particular dynamics, soybeans and corn have rallied to multiyear highs, driven by relentless buying from China as it rebuilds its hog herd following a devastating pig disease. Agricultural prices are more dependent on global economic and population growth, rather than the decarbonization trend underpinning excitement in metal

Schacter’s Eye on Energy – Feb. 24th

The Arctic Polar Vortex brought near century lows in temperatures last week to most of North America with frigid temperatures that  knocked out electricity grids. Texas was the hardest hit with water, heat, refineries and power out due to the freezing temperatures. It may take a few weeks to get remediation done now that the weather has warmed up and repairs are underway. The price of crude spiked to US$63/b (up one dollar from last week). The data for the next few weeks should see divergences from the norm as these issues take time to be resolved. While natural gas prices have backed off from the cold weather spikes, crude oil remains elevated due to speculative forces pushing up crude oil futures and options.  Some option positions into Q4/21 are positioned for WTI to exceed US$100/b. We see this enthusiasm as nuts. Has the pandemic gone away? Have we had everyone vaccinated who wants one of the vaccines? Has herd immunity arrived?  Are the mutations irrelevant? I do see consistent US$100/b for WTI in the ‘future’ but not until 2024 onward.

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 February 24th was mixed. Commercial Inventories rose by 1.3Mb on the week compared to a forecasted decline of 5.2Mb/d. The difference was due to demand falling by 1.98Mb/d (13.9Mb on the week) and exports falling by 1.55Mb/d offset by imports falling by 1.30Mb/d. Motor Gasoline Inventories were unchanged while Distillate Inventories fell 5.0Mb due to strong winter demand. Refinery Utilization fell 14.5 points to 68.6% from 83.1% as most of the Texas refinery industry was shut down. US Domestic Crude Production fell by 1.1Mb/d to 9.7Mb/d and is down 3.3Mb/d from last year’s 13.0Mb/d. This level is better than forecast as production has recovered faster than expected.

With many parts of the US shut down last week due to the extreme winter weather Total Product Consumption fell 1.98Mb/d to 18.7Mb/d, Finished Motor Gasoline Consumption fell by 1.2Mb/d to 7.2Mb/d and Jet Fuel consumption fell by 196Kb/d to 979Kb/d. Cushing Oil Inventories rose last week by 2.8Mb. Inventories at Cushing are now at 47.8Mb and are up from 39.1Mb a year ago.

Baker Hughes Rig Data: The data for the week ended February 19th showed the US rig count unchanged despite the freezing weather in Texas, and a decline of four rigs for the Canadian rig count. In the US there were 397 rigs working, but that remains down 50% from 791 rigs working a year ago. The US oil rig count fell by one rig offset by a  one rig increase for natural gas drilling. The Permian saw an increase of one rig to 204 rigs working and remains 50% below last year’s level of 409 rigs working. Canada saw a  decline of four rigs last week with 172 rigs working. This is 30% lower than the 244 rigs active last year. The rig count for oil fell by one rig to 100 rigs working but is down 41% from 169 rigs working last year. The natural gas rig count fell by three rigs to 72 rigs active and is down from 75 rigs working at this time last year. In a few weeks we head into break up season so the rig count will start to fall off sharply as the road bans come on.

Conclusion: WTI crude oil is up almost US$11/b from the start of February.  Of this rally US$8-9/b is due to the infusion of speculative money (from sources like the Robinhood and Reddit novice retail horde) who are buying futures and call options. These horde investors, a gang of over 14M retail investors, are trying to  squeeze the energy Commercials (refiners, petrochemical companies and energy companies etc.) shorts who are short 1.71Bb (the prior week 1.64Bb). Commercials are now net short 621Mb. Historically commercials are right in the end and speculative investors get burned. We see this outcome occurring again once winter is over and world demand for crude falls 2.0-2.5Mb/d.

We believe that there is US$14-16/b of downside risk for WTI as markets begin to reflect the demand situation post-winter, the recovery in US production and OPEC cheating and/or raising approved production levels. We see WTI crude breaching US$50/b in April and going lower thereafter. OPEC meets on March 4, 2021 to ease curbs and are likely to increase production materially to lower Brent and WTI crude prices and not negatively impact the economic recovery or give incentive to the US shale industry to increase production after the winter weather event is over.  Russia and Iraq are the most interested in seeing quota’s raised.

Technically the near-term support level for WTI crude is US$58.60/b. Energy and energy service stocks are very overbought and being chased by hot momentum money. We are clearly in the bear camp now. 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. Results for Q4/20 are now being released and are not strong enough to justify current stock price levels if crude retreats. The cold weather had lifted AECO natural gas to C$5.31/mcf last week but AECO today is down to $2.99/mcf. The NYMEX US price now at US$2.86/mcf is down from US$3.24/mcf  a week ago. The speculative players are not involved in natural gas so we see a major divergence in the price activity between the two commodities.

We now have a SELL signal in place since January 14, 2021. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of 14 stocks and the prices at which we think the ideas be harvested. We sent out a second sell signal on February 5th and added four additional ideas for harvesting. We ourselves have sold a large portion of our energy holdings for substantial profits. We sit in cash or defensive positions.  The next few months could see significant downside for the energy sector. The topping process is ongoing and some surprise events will prick this bubble as the GameStop, AMC, cannabis and other bubbles were busted this month.

Energy Stock Market: The S&P/TSX Energy Index now trades at 117 and is part of a lengthy and extended broadening topping process. While we had expected this bubble to burst already, market manias can extend even longer and with crazier valuations than rational expectations would forecast. The S&P/TSX Energy Index is expected to fall substantially in the coming months. A breach of 103.60 should initiate the sharp decline.

$100 Oil?

 

Oil prices could go as high as $100 a barrel next year on the back of “very easy monetary policy” and reflation trade, Amrita Sen, chief oil analyst at Energy Aspects, told Bloomberg in an interview.

“It’s a futures market, we always discount stuff that’s going to happen in the future, now. That’s why prices are rallying right now,” the analyst said on the Bloomberg Surveillance program.

“We’ve always called for $80 plus oil in 2022. Maybe that is $100 now given how much liquidity there is in the system. I wouldn’t rule that out,” Sen noted.

On Monday, Brent Crude prices hit $60 a barrel, rising above that threshold for the first time since the start of the COVID-19 pandemic early last year.

In terms of prompt fundamentals, Energy Aspects’ Sen thinks, like some other analysts, that the market has gotten ahead of itself, “because right now demand is still relatively weak.”

However, the second half of the year does look much, much healthier in terms of demand, the analyst added.

Like other analysts and Torbjörn Törnqvist, chief executive at one of the world’s largest independent oil traders, Gunvor, Sen also sees headwinds to price gains at oil above $60, as U.S. production is set to begin rising.

According to Energy Aspects, U.S. oil output will not go back to pre-COVID levels any time soon, if ever, because producers are more focused on shareholder returns right now.

Last week, Törnqvist told Bloomberg that oil prices were unlikely to soar much above the $60 per barrel mark, considering that this price level would incentivize a lot of oil supply, including from the United States.

“We are at price levels which will look increasingly attractive to producers, so we would expect to see some producer flows coming into the market, which should provide some resistance to prices,” ING strategists Warren Patterson and Wenyu Yao said on Tuesday.

“Looking at the WTI forward curve, while the curve is in backwardation, prices all the way through to the end of 2022 are above US$50/bbl,” they said.

 

Schachter Eye on Energy – Feb 18th

An Arctic Polar Vortex has brought near century lows in temperatures to most of North America (and even reached into northern Mexico) bringing frigid temperatures that have knocked out the electricity grids. Texas has been hardest hit with water, heat, refineries  and power out due to the freezing temperatures. It may take three to four weeks to get remediation done on the 4Mb/d of oil production shut in. The price of crude spiked up US$4/b over the last few days to US$62/b. Electricity rates have also spiked to record prices (wholesale prices to US$10,000/MWh yesterday up from US$50/MWh before the cold blast hit Texas). The next few weeks should see big divergences from the norm as these issues plague the industry. Parts of Texas are now colder than parts of Alaska. 

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 Thursday February 18th was moderately bullish. Commercial Inventories fell by 7.3Mb on the week compared to a forecasted decline of 2.43Mb/d. The difference was due to a rise in exports of 1.245Mb/d or 8.7Mb on the week. If not for this export increase storage would have risen. Motor Gasoline Inventories rose by 0.7Mb in the week as Refinery Utilization rose 0.1% to 83.1% from 83.0% in the prior week. While an increase it is below last year’s level of 89.4% as overall demand for product is pandemic and now weather impacted. US Domestic Crude Production fell by 200Kb/d to 10.8Mb/d as the freezing weather started to shut in production late last week . Compared to a year ago this is down 2.2Mb/d from last year’s 13.0Mb/d.

The bullish part of the report this week was on the consumption side. Total Product Consumption rose 484Kb/d to 20.67Mb/d. Finished Motor Gasoline Consumption rose by 549Kb/d to 8.41Mb/d but is down 511Kb/d from last year’s 8.92Mb/d. Jet Fuel consumption fell by 88Kb/d to 1.18Mb/d and remains down 207Kb/d from last year’s 1.38Mb/d. Cushing Oil Inventories fell by 3.0Mb. Inventories at Cushing are now at 45.0Mb down from 48.0Mb last week but are up from 38.2Mb a year ago.

Baker Hughes Rig Data: All of the following data is before the Arctic Polar Vortex hit the US and knocked out the electricity grid and the oil production of Texas. More than 4.2M people remain without power as of today. More than 4Mb/d or around 40% of US production is now shut in. The Permian (the largest producing field) has wells that produce large amounts of water with the oil and now have frozen surface valves. It may be two to three weeks for this to be resolved. On the natural gas side 17Bcf/d or 18% of US production is also shut in. 

The data for the week ended February 12th showed a rise for the US and Canadian rig counts. In the US rigs rose by five (up eight rigs in the prior week) to 397 rigs working, but remains down 50% from 790 rigs working a year ago. The US oil rig count rose by seven (up four rigs the prior week) to 306 rigs but is down 55% from 678 rigs working last year. The Permian saw an increase of five rigs to 203 rigs working and remains 50% below last year’s level of 408 rigs working. Over US$45/b for WTI seems to be a price point where producers see economic returns from drilling. The increase in drilling activity has seen a rise in US domestic production of 100Kb/d to 11.0Mb/d. If prices remain at current levels then OPEC will face competition again from the easy to drill and bring on shale plays in the US. With a large infrastructure available and cheap drilling costs those firms with low cost land and decent balance sheets may show meaningful growth at current prices.

Canada saw an increase of five rigs last week with 176 rigs working. This is 31% lower than the 255 rigs active last year. The rig count for oil rose by six rigs to 101 rigs working but is down 41% from 172 rigs working last year. The natural gas rig count fell by one rig to 75 rigs active and is down 10% from 83 rigs working at this time last year.

Conclusion: WTI crude oil is up almost US$10/b to US$61.20/b since the start of February as very cold weather across North America brings temperatures down, electricity outages and heavy snow in many areas. Of this rally US$8/b is due to the infusion of speculative money from the Robinhood and Reddit novice retail horde. These horde investors seem finished with GameStop and other stock shorts, are done now with silver and have moved to crude oil and cannabis stocks to get their focused herd following price momentum moves. The Reddit/Robinhood gang of over 14M retail investors, are in the case of energy, trying to  squeeze the Commercials (refiners, petrochemical companies and energy companies etc.) shorts who are short 1.64Bb (net short 617Mb at the end of last week). This plus the recent cold spell has lifted crude prices to levels that OPEC and Saudi Arabia are now concerned about. If oil prices remain at his level after the cold spell it would provide incentive to the US shale industry to ramp up production and deprive OPEC of more market share. Last week the US exported 3.86Mb/d or 27Mb on the week. This deprives OPEC of clients and market share. The Saudis are now talking about raising their and OPEC’s quota at their next meeting in March.

We believe that there is US$14-16/b of downside risk for WTI as markets begin to reflect the demand situation post-winter, the recovery in US production and OPEC cheating and/or raising approved production levels. When these hot money traders get bored with energy (as they did with GameStop, AMC and Blackberry etc.) we see WTI crude breaching US$50/b and moving into the mid-US$40s as rational behavior returns when winter nears its end.

Technically the near-term support level for WTI crude is US$54/b and then major support is at US46.15/b. Energy and energy service stocks are very overbought and some have rolled over with meaningful declines. We are clearly in the bear camp now. 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. Results for Q4/20 are now being released and are so far not good. The bulk of the companies release over the next few weeks.

We now have a SELL signal in place since January 14, 2021. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of 14 stocks and at what prices we think the ideas be harvested. We sent out a second sell signal on February 5th and removed four additional ideas for harvesting. The next few months could see significant downside for the energy sector.

Energy Stock Market: The S&P/TSX Energy Index now trades at 107 and is part of a broadening topping process. The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low of late October 2020) in the coming months. A breach of 103.60 should initiate the next sharp decline. The recent cold weather has lifted AECO natural gas to C$5.31/mcf (yesterday), the price spike we expected during the worst of winter. Natural gas stocks have been some of the best winners recently. The NYMEX US price at US$3.12/mcf has lifted as well, but not as much as Canadian prices.

Our SER February Monthly SER (to come out on February 19th) focused on our February 5th SELL signals and the rationale for selling the four additional ideas. Downside from here for the sector remains substantial in the 40-50% range.

Our Q1/21 webinar takes place next week Thursday February 25th at 7PM MT. There will be two investment presentation sections. The first will cover the downside parameters we see for the general market depending upon which of the many mania bubbles burst. The second section will discuss how to build an energy portfolio for the new Energy Bull Market that we foresee lasting into 2025. The different approaches that conservative, growth and entrepreneurial investors should consider will be discussed. Individual ideas for each investor approach will be covered. 

If you want to join our webinar next week, you need to become a subscriber in the next week and register for the event. 

Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all archived Webinars (and be able to join us for our next webinar Thursday February 25th), Action Alerts, TOP PICK recommendations when the next BUY or SELL signal occurs, as well as our Quality Scoring System review of the 27 companies that we cover. We go over the markets in much more detail and highlight individual companies’ financial results in our reports. If you are interested in the energy industry this should be of interest to you.

To get access to our research go to  https://bit.ly/34iKcRt to subscribe.

 

Schachter’s Eye on Energy – Feb. 10th

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 February 10th were moderately bullish. Commercial Inventories fell by 6.6Mb on the week compared to a forecasted decline of 200Kb/d. The largest part of the difference was due to a decline in imports of 650Kb/d or 4.6Mb on the week. Motor Gasoline Inventories rose by 4.3Mb on the week as Refinery Utilization rose 0.7% to 83.0% from 82.3% in the prior week. While an increase it is below last year’s level of 88.0% as overall demand for product is still pandemic impacted. Crude Oil Stocks are now 26.5Mb or 6.0% above last year’s level of 442.5Mb. US Domestic Crude Production rose by 100Kb/d to 11.0Mb/d as the increase in drilling finally lifted production. Compared to a year ago this is down 2.0Mb/d from last year’s 13.0Mb/d.

The bullish part of the report this week was on the consumption side. Total Product Consumption rose 1.66Mb/d to 20.2Mb/d and only down 782Kb/d from last year’s 20.97Mb/d. This data can swing around quite substantially from week to week. For example, last week Total Product Supplied fell by 1.15Mb/d. Finished Motor Gasoline Consumption rose by 87Kb/d to 7.86Mb/d and is down 864Kb/d from last year’s 8.72Mb/d. Jet Fuel consumption rose by 514Kb/d to 1.26Mb/d but remains down 401Kb/d from last year’s 1.67Mb/d. Cushing Oil Inventories fell by 700Kb. Inventories at Cushing are now at 48.0Mb down from 48.7Mb last week but are up from 38.4Mb a year ago.

Baker Hughes Rig Data: The data for the week ended February 5th showed a mixed result for the US and Canadian rig counts. In the US rigs rose by eight (up six rigs in the prior week) to 392 rigs working, but remains down 50% from 790 rigs working a year ago. The US oil rig count rose by four (up six rigs the prior week) to 299 rigs but is down 56% from 676 rigs working last year. The Permian saw an increase of six rigs to 198 rigs working and remains 51% below last year’s level of 405 rigs working. Over US$45/b for WTI seems to be a price point where producers see economic returns from drilling. The increase in drilling activity has now seen a rise in US domestic production of 100Kb/d to 11.0Mb/d. If prices remain at current levels then OPEC will face competition again from the easy to drill and bring on shale plays in the US. With a large infrastructure available and cheap drilling costs those firms with low cost land and decent balance sheets may show meaningful growth at current prices. Hedging out new production may also aid companies in lifting production near term.

Canada saw a decrease of three rigs last week with 171 rigs working. The extremely cold weather is hampering activity. This is 33% lower than the 257 rigs active last year. The rig count for oil fell by three rigs to 95 rigs working and is down 43% from 167 rigs working last year. The natural gas rig count held steady at 76 rigs active but is down from 90 rigs working at this time last year.

Conclusion: WTI today is holding at US$58.35/b as very cold weather across North America due to an Arctic Vortex brings temperatures down and heavy snow in many areas. In Alberta we are seeing temperatures of minus 40 celsius (or even colder in Northern Alberta) with the wind chill. The strong US$6/b rally over the last week is due to the cold weather and the infusion of speculative money from the RobinHood and Reddit novice retail horde. These horde investors seem finished with GameStop and other stock shorts, are done now with silver and have moved to crude oil and cannabis stocks to get their focused herd following price moves. We believe that there is US$10-15/b of downside risk for WTI as markets begin to reflect the demand situation post-winter, the rise of US production and OPEC cheating. The Reddit/RobinHood gang of over 14M retail investors, are in the case of energy, moving to pressure (short squeeze) the Commercials (refiners, petrochemical companies and energy companies etc.) who are short 1.57Bb (net short 585Mb at the end of last week). When these hot money traders get bored with energy (as they did with GameStop, AMC and Blackberry etc.) we see WTI crude breaching US$50/b and moving into the mid-US$40s as rational behavior returns next month with winter nearing its end.

WTI Crude Oil:

The specific rationale for our downside crude oil price view is:

  1. Saudi Arabia and Russia are fighting for market share in the only growth market so far in 2021, that of China. The Saudi cut of 1.0Mb/d started on February 1st and lasts for only two months. Russia’s increase this month now puts them ahead of the Saudis in market share in China. Other OPEC countries like Iraq are also moving to increase volumes. Russia for example does not want to see the US shale giant reawakened and may add 1.0-1.5Mb/d to supplies to drive down prices and stop the US shale recovery.
  2. Covid mutations from the UK and South Africa are worrying medical professionals as they are transmitted faster and may, in the case of the South African version, not be handled effectively by current vaccines. Dr. Fauci is calling on vaccine producers to manufacture versions that are specifically tailored to the emerging variants. Some concerned epidemiologists fear that producing these new versions could take into the end of 2021. While President Trump talked about vaccinating the US population by the end of Q2/21, President Biden is talking about late summer and his CDC officials are now talking about either US Thanksgiving or winter 2021-2022. If the mutations are not handled by current vaccines then this could extend this timeline. Bloomberg on February 8th, forecast that herd immunity will not be reached in China for 5.5 years, the US within 10 months and six months for the UK which is very active in vaccinating its citizens. There is also concern that case numbers will rise in the US post the Super Bowl super-spreader parties and lack of masking.

Technically the near-term support level for WTI crude is US$51/b and then major support is at US46.15/b. Energy and energy service stocks are overbought and many have rolled over. We are clearly bearish now. 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. Results for Q4/20 are now being released and are so far not good. Cenovus and Precision Drilling were the latest to release. Crude prices may stay range bound this month but in March crash through US$50/b.

We now have a SELL signal in place. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of which stocks and at what prices we think ideas could be harvested. The next few months could see significant downside for the energy sector.

Energy Stock Market: The S&P/TSX Energy Index now trades at 101.23. Our Q1/21 target of 100-105 was reached when the Index reached a high at 103.60 in mid-January. The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low of late October 2020) before late April. A breach of 98.66 (the low this week) should initiate the next sharp decline. The recent cold weather has lifted AECO natural gas to C$3.86/mcf (yesterday), the price spike we expected during the worst of winter. Natural gas stocks have been some of the best winners recently. The NYMEX US price at US$2.91/mcf has lifted as well, but not as much as Canadian prices.

Our SER February Interim Report (out on February 4th) focused on our January 14th SELL signal and the personal sell transactions that we did on January 22nd, after the five day notice period to subscribers. We sent out another Action Alert SELL on February 5th removing an additional four ideas from our BUY List that we see having material downside. This will be covered in our February SER Monthly to be released on Thursday February 19th. Downside from here for the sector remains substantial in the 30-50% range.

Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all archived Webinars (and be able to join us for our next webinar Thursday February 25th at 7PM MT), Action Alerts, TOP PICK recommendations when the next BUY or SELL signal occurs, as well as our Quality Scoring System review of the 27 companies that we cover. We go over the markets in much more detail and highlight individual companies’ financial results in our reports. If you are interested in the energy industry this should be of interest to you.

Our guest article by Ron Barmby in our February Monthly SER issue will be on ‘Why The Carbon Tax Question Before The Supreme Court Is Incomplete’.

To get access to our research go to  https://bit.ly/3jjCPgH to subscribe

Schachter’s Eye on Energy – Feb. 3rd

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 February 3rd were very bearish. For now investors are focusing on the Saudi cut of 1.0Mb/d for February and March and the fearless forecasts of some prognosticators of rising energy demand in the coming months as vaccines are rolled out. This ignoring of the current falling demand data will catch up to the current bullish mania. The Gamestop market forces have succeeded in pushing up silver prices and some now see crude as the next commodity that the 7M retail Reddit horde can manipulate higher.

Commercial Inventories fell by 1.0Mb on the week right on the forecast. Motor Gasoline Inventories rose by 4.5Mb on the week as Refinery Utilization rose 0.6% to 82.3% from 81.7% in the prior week. While an increase it is below last year’s level of 87.4%. Crude Oil Stocks are now 40.7Mb or 9.3% above last year’s level of 435.0Mb. US Domestic Crude Production remained at 10.9Mb. Compared to last year this is down 2.0Mb/d from last year’s 12.9Mb/d.

The important part of the report this week was on the consumption side. Total Product Consumption fell 1.15Mb/d to 18.53Mb/d. Finished Motor Gasoline Consumption fell by 63Kb/d to 7.77Mb/d while Jet Fuel consumption fell by a whopping 490Kb/d to 750Kb/d. Overall Product demand is now down 11% from last year, Gasoline demand is down 13% and Jet Fuel by 55%. Cushing Oil Inventories fell by 1.5Mb. Inventories at Cushing are now at 48.7Mb down from 50.2Mb last week but are up from 36.7Mb a year ago.

Baker Hughes Rig Data: The data for the week ended January 29th showed increases in the US and Canadian rig counts. In the US rigs rose by six (up five rigs in the prior week) to 384 rigs working, but remains down 51% from 790 rigs working a year ago. The US oil rig count rose by six (up two rigs the prior week) to 295 rigs but is down 56% from 675 rigs working last year. The Permian saw an increase of four rigs to 192 rigs working and remains 53% below last year’s level of 406 rigs working. Over US$45/b for WTI seems to be a price point where producers see economic returns from drilling. Yet, so far this increase in drilling activity has not seen a corresponding increase in US domestic production.

Canada saw an increase of two rigs last week with 174 rigs working. However, it is 30% lower than the 247 rigs active last year. The rig count for oil has risen to 98 rigs (up two rigs last week) but is down 38% from 157 rigs working last year. The natural gas rig count held steady at 76 rigs active but is down from 90 rigs working at this time last year.

Conclusion: WTI today is at US$55.82/b, up on euphoria of the Saudi cut, very cold winter weather and the Reddit rumours. We believe that the top in crude prices for Q1/21 is being made now and that there is US$10-15/b of downside risk as markets begin to reflect current fundamentals and not the bullish chat room mania. The Reddit room gang see Commercials (refiners, petrochemical companies and energy companies etc.) short 588Mb at the end of last week and may want to squeeze them. In the next few weeks we expect to see WTI crude breaching US$50/b and moving into the mid-US$40’s as rational behavior returns.

WTI Crude Oil:

The reason for our downside crude oil price view is:

  1. Saudi Arabia and Russia are fighting for market share in the only growth market so far in 2021, that of China. The Saudi cut of 1.0Mb/d started on February 1st and lasts for only two months. Russia’s increase this month now puts them ahead of the Saudis in market share in China.
  2. Iran is increasing production and is moving crude oil and products via intermediaries as it sees the US and Iran moving towards a new nuclear accord deal that will remove or reduce sanctions. Iran may have as much as 2.0Mb/d of shut-in production that could be brought on quickly. In December 2020 they produced 2.0Mb/d so they could double production if a deal is concluded and sanctions are removed.
  3. Reuters yesterday commented that demand forecasts are again being lowered for 2021. The recent decrease was of an additional loss of 300,000 b/d due to the pandemic drag. Once winter is over world wide demand falls by 2.0-2.5Mb/d of which over 1.0Mb/d is from the US.
  4. Covid mutations from the UK and South Africa are worrying medical professionals as they are transmitted faster and may in the case of the South African version, not be handled effectively by current vaccines. Dr. Fauci is calling on vaccine producers to manufacture versions that are specifically tailored to the emerging variants. Some concerned epidemiologists fear that producing these new versions could take into the end of 2021. Today the press commented that Public Health England said the E484K mutation could be much more resistant to the current range of vaccines. These mutations are believed to bind easier to human cells and evade the antibodies. Other concerns are that the South Africa variant may be able to reinfect people who have contracted Covid-19 and recovered.
  5. Death rates in the US are picking up and now have exceeded 443K (425K last week) with the total caseload over 26.3M. Current government forecasts are for 600-660K deaths before herd immunity is achieved, possibly by September. January had the highest death rate yet at over 95,000 fatalities. If the new virus mutations take off, then this number could be exceeded in March or April.

Technically the near-term support level for WTI crude is US$50/b and then major support is at US46.15/b. Energy and energy service stocks are overbought and have rolled over. We are clearly bearish now. 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. Results for Q4/20 should start being released shortly and they will for the most part not be good. Imperial OIl was the first to report and they took a severe impairment. Depending upon the pressure from the above issues we may see crude prices range bound in February and in March, crash through US$46/b if demand remains weak and the world wide crude inventory build commences once winter is over.

We now have a SELL signal in place. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of which stocks and at what prices we think ideas could be harvested. The next few months could see significant downside for the energy sector.

Energy Stock Market: The S&P/TSX Energy Index now trades at 96.55 down nearly 7% from the recent high.  Our Q1/21 target of 100-105 was reached when the Index reached a high at 103.60. The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low of late October 2020) during March/April. A breach of 89.77 (the low of last week) should initiate the next sharp decline.

Our SER February Interim Report (out February 4th) focused on our SELL signal and the personal sell transactions that we did on January 22nd, after the five day notice period to subscribers and the removal of 14 ideas from our BUY List (going from 25 to 11 ideas) on January 14th. The major decline we have been forecasting is clearly underway and may last into late March or April. Downside from here remains substantial with the Index downside in the 30-50% range.

Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all archived Webinars (next webinar Thursday February 25th), Action Alerts, TOP PICK recommendations when the next BUY or SELL signal occurs, as well as our Quality Scoring System review of the 27 companies that we cover. We go over the markets in much more detail and highlight individual companies in our reports. If you are interested in the energy industry this should be of interest to you.

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