The oil markets have been enjoying a period of sustained rally, thanks to a stream of positive factors including somewhat successful compliance to agreed production cuts, a partial rebound in oil demand as well as growing optimism about a possible extension to the OPEC+ cuts. Brent prices briefly touched $40/barrel on Monday, a level they last touched several months ago with WTI looking to also breach the psychological level if OPEC+ signs off on extensions when it reconvenes on June 10.
The same, however, can hardly be said about the natural gas situation.
Natural gas prices are still flirting with decade-lows courtesy of a stubborn supply overhang thanks to a deluge from shale fields and weak demand due to unfavorable weather.
In fact, the supply glut has become so bad that even a leading producer turning off the taps has done little to boost prices. Natural gas prices have barely barged after Russia’s national oil producer (NOC), Gazprom PJSC, cut off shipments through a key link via Belarus and Poland. CLICK for complete article
This week’s article focuses on how inventory build in the US is being ignored, and what OPEC will do going forward. So far OPEC talks the talk but doesn’t walk the walk.
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 28 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 June 3rd’s EIA data was mostly bearish. While the headline number of commercial crude stocks was down by 2.1Mb it was less than the 3.1Mb decline expected. The decline was due to net imports falling by 639Kb/d or by 4.5Mb on the week. If net imports had been flat, crude inventories would have risen by 2.4Mb in the week. Motor gasoline stocks rose by 2.8Mb and Distillates by 9.9Mb. Overall stocks rose a whopping 19.2Mb on the week. Total stocks are now up 129.8Mb over last year of which commercial crude stocks are up 49.1Mb above last year or up by 10.2%. Refinery runs rose to 71.8% from 71.3% in the prior week.
US production of crude fell by 200Kb/d to 11.2Mb/d and is now down 1.9Mb/d from the peak in mid-March at 13.1Mb/d. We are nearing our expected level of 11.0Mb/d that we have been forecasting for the summer production level. However, there is now talk about some US energy companies (examples: Parsley Energy and EOG Resources) bringing back hundreds of thousands of barrels of shut-in low cost production. If so this would exacerbate the inventory glut. Cushing saw a decline of 1.8Mb to 51.7Mb (last week storage down was by 3.4Mb) as refinery activity consumed more crude. The forecast had been for a decline of 3.4Mb on the week. However, coastal and offshore inventories continue to rise.
The most bearish part of the report was that overall product consumed fell during the Memorial holiday weekend by 892Kb/d to 15.1Mb/d, and down 4.33Mb/d or 22% from 19.4Mb/d consumed last year at this time. Finished motor gasoline did rise by 295Kb/d on the long weekend from the prior week to 7.55Mb/d, but is still down 20% from 9.44Mb/d last year. Jet fuel demand plunged by 476Kb/d from the prior week to 385Kb/d. However, it was 1.43Mb/d lower or 79% less than last year as travellers were reluctant to get on planes while there is no cure for Covid-19. Jet fuel demand may have the most difficulty in seeing a recovery until a vaccine is readily available and people feel safe flying again.
Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 17 rigs (prior week down 21 rigs) to 301 rigs and down 69% from 984 rigs working a year ago. The Permian felt the largest basin loss with a rig loss of 14 rigs (last week down 13 rigs) or down by 67% from a year earlier level of 452 rigs. The US oil rig count fell by 15 rigs to 222 rigs (down 21 rigs last week) and down 73% from 800 rigs working last year. Canada had a decline of one rig and the count now is at 20 rigs working and down 76% from 85 rigs working a year ago. The rate of rig activity is now decelerating and we are getting close to the bottom for this key energy service sector.
OPEC Gamesmanship: OPEC this week is planning a virtual meeting with Russia to discuss (the OPEC+ group) extending the current level of cuts for another month or two. OPEC wants the 9.7Mb/d of reported cuts to last into the end of the year but Russia is game for only one or two months and wants to see storage inventory data before agreeing to any additional extensions. Russia’s Energy Ministry now sees the global surplus at 7-12Mb/d (Reuters report). It appears that the OPEC cuts of 9.7Mb are not being fully implemented with Iraq, Iran and Nigeria cheating as much as they can. Some estimates show the real May cut was just over 5.9Mb/d or production of 24.77Mb/d. OPEC talks a good talk but does not walk the walk with its actions.
Stock Market Bubble Burst Issues: The rally off the bottom of mid-March appears to be close to exhausting its upward movement for the major US exchanges. The recent strength has been led by the internet favourites as money chases fewer and fewer names (these are over 20% of the S&P 500 Index weight). Our key reasons for expecting another black swan to topple the general markets include:
1. Stock market valuations are at extreme valuation levels like just before the Dot-Com bust. They can rise until buyers just stop chasing them. Remember the cannabis stock craze that ended last year and has collapsed since then.
2. Earnings results for Q2/20 will be coming out next month and they and the guidance are likely to be ugly. Bankruptcies and solvency issues could be the black swan event as Enron was in 2001 and Lehman was in 2008.
3. The murder of George Floyd and the street protests are igniting a society “I can’t breathe.’ Major racial reform is needed but President Trump is tone deaf.
4. The coverage of Covid-19 is not front and centre anymore and the caseload and fatalities are likely to be rising as the massive street protests accelerate a new wave. When was the last time we had a White House update?
5. The China/US trade war and super power battle over the issues of the Wuhan virus are now escalating with airline travel restrictions by China resulting in the US suspending Chinese airlines from US airspace. China has also not been buying what it agreed to in the Phase One of the trade deal. This is likely to be a flash point as the US election cycle gets closer.
6. The US Treasury will be auctioning off over US$2T of debt to fund the unprecedented deficits, and will need real buyers as the Federal Reserve is focused on lending to help companies. This debt raise will remove liquidity from the economy, the reverse of what happened from mid-March to the end of May.
Conclusion: As we write this, WTI is at US$36.28/b for the July contract (down US$0.53/b on the day) due to the overall inventory build and demand drop. After a robust short covering rally of nearly 90% from the April low, the largest monthly gain on record, crude prices are likely peaking now. We see a decline below US$30/b as the line in the sand for crude oil bulls. We do not see supply and demand balancing until August so there will be a storage problem for the market to face in the coming weeks. As we see more builds in the coming weeks, like this week’s overall build, we see this crude price breach occurring and fear of a lack of storage returns. This breach should start the next phase of worry for energy bulls and shortly restart selling of energy and energy service stocks. We expect this to occur this month. During June/July we expect to see WTI being vitiated below US$20/b due to intermarket margin call pressure and for the S&P/TSX Energy decline below 76.50 (now 83.45) and breach 50. Much lower levels are expected over the coming months. The highest risk companies with the most downside are those with high debt loads, high operating costs, have current balance sheet debt maturities of some materiality over the next 12 months and those that produce heavier barrels. Hold cash and remain patient for the next low risk BUY window as we saw in mid-March. If over-invested take appropriate action.
Our June SER Interim Report will come out tomorrow. It includes the remaining 12 companies Q1/20 results for the companies we cover. We include our new SER Quality Scoring System for those that are: Successful, those that will Survive, and those that are Problematic (mainly debt levels and near term maturity problems). If you are interested in this report please go to our website to the subscriber page. Our final count of all the companies we cover shows three ‘A’s – Successful, thirteen ‘B’s – Survivors, and twelve as ‘C’s – or Problematic in this crazy and unexpected environment. Unfortunately there has been a lot of pain over the last few months for investors but there will be another bout of value destruction starting shortly. Energy stocks may return to the mid-March lows but other high profile market favourite areas will likely get the royal shaft.
Subscribe to the Schachter Energy Report and receive access to our Webinar from Thursday May 28th, our Action Alerts, our TOP PICK recommendations when the next BUY signal occurs as well as our Quality Scoring System review of the 28 companies that we cover.
To get access to our research please go to http://bit.ly/2OvRCbP to subscribe.
An MIT spin-out company is planning to cross the commercial nuclear fusion finish line before anyone else, and big money is backing this game-changing tech that will dictate our energy future by promising unlimited zero-carbon energy–the holy grail. By 2025, Commonwealth Fusion Systems (CFS)–an MIT spin-out–plans to see is SPARC project become the first fusion reactor to show “net energy gain” by 2025. By 2030, it intends to make nuclear fusion a commercial reality, disrupting all those nuclear fusion experiments elsewhere in the world that have been working towards this a lot longer, and disrupting energy–forever.
Microsoft billionaire Bill Gates believes it. He was the first big backer of CFS. And now, Norway’s oil giant–Equinor–is throwing money behind it.
Last week, CFS–founded only in 2018–raised another $84 million from investors in Europe and Asia, bringing the total raised by the nuclear fusion startup to $200 million. Singapore’s Temasek Holding Pte was also among the key investors for this cash round… CLICK for complete article
Kodiak Copper CEO Claudia Tornquist joins Mike to talk about the supply and demand situation for copper, it’s importance to the green technology revolution, and where investors can look for good copper assets and companies in the stock market.
There is no question that as the oil price dropped in the first quarter of 2020, producers reacted strongly curtailing new drilling, and actually shutting in existing production. Markets have taken encouragement from this withdrawal of supply and helped prices for WTI (the key U.S. benchmark) to a rally of historic proportions.
As the price of WTI crested $30/bbl concerns began to mount that this would embolden drillers to put a bunch of rigs in the field and resume their ‘merry’ ways, drilling to soak up as much market share as they can.
Drilling and fracking will of course begin to pick up as prices approach $40, but concerns about a new ‘Black-gold rush’ are over-wrought. The capacity to put hundreds of rigs back to work simply no longer exists.
In this article we will take a look at the fundamentals of providing services related to fracking, and why capacity has been permanently withdrawn from the market… CLICK for complete article
This week Josef explores why a large build in US Inventories was ignored by the stock market as it continues to focus on the economy reopening and why US total stocks grew by 17.0M while total demand fell by 628Kb/day to 16.0M.
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 and provides Action BUY and SELL Alerts for paid subscribers. Learn more and subscribe.
EIA Weekly Data: Thursday’s (May 28th) EIA data was delayed by one day due to the US Memorial Day holiday on Monday. The report was mostly bearish with total stocks up 17.0Mb on the week with the headline commercial crude stocks number a 7.9Mb rise (versus a 1.9Mb decline forecast). Gasoline stocks fell a modest 0.7Mb, however Distillate inventories rose by 5.5Mb. The rise in commercial stocks and rise in inventories of products was due to imports rising by over 2.0Mb/d or by 14.5Mb on the week, and due to refinery runs rising to 71.3% from 69.4% last week.
US production of crude fell by 100Kb/d to 11.4Mb/d and is now down 1.7Mb/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 Permian basin. This summer US production is likely to be under 11.0Mb/d as the high decline shale basins see rapid production declines (voluntary and involuntary). It is very likely the decline in crude oil production could reach down to 10.0Mb/d by late Fall if commodity prices fall in the next month or so. Cushing saw a decline of 3.4Mb to 53.5Mb as refinery activity consumed more crude.
The most bearish part of the report was that overall product consumed fell by 628Kb/d to 16.0Mb/d and is down 5.46Mb/d or 25% from 21.4Mb/d at this time last year as the Memorial weekend usually sees lots of travel. But not so this year due to the Covid-19 health crisis. Finished motor gasoline did rise by 463Kb/d from the prior week to 7.25Mb/d, but is still down 22% from 9.39Mb/d last year. Jet fuel demand rose by 226Kb/d from the prior week to 860Kb/d as some decided to fly to visit family and friends during the long weekend. However, it was 1.165Mb/d lower or 57% less than last year. Jet fuel demand may have the most difficulty in seeing a resurgence until a vaccine is available and people feel safe flying again.
Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 21 rigs (prior week down 35 rigs) to 318 rigs and down 67% from 983 rigs working a year ago. The Permian felt the largest basin loss with a rig loss of 13 rigs (last week down 23 rigs) or down by 64% from a year earlier level of 451 rigs. The US oil rig count fell by 21 rigs to 237 rigs and down 70% from 797 rigs last year. Canada had a decline of two rigs and the count now is at 21 rigs working and down 73% from 78 rigs working a year ago. On May 27th the Alberta Energy Minister said Alberta producers had already cut production by about a quarter or by 1Mb/d. If crude prices don’t recover in Q3/20 there may end up being a total of 1.2-1.6Mb/d shut in during that quarter. The EIA report of May 15th showed Canadian exports to the US of 2.946Mb/d down 20.1% from 3.688Mb/d sent down the prior year so as of that date the US was already taking 742Kb/d less from us.
Conclusion: WTI as we write this is at US$33.50/b for the July contract and is ignoring the rise in US inventories as market participants focus on the economies reopening and the multitude of drugs being talked about as possible coronavirus cures. We see a decline below US$30/b as the line in the sand for crude oil bulls. We do not see supply and demand balancing until July so there will be a storage problem for the market to face in the coming weeks. This week’s rise is being ignored. As we see more builds in the coming weeks we see this breach occurring and fear of a lack of storage returns. This breach should start the next phase of worry for energy bulls and restart heavy selling of energy stocks. We expect this to occur starting in early June.
The short covering rally of the last few weeks took the S&P Energy Bullish Percent Index from 0% on March 9th to 100% on May 4th. It is now at 80.8% a fairly lofty level. As the general stock market declines in the coming weeks, we expect to see the energy sector fall as well. The Energy Bullish Percent Index is likely in this situation to fall to below 10%, providing the next low risk BUY signal. For the S&P/TSX this means a decline to the 32-36 level. The S&P Energy Index today is at 79.2 so there is lots of downside risk over the coming weeks and possibly months.
Speculative ownership of crude oil futures continues to rise chasing crude, with many buying later dated contracts after the May expiry problem. Speculators were taught a nasty roll over lesson on the nearby contact. Last week speculators owned a net long position of 547Mb up from 533Mb the week before. Commercials are now short 583Mb up from 552Mb the week before. We expect that a market decline with intermarket margin calls will knock the speculator’s position down to below 200Mb net long at the next bottom in crude prices. It is possible that commercials will move to net long positions in this event.
Our June SER Interim Report will come out next week Thursday and we plan to go over the remaining Q1/20 results for the companies we cover (13 companies will be reviewed in the report). We include our new SER Quality Scoring System for those that are: Successful, those that will Survive, and those that are Problematic (mainly debt levels and near term maturity problems). If you are interested in this report then please go to our website and to the subscriber page. Our final count shows three ‘A’s – Successful, thirteen ‘B’s – Survivors, and thirteen as ‘C’s – as Problematic. The deterioration of companies is due to the lower commodity prices, impairments taken, declining cash flows making debt coverage problematic and a batten down the hatches worry of another black swan event.
Subscribe to the Schachter Energy Report and receive access to our Webinar from Thursday May 28th, our Action Alerts, our TOP PICK recommendations when the next BUY signal occurs as well as our review of the 29 companies that we cover.
To get access to our research please go to http://bit.ly/2OvRCbP to subscribe.