Energy & Commodities

Why Natural Gas Prices Are Set To Go Higher

Winter temperatures below seasonal norms in the northern hemisphere have created a rally in natural gas prices from Asia to Europe.    The spot liquefied natural gas (LNG) prices in north Asia jumped to record highs last week, while the key price marker in Europe, the Dutch Title Transfer Facility (TTF), rallied to the highest in more than two years.

The natural gas markets at the start of 2021 look completely different from the beginning of last year, when milder weather and the pandemic hit to demand had dragged natural gas prices down to historic lows.

This winter season, a rebound in Asian natural gas demand, supply issues at major LNG exporters, logistics issues at the Panama Channel, soaring tanker rates, and last but not least, the cold snap from Madrid to Tokyo, are pushing gas prices higher…CLICK for complete article

Metals behind EV revolution to resume volatile rally – again

Battery metals are set to rebound this year as an electric-vehicle boom is bolstered by post-pandemic push for a green economic recovery.

US President-elect Joe Biden has indicated the sector could get a boost, while China wants new energy vehicles to account for about 20% of total new car sales by 2025. Germany has extended subsidies on EVs for an extra four years, and the U.K. will ban sales of new petrol and diesel cars from 2030.

The markets for metals such as lithium and cobalt, which soared in 2018 before slumping on concerns about oversupply, will be underpinned by a step change in battery demand. Global EV sales are projected to surge 60% this year, according to BloombergNEF.

“Now it’s much more real,” Aleksandr Khodov, lead analyst for nickel and cobalt at Trafigura Group, said in a phone interview. “We’re not talking about hundreds of thousands of electric vehicles anymore, we’re talking about more than 5 million in 2021.” CLICK for complete article

Schachter’s Eye on Energy – Jan. 13th

This week Josef discusses how the slow rollout of Covid vaccines is likely to shaft crude oil prices in the coming months and how the downside could be US$10/b.

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 January 13th was mixed. Commercial inventories fell 3.2Mb on the week versus the forecast of a 1.9Mb decline. The miss was due to refinery runs rising to 82.0% from 80.7% in the prior week, resulting in Distillate inventories rising by 4.8Mb and Gasoline Inventories by 4.4Mb. So the decline in crude inventories was more than offset by the increase in these product categories. Crude inventories are now 53.7Mb or 12.5% above last year’s level of 428.5Mb. US domestic crude production was unchanged at 11.0Mb/d, but is down 2.0Mb/d from last year’s 13.0Mb/d.

Consumption rose sharply last week. Total usage rose by 2.55M/d to 19.6Mb/d offsetting last week’s decline of 2.26Mb/d. Gasoline consumption rose by 91Kb/d to 7.53Mb/d while Jet Fuel consumption rose by 551Kb/d to 1.47Mb/d. Total product demand was up 560Kb/d from last year.

Cushing Oil Inventories fell by 2.0Mb as consumption rose. Inventories at Cushing are now at 57.2Mb down from 59.2Mb last week.

Baker Hughes Rig Data: The data for last week showed an increase in the US and Canadian rig counts. In the US rigs rose by nine (up three rigs in the prior week) to 360 rigs working, but remains down 54% from 781 rigs working a year ago. The US oil rig count rose by eight (up three rigs the prior week) to 275 rigs but is down 58% from 659 rigs working last year. The Permian saw an increase of four rigs to 179 rigs working but remains 55% below last year’s level of 397 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 now at 11.0Mb/d.

Canada saw a big increase in the rig count last week as activity normally picks up in the New Year. The rig count rose by 58 rigs to 117 rigs working. While a significant increase, it is 50% lower than the 118 rigs added in the first week of last year when 203 rigs were active. The current rig activity level is down 42% from a year ago. The rig count for oil has risen to 53 rigs (18 last week) but is down 56% from 120 rigs working last year. The natural gas rig count rose by 23 rigs to 64 rigs active but is still down from 83 rigs working at this time last year.

Conclusion: WTI today is at US$53.36/b (high today of US$53.93/b) and we see a significant Q1/21 topping range in the US$52-55/b area occurring shortly.

The reason for our bearishness is twofold.

One, is that some OPEC+ members continue to produce over their quotas (Russia, Kazakhstan and Iraq) and non-quota members (Iran, and Venezuela) are trying to sell at discounts whatever they can sell at discounts through intermediaries. Russia is leading the group increasing supplies to take advantage of the current robust prices while the Saudis want to cut back production so that a meaningful glut does not happen later this quarter. Cold weather is helping demand but winter ends in about two months and then the slower demand shoulder season occurs.

The second, is that the mutation variants of the coronavirus are causing increased lockdowns and curfews, especially in OECD countries. Ireland, the Czech Republic, Germany, Slovenia and the UK, are now on tighter restrictions. Death rates are rising. In Alberta we had the highest death rate yet yesterday. The US is now nearing 380,000 dead and forecasts for the end of January see this at over 450,000. The US daily death toll is now exceeding 4,000 individuals on many days with all age groups being affected. President-elect Biden wants to vaccinate 1.0M people per day in his first 100 days and getting sufficient vaccines out and people vaccinated at this rate is a challenge. Bloomberg reports that if the goal is 75% of Americans vaccinated to get to herd immunity, then 2.0M people need to be vaccinated daily to get to this herd level by August. This is a big challenge and one that is also extending the timeline of Q2/21 that had been promised by the current administration’s ‘Warp Speed’ program.

The World Health Organization (WHO) yesterday were quite pessimistic about when the world would have herd immunity with a forecast that it was more like in early 2022 than during 2021, especially due to the mutations that may not be controlled by currently available vaccines.

The near-term support level is US$46.15/b. Energy and energy service stocks are overbought and could stay so for a little while longer. We see significant downside risk. 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 in early February and they will for the most part not be good.

We are getting concerned about valuations and we may get a SELL signal at some point in the near term. Subscribers of our regular service will be notified when this occurs and what stocks and at what prices gains should be harvested. 

Energy Stock Market: The S&P/TSX Energy Index now trades at 100.2 and is reaching our near term target of 105. The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low in late October 2020) during Q1/21. A breach of 87.55 should start this downward trend.

In our December SER we introduced a new feature, monthly articles from a guest contributor, Professional Engineer and oil industry veteran, Ron Barmby. He will provide articles on climate change and related policies that affect the energy sector. In our January SER Monthly edition (to be published on Thursday January 21) he will cover the Federal Clean Fuel Tax Issue.

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.

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

 

Tesla Slips As More Apple EV Plans Reported, B of A Upgrades

Tesla is sinking on Monday despite a new upgrade and a raised price target from Bank of America. The pressure on Tesla stock appears to be due to further evidence that Apple is, in fact, working with Hyundai on electric cars. We had first reported that Apple was elbowing its way into the EV world last Friday.

This morning, rumors of Apple and Hyundai working together got another shot in the arm when it was reported that the two companies would announce a partnership deal in March, according to StreetInsider.com.

The two companies “plan to start production around 2024 in the United States,” the report says. “The first media report that appeared over the weekend in South Korea noted the companies plan to use Kia Motors’ factory in Georgia, or alternatively, build a new factory in the United States.”

It is being reported that the partnership has a goal of producing 100,000 vehicles in 2024. 

Last week, after rumors first swirled about the partnership, Hyundai issued a statement backing away from the report and saying it had been contacted by “a number of potential partners” for EV development on Friday morning. Hyundai instead said last Friday “it received requests for potential cooperation from a number of companies,” according to Bloomberg.

Last Thursday evening, it was reported that an internal discussion at Hyundai about a partnership with Apple had already been complete and was awaiting the Chairman’s approval. Hyundai and Apple were reported to be working on Apple Car production, self-driving and battery development together…CLICK for complete article

Thanks to massive government subsidies Norway is the first country to have electric cars over 50% of new vehicle sales. What climate activists fail to grasp is that represents a heck of a lot of copper, aluminum, steel, graphite and lithium mining.

Schacter’s Eye on Energy – Jan. 6th

Saudi’s fear of economic impact from new Africa Covid mutation causes them to unilaterally cut back crude production by 1.0Mb/d. Production increases by Libya, Russia, Kazakhstan, Iran, Iraq and Venezuela will likely offset this. Clearly OPEC+ is in disarray. The Expected spike to US$50+/b has occurred. Downside now ahead. We expect WTI to fall below US$45/b in February and below US$40/b in March before we see the next important bottom..

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

OPEC Supply Meeting: The two day (Jan 4-5) virtual OPEC+ meeting derailed as the Saudi’s wanted at first to have no increase in February quotas as they worried about the economic impact of more OECD lockdowns due to the new Covid mutations. The rest of OPEC wanted a second monthly 500,000 b/d increase as they looked at the demand growth in China and India. This disarray in OPEC is a weakness as last seen in February when the Saudis and Russia fought a market share war just as the pandemic got underway. In the end OPEC+ granted Russia and Kazakhstan an increase of 75,000 b/d together in each of February and March. The Saudis then unilaterally cut 1.0Mb/d for February and March to help hold back an expected increase in worldwide crude oil storage levels during Q1/21. Oil prices spiked on this surprise offer with WTI rising over US$50/b. We had been expecting a move up into the US$48-52/b level so this jump gets us into this peaking range. We see this price spike taking crude prices into the high part of the range for Q1/21. The problem we see is that some OPEC members, with and without quotas, will increase their volumes anyways as they are desperate for funds to sustain their collapsing economies. Libya, Iran, Iraq and Venezuela have been finding ways to move more oil, (some clandestinely, like Iran and Venezuela). The failure of OPEC to reach a consensus means more disruption and cheating is likely. As long as prices stay firm then cheating makes sense.

EIA Weekly Data: The EIA data on Wednesday January 6th was mixed. Commercial inventories fell 8.1Mb on the week versus the forecast of a 2.1Mb decline. The miss was due to refinery runs rising to 80.7% from 79.7% in the prior week and resulting in Distillate inventories rising by 6.4Mb and Gasoline Inventories by 4.5Mb. Overall Stocks rose by 1.7Mb on the week to 1.34Bb. Crude inventories are now 54.4Mb or 12.6% above last year’s level of 431.1Mb. US domestic crude production was unchanged at 11.0Mb/d, but is down 1.9Mb/d from last year’s 12.9Mb/d.

Consumption fell sharply last week. Total usage fell by 2.26Mb/d to 17.05Mb/d. Gasoline consumption fell 687Kb/d to 7.44Mb/d while Jet Fuel consumption fell 300Kb/d to 917Kb/d. Total product demand is now down 11.9% from last year. Gasoline Demand is down 8.5% from the 8.1Mb/d consumed last year and Jet Fuel is 43.1% below demand of 1.61Mb/d last year.

Cushing Oil Inventories rose by 800Kb to 59.2Mb compared to 35.5Mb last year at this time. If Cushing inventories exceed 60Mb then there will be concern about excess inventories in the domestic market. When this occurs crude prices should come under pressure.

Baker Hughes Rig Data: The holiday week data for last week came out on Wednesday December 30th. The Baker Hughes Rig Survey showed an increase in the US rig count. It rose by three (up eight rigs in the prior week) to 351 rigs working, but remains down 56% from 796 rigs working a year ago. The US oil rig count rose by three (up five rigs the prior week) to 267 rigs but is down 60% from 670 rigs working last year. The Permian saw an increase of two rigs to 175 rigs working but remains 57% below last year’s level of 403 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 now at 11.0Mb/d.

Canada saw a big decrease in the rig count last week, down 23 to 59 rigs working as the industry slowed down for the holiday season. The rig activity level is down 31% from a year ago when 85 rigs were working. The rig count for oil is now at 18 rigs (down 13 from last week) and down 33% from 27 rigs working last year. The natural gas rig count fell by 10 rigs last week to 41 rigs working, down 29% from 58 working at the end of last year. The Canadian rig count is now rising and we should see a strong pick up in the coming weeks as the robust Q1 winter activity occurs.

Conclusion: WTI today is at US$50.46/b (high US$50.71/b) up US$2/b over the last two weeks.

Positive issues for higher crude prices:

  • Winter is here in earnest and demand is rising especially for heating oil.
  • A war premium is now included in crude prices due to two recent attacks on Saudi oil facilities by Yemen militants and Iran grabbing a Korean tanker. Iran did this in retaliation for Korea responding to increased US sanctions on Iran and freezing US$7B of funds in South Korean banks.
  • The Saudi surprise announcement to unilaterally cut back production by 1.0Mb/d for the next two months is expected to slow the projected inventory build.

Negatives issues for lower crude prices:

  • OPEC+ cheating is rising as prices and volume demand allows countries to gain more revenues or market share. Russia is producing 100,000 b/d above quota and selling the volumes to energy hungry China. Iran added 39,000 b/d in November to reach 1.99Mb/d, Libya added 656,000 b/d to reach 1.11Mb/d and plan to get to 1.6Mb/d in early 2021 and Venezuela added 25,000 b/d to reach 407,000 b/d.
  • The demand for energy is expected to wane in the coming months as the pandemic spread causes more shutdowns of economies. Lockdowns and curfews are occurring across the US, Canada and most of Europe with tightened restrictions. The UK’s speedier mutant variant is worrisome as it has now spread to other countries. The US is seeing an acceleration of cases and deaths despite having two vaccines available. The next 3-5 months could see terrible levels of deaths as many areas have ICU beds fully utilized and are now rationing care. The new Africa mutation is very worrisome as it is even more virulent than the UK mutation, and some epidemiologists worry that this strain may not respond to current vaccines. If so, more work will need to be done to create new vaccines and getting herd immunity, may take into late 2021.

The near-term support level is US$46.25/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 are overbought and could stay so for a little while longer. We see significant downside risk. 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 late March or April 2021. 

Energy Stock Market: The S&P/TSX Energy Index now trades at 100.8 and is reaching our target for early 2021 of 100-105. The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low in late October 2020) during Q1/21. A breach of 87.55 should start this downward trend.

In our December SER we introduced a new feature, monthly articles from a guest contributor, Professional Engineer and oil industry veteran, Ron Barmby. He will provide articles on climate change issues and related policies that affect the energy sector. We hope you learn much from this new product offering. In our January SER Monthly edition (to be published on Thursday January 21) he will cover the Federal Clean Fuel Tax Issue.

Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all archived Webinars, Action Alerts, TOP PICK recommendations when the next BUY 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.

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