Canadian pipeline operator Enbridge Inc notified oil shippers on Wednesday that it would offer capacity for 620,000 barrels per day (bpd) on its Line 3 oil pipeline starting in October, signaling confidence in completing the long-delayed project.

The aging pipeline, which Enbridge is replacing, carries oil from Alberta to U.S. Midwest refiners. The replacement will eventually allow Enbridge to double capacity to 760,000 bpd.

Enbridge said in its notice to shippers, seen by Reuters, that its planned capacity is subject to finishing construction activities to replace the aging line in Minnesota…read more.

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EIA Weekly Data: The EIA data on Wednesday September 1st was mixed for crude oil prices. On the positive side for crude prices, Commercial Crude Inventories fell by 7.2Mb (forecast was for a decline of 3.1Mb) as Hurricane Ida preparation increased demand. Offsetting this bullish number was that Gasoline Inventories rose by 1.3Mb, and US crude oil production rose by 100Kb/d to 11.5Mb (up 1.8Mb/d from a year ago). Our target of 12.0Mb/d for US production during Q4/21  is getting a lot closer to reality. Refinery Utilization fell 1.1% to 91.3% last week (last year was 76.7% and in 2019 was 94.8%) as refiners shut down in advance of the approaching devastating hurricane.

Demand for Jet Fuel, Distillates, Fuel OIl and Propane rose prior to the landfall of Hurricane Ida, with Total Product Demand rising by 1.0Mb/d to 22.8Mb/d. Overall demand is now above late-August 2019 levels when consumption was 21.6Mb/d. Gasoline consumption rose a modest 5b/d to 9.58Mb/d (9.47Mb/d consumed in late-August 2019). Jet Fuel Consumption rose a robust 398Kb/d to 1.80Mb/d (now only slightly below the pre-pandemic level of 1.88b/d of late-August 2019). Cushing Inventories rose last week by 0.8Mb to 34.5Mb compared to 52.5Mb last year.

Baker Hughes Rig Data: The data for the week ending August 27th showed the US rig count with a rise of five rigs to 508 rigs. Of the 508 US rigs active, 410 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 105% from 244 rigs working a year ago. The US oil rig count is up 227% from 180 rigs last year at this time. The natural gas rig count is up a more modest 35% from last year’s 72 rigs. The Permian saw an increase of two rigs to 249 rigs and is up 99% from 125 rigs last year at this time.

Canada had a nine rig decline last week to 147 rigs as the spring/summer programs are completed. Canadian activity is now up 2.7x from 54 rigs last year. There were 85 oil rigs working last week, up from 19 last year. There are 62 rigs working on natural gas projects now, up from 35 last year.

The material increase in rig activity over a year ago in both the US and Canada should continue to translate into rising liquids and gas production. The data from the companies that have reported Q2/21 results are supporting this rising production profile.

Conclusion:

OPEC+ is meeting later today to ratify production levels for October. We expect that they will affirm the increase in production of 400Kb/d as part of the plan to add 2.0Mb/d before year-end under their most recent agreement. Forecasts now see OPEC+ adding more crude in 2022, moving their volumes by 2H/22 back to levels produced prior to the Covid pandemic start which required them to cut production by 10Mb/d. They still have 4-5Mb/d of capacity that can be added next year to meet the growth in demand that they see occurring. Some forecasts now see an excess of 2-2.5Mb/d starting after winter 2021-2022 ends.

Starting in the next few weeks of September now that the summer driving season is over, there should be weekly builds in Commercial Crude Stocks around the world as inventories build to meet the winter 2021-2022 needs. If we see repetitive weekly rises of some significant volumes to US storage levels, WTI crude should decline below US$60/b later in September. Normal fall builds are 2-3Mb per week but if we see any builds over 5Mb in any week, that would push meaningful pressure on crude prices.

Bearish pressure on crude prices:

1. The EU is recommending that non-essential travel to the US be halted due to the rapid rise in US caseloads. This will lower air travel and the demand for Jet Fuel, and as a result lower Crude oil demand will occur. Cancellations of passenger flights in the US have caused many US airlines to lower capacity by 8-10% starting this month.
2. The US ADP jobs report was quite disappointing with a rise of only 374K jobs. The forecast had been for over 600K jobs and the expectation is that the official jobs report out this Friday would be over 700K jobs (July showed an increase of 832K jobs). If it is another low number that would be disappointing especially since the Federal unemployment support of US$300 per week ends this weekend. This funding support has been utilized by 12M people.
3. Low vaccination rate countries in Asia are imposing new growth-sapping restrictions due to the fast rise in the new, more lethal and faster spreading variants. Vietnam has the most aggressive lockdowns announced this week.
4. Countries such as Argentina, Australia, Bangladesh, Central African Republic, China (14 of 32 provinces seeing spikes – including Wuhan where the outbreak started, as well as in the capital Beijing), Cuba, Greece, Indonesia, Iran, Iraq, Japan, Malaysia, Mexico, Morocco, New Zealand, Philippines, Saudi Arabia, South Africa, South Korea, Sri Lanka, Thailand, Venezuela, and Vietnam are all seeing rising caseloads and are tightening movement and putting in curfews. This list is up by two new countries from last week. Death counts are now up to 4.51M worldwide and are over 639K in the US. The total worldwide caseload is now 217.1M people of which the US has 39.1M cases.

Bullish pressure on crude prices:

1. Rising vaccination levels of the adult US population toward herd immunity level has lifted travel.
2. Hurricane Ida (a Category 4 Hurricane) necessitated shutting in most of the offshore Gulf of Mexico oil and gas production. Over 1.7Mb/d of crude was shut in which equates to over 90% of offshore production.
3. Hurricane Ida, extreme heat waves, forest fires, 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 utilities have low water levels due to the drought. NYMEX natural gas prices are now at US$4.57/mcf. AECO prices have drifted lower but are still at an attractive C$3.50/mcf.

CONCLUSION: 

WTI has lifted from US$61.74/b two weeks ago to US$67.75/b today due to Hurricane Ida and the shutting in of most of the US offshore crude production. With the summer driving season over and the normal fall build season starting shortly, we expect WTI crude oil prices to start to go down again. We had forecasted that WTI would decline below US$65/b in August (which it did) and now see a breach of US$60/b as likely before the end of September. How low we go will depend upon the health of the largest economies (The US, China and the EU) and how large the seasonal crude storage builds are. Our worst case downside for WTI crude is for US$48-54/b during Q4/21. 

Energy Stock Market: The S&P/TSX Energy Index trades currently at 122 and is down 16% from the high of 145 in mid-June. With the decline in crude in the first two weeks of August to US$61.74/b, the Energy Index fell to a low of 109.72 (a 24% decline from the high). Once WTI breaches US$61.74/b later this month, we should be heading towards 100 for the Energy Index.

The energy sector is facing attacks (becoming the climate battle punching bag) by the Liberals, NDP and the Green Party as the Federal election cycle is now underway. Canadian energy stocks are likely to face more pressure than energy stocks in the US during the September election cycle.

When, not if, WTI breaks US$60/b the S&P/TSX Energy Index is likely to breach 80 resulting in a painful 45% decline from the peak in mid-June. Over-invested bulls are likely to get hurt pretty badly. We recommend caution and holding cash for the next low risk entry point on that portion of one’s portfolio which is energy focused. The energy and energy service companies with the most downside are those with stretched balance sheets, and have missed production, revenue or EBITDA forecasts. Some of the hardest hit energy and energy services companies are down 40-50% so far from the 2021 highs.

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Crude oil prices could rise further if OPEC+ stops adding barrels to global supply, which is a possibility after the cartel’s next meeting, according to the Kuwaiti oil minister.

“The markets are slowing. Since COVID-19 has begun its fourth wave in some areas, we must be careful and reconsider this increase. There may be a halt to the 400,000 (bpd) increase,” said Mohammad Abdulatif al-Fares, as quoted by Reuters.

OPEC+ had agreed to boost oil production by 400,000 bpd every month beginning August until the group’s combined output reached pre-agreement levels towards the end of next year. But now that demand concerns are once again coming to the fore, OPEC+ is signaling that it is always ready to change tack…read more.