Energy & Commodities

Schachter’s Eye on Energy – May 13th

This 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 29 energy and energy service companies with regular updates. He holds quarterly subscriber webinars (next one Thursday May 28th) and provides Action BUY and SELL Alerts for paid subscribers. Learn more and subscribe.

EIA Weekly Data: Wednesday’s (May 13th) EIA data was quite positive. Commercial stocks fell by 700Kb/d versus the forecast of a rise of 4.1Mb. Part of the difference was due to imports falling by 300Kb/d or by 2.1Mb on the week. Overall stocks rose a modest 1.4Mb. The only material increase was in distillates which rose 3.5Mb. The decline in refinery runs to 67.9% from 70.5% last week and strong demand for gasoline lowered gasoline inventories by 3.5Mb on the week.

US production of crude fell by the largest weekly decline this year down 300Kb/d to 11.6Mb/d and now down 1.5Mb/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 Bakken and the Permian basins. By 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 possible this closure of production could reach 10.0Mb/d by late Fall. Cushing saw a surprise decline of 3.0Mb to 62.4Mb.

The most positive result in the report was that overall product demand grew by 9.5% this week to 16.8Mb/d, with finished motor gasoline demand rising by 11% to 7.4Mb/d as more US States reopened and people began increased movement. Offsetting this was a fall in jet fuel demand of 32% to 352Kb/d from 515Kb/d during the week before. Jet Fuel demand may have the most difficulty in seeing a resurgence until a vaccine is available.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 34 rigs (prior week down 57 rigs) to 374 rigs and down 62% from 988 rigs working a year ago. The Permian felt the largest basin loss with a rig loss of 21 rigs (last week down 27 rigs) or down by 57% from a year earlier level of 457 rigs. The US oil rig count fell by 33 rigs to 292 rigs and down 64% from 805 rigs last year. We expect the US rig count to fall even further than our prior forecast of 400 rigs, with a new lower target of 320 rigs by the end of May. Canada had a decline of one rig and the count now is at 26 rigs working but down 59% from 63 rigs working a year ago. It is likely that 700Kb/d has been shut in already in Canada and maybe a total of 1.2-1.6Mb/d may be shut in before the end of Q3/20.

Conclusion: WTI as we write this is down 37 cents at US$25.41/b for the June contract. The bounce in crude prices over the last week won’t last as it is clear that more oil needs to be shut-in to balance supply and demand.

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. Since then the market malaise and decline has pulled energy lower as well and the Index on May 13th has dropped to 70%. We expect to see the energy sector correct significantly in the coming weeks as the general market decline unfolds and that this Index will fall 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 71.8 down from a high of 78.7 last week or down 8.2% so far.

Federal Reserve Chairman Powell weighed in today on his concern about a prolonged economic downturn due to the Covid-19 outbreak and concern about the pace and timing of the rebound. The shape of the recovery ‘V’ as President Trump wants and needs if he wants to be re-elected, ‘U’ as most economists forecast and bathtub shaped, as is now getting some support are depressing stock markets. Over the last two weeks the Dow Jones Industrials have fallen over 1,600 points (today down nearly 600 points as we write this) and our target for the Index is for it to plunge below 18,000 (now 23,159) and the TSX to below 9,000 (now 14,487 – down 2% over the last week). Both Canada and the US States want to start extensive testing and tracing and need significant numbers of test kits which are not yet available. The key need is tests that can be done quickly with the results obtained in minutes and not days as is now. The current plunge could be even uglier and more painful than the one from mid-February to mid-March especially if we see a significant rise in Covid-19 cases and deaths as some of the reopenings may be moving too fast. The financial support provided by governments via direct financing and via the Central Banks is being used up and more funds are needed but so far have not been made available as the political divide continues. The US is having more difficulties as it is a Presidential election year and both parties have divergent positions about what to do.

We are holding our next important SER webinar on Thursday May 28th so subscribers should send in questions and sign up for the webinar. We plan to go over Q1/20 results from companies that have reported and show 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).

FYI – I will be on BNN’s Market Call with Andrew Bell next Wednesday May 20th via Skype at 10AM MT.

Subscribe to the Schachter Energy Report and receive access to our Webinar, our Action Alerts, our TOP PICK recommendations when the next BUY signal occurs as well as our review of companies ability to survive the present existential virus collapse impacting crude prices.

To get access to our research please go to http://bit.ly/2OvRCbP to subscribe.

Hand Sanitizer Boom Could Save The Ethanol Industry

With widespread layoffs and furloughs hitting post-World War II records and a global economy deep in the throes of a recession, the economic devastation wrought by the Covid-19 pandemic is only rivaled by the Great Depression. Yet, some businesses have been thriving during this upheaval, while others have had to reinvent themselves thanks to dramatic shifts in consumer behavior.

POET LLC, the world’s largest ethanol manufacturer producing about two billion gallons of the product per year, has made a pretty drastic business transition after retooling and pivoting into hand sanitizers instead. POET has re-engineered its systems to make pharmaceutical-grade hand sanitizers after ethanol prices cratered following weak gasoline demand.

Second Act POET runs more than two dozen ethanol plants in the U.S. but has been forced to close down three plants. It is running the remaining plants at half capacity and has laid off 10% of its workforce.

Pivoting into hand sanitizers is not as dramatic as, say, auto companies such as Ford, GM, and Tesla repurposing their car factories to make ventilators. Nevertheless, POET CEO Jeff Broin says the conversion from an ethanol manufacturer to one making hand sanitizers comes with some pretty significant costs….CLICK for complete article

A Supply Chain War Will Not End Well For The Global Economy

Global supply chains – technically dubbed global value chains – have become weaponized in the economic battles of Covid-19. For the West, the target is China, a favorite scapegoat in a self-serving blame game. Japan has earmarked some ¥243 billion of its record ¥108 trillion rescue package to assist Japanese companies in pulling operations out of China, and Larry Kudlow, Trump administration economic policy chief, has hinted at similar relocation support for US companies.

The goal is threefold: Punish China for the coronavirus, eliminate a source of vulnerability in production lines of critical equipment, and bring back home, via reshoring, offshore platforms that have undermined and hollowed out domestic operations. While angst is certainly understandable as the world grapples with a devastating pandemic, these goals present the world with many risks….CLICK for complete article

Schachter – Eye on Energy May 6th

This week Josef Schachter gives 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 29 energy and energy service companies with regular updates. He holds quarterly subscriber webinars (next one Thursday May 28th) and provides Action BUY and SELL Alerts for paid subscribers. Learn more and subscribe

EIA Weekly Data: Wednesday’s (May 6th) EIA data was mixed. Commercial stocks increased by 4.6Mb (versus a forecast of 7.0Mb) with the difference due to a rise in exports of 244Kb/d to 3.55Mb/d, and was responsible for 1.7Mb of the forecast miss. Overall stocks rose a whopping 19.6Mb on the week with the strategic reserve (SPR) taking in 1.7Mb. The  largest increase was in distillates which rose 9.5Mb. One bright spot was Gasoline inventories which fell 3.2Mb on the week as consumption lifted strongly. Refinery runs rose to 70.5% from  69.6%. US production of crude fell 200Kb/d to 11.9Mb/d and is now down 1.2Mb/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 Bakken and the Permian basins. By summer US production is likely to be under 11.0Mb/d as the high decline shale basins see rapid production declines (voluntary and involuntary). Cushing saw a rise in storage of 2.0Mb to 65.4Mb and may have less than a month left until full (effective capacity 76-77Mb).

On the positive side this week’s finished motor gasoline demand lifted by 14% to 6.67Mb/d as more US States reopened and people began increased movement. Offsetting this was a fall in jet fuel demand of 36% to 515Kb/d from 800Kb/d during the week before. In addition propane usage fell 37% to 826Kb/d from 1.3Mb/d which led to an overall decline in total product supplied of 3% or down 409Kb/d to 15.25Mb/d.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 57 rigs (prior week down 64 rigs) to 408 rigs and down 59% from 990 rigs working a year ago. The Permian felt the largest basin loss with a rig loss of 27 rigs (last week down 37 rigs) or down by 52 from a year earlier level of 459 rigs. The US oil rig count fell by 53 rigs to 325 rigs and down 60% from 807 rigs last year. We expect the US rig count to fall even further than our prior forecast of 400 rigs, with a new lower target of 350 rigs by the end of May. Canada had a rise of one rig as spring break up is over, and the count now is at 27 rigs working but down 56% from 61 a year ago. It is likely that 700Kb/d has been shut in already in Canada during Q2/20 and maybe a total of 1.2-1.6Mb/d may be shut in before the end of Q3/20.

Conclusion: WTI as we write this is at US$23.44/b for the June contract, down US$1.12/b on the day due to the weak EIA data and concern about the shortage of storage developing world-wide.  The bounce in crude prices over the last week won’t last as it is clear that there is inadequate storage and more oil needs to be shut-in The focus on the week is Friday’s jobs report with forecasts ranging from 20-24M jobs lost in April in the US and between 3.5-4.8M in Canada. The higher the number the more negative the markets will take the data.

With storage just weeks away from being full we expect more production to be shut in mostly involuntarily. To show how everyone is searching for more places to store oil, Enbridge has agreed to open an old oil pipeline between Saskatchewan and Manitoba to temporarily store 990Kb starting in June. Another company Total Energy Services has found interest in using its frack fluids tanks as temporary storage. Our target is for crude to fall below US$10/b before reduced supply and reduced demand balance out in Q3/20.The S&P/TSX Energy Index has fallen over the last week by 5% to 72 from 76 as Q1/20 results have started to come out and the poor results, write-downs and more dividend cuts (Suncor) weigh on the sector. There is continuing hope that the Canadian government will do something material to help the industry but so far the support is insufficient to stabilize the sector. We are pessimistic that it will be too little and too late for this leftist environmental focused minority government which wants to get its legislation supported by the NDP and Greens, rather than the Conservatives.

The short covering rally of the last few weeks took the S&P Energy Bullish Percent Index from 0% on March 9th to 100% last week and has dropped off over the last few days to 96%. In lengthy bull markets this would be a SELL signal but in this instance we see this as a near term overbought indicator. We recommend investors hold off additional buying until we see a meaningful correction. We expect to see the energy sector correct significantly in the coming weeks and that this Index will fall again below 10%, providing the next low risk BUY signal. For the S&P/TSX this means a decline to the 32-36 level..

The longer the delay in getting adequate testing kits so that the economy can be reopened, the lower the markets may go as getting back to a new normal requires confidence of citizens. Over the last week the Dow Jones Industrials have fallen nearly 1,000 points and our target for the Index is for it to plunge below 18,000 (now 23,858) and the TSX to below 9,000 (now 14,843 – down 2% over the last week).  Both Canada and the US States want to start extensive testing and tracing and need significant numbers of test kits which are not yet available. The near term plunge could be even uglier and more painful than the one from mid-February to mid-March especially if we see a rise in Covid-19 cases and deaths as some of the reopenings were too fast.

Subscribe to the Schachter Energy Report and receive Action Alerts and our TOP PICK recommendations when the next BUY signal occurs as well as our review of companies ability to survive the present existential virus collapse impacting crude prices.

To get access to our research please go to http://bit.ly/2OvRCbP to subscribe.

Commodities Barely Weather The COVID Storm

It’s been a mixed bag for commodities, and it’s mostly been negative, with oil and gas and agriculture taking huge hits from the pandemic, and gold only humbly rallying on its safe haven laurels, while battery metals can’t catch a break despite production shut-ins.

Overall, the month ended on a sour note, more than anything dragged down by West Texas Intermediate (WTI) oil prices going into negative territory briefly. For oil, it’s about crippling demand amid a major supply glut that has everyone scrambling for storage, while for agriculture, it’s about major supply chain disruptions. CLICK for complete article

Bone-Chilling Charts of the Collapse in US Demand for Gasoline, Jet Fuel, and Diesel

Oil companies are reporting financial fiascos every day: Today Exxon reported its first quarterly loss since 1999 ($610 million), on a “market-related” $2.9 billion write-down. “We’ve never seen anything like what the world is facing today,” CEO Darren Woods said.

On Thursday, Texas-based shale-driller Concho Resources reported a quarterly loss of $9.3 billion, after writing down the value of its oil and gas assets by $12.6 billion.

Also on Thursday, it was reported that Oklahoma-based Chesapeake Energy, a pioneer in shale-drilling, was preparing to file for bankruptcy…Click for full article.