Energy & Commodities

Schachter’s Eye on Energy – Dec 23rd

The UK speedier Coronavirus variant cuts oil prices by US$2/b so far this week as travel is restricted to and from the UK. A bounce back to the recent highs is likely in early 2021. This could become the high for Q1/21.

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 December 23rd was mixed. Commercial inventories fell 0.6Mb on the week to 499.5Mb but this was all due to US exports recovering by 472Kb/d, or by 3.3Mb on the week. With no change in exports there would have been a gain in inventories this week. Crude inventories are now 58.2Mb or 13.2% above last year’s level of 441.4Mb. Gasoline inventories fell by 1.1Mb while distillates fell by 2.3Mb as US Refinery Utilization and product produced declined from 79.1% to 78.0% and is much below last year’s level of 93.3%. 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 last week. Total usage fell by 247Kb/d to 19.1Mb/d. Offsetting this Gasoline consumption rose 47Kb/d to 8.0Mb/d while Jet Fuel demand rose 46Kb/d to 1.196Mb/d. Total Demand now is 2.26Mb or 10.6% below last year’s level of 21.35Mb/d.  Gasoline Demand is down 13.8% from the 9.3Mb/d consumed last year and Jet Fuel is 22.4% below demand of 1.54Mb/d last year.

Total Stocks are now 92.8Mb or 7.3% above the 1.26Bb in storage last year. Cushing Oil Inventories were flat on the week at 58.4Mb in storage but are high compared to 37.8Mb last year at this time. If Cushing inventories exceed 60Mb then there will be concern about excess inventories in the domestic market. In early 2021, this could occur resulting in significant crude price pressure.

Baker Hughes Rig Data: Last week Friday, the Baker Hughes Rig Survey showed an increase in the US rig count. It rose by eight (up 15 rigs in the prior week) to 346 rigs working, but remains down 57% from 813 rigs working a year ago. The US oil rig count rose by five (up 12 rigs last week) to 263 rigs but is down 62% from 685 rigs working last year. The Permian saw an increase of six rigs to 174 rigs working but remains 58% below last year’s level of 414 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.

Canada saw a big decrease in the rig count last week, down nine to 102 rigs working as the industry slows down for the holiday season. The rig activity level is down 32% from a year ago when 149 rigs were working. The data will continue to decline for the next week or two and then start up again with greater activity in the New Year. The rig count for oil is now at 41 rigs (down 11 from last week) and down 53% from 88 rigs working last year. The natural gas rig count rose by two rigs last week to 61 rigs working, unchanged from last year.

Natural gas prices have recovered significantly as colder weather hits across North America (with the NorthEast particularly hit hard). AECO is now at $2.66/mcf. NYMEX is now at  US$2.70/mcf. We expect much higher prices over the coming winter months. With cold weather across much of Asia, spot LNG prices have rocketed up to US$12/MmBtu for importers in Japan, China and South Korea to meet their electricity and heating needs. The US exported a record high of 9.4Bcf/d of LNG and operated at 93% capacity.

Conclusion: We are now back to crude price levels seen in March 2020 just before the pandemic caused lockdowns of worldwide economies. WTI today is at US$47.98/b up slightly from last week.

Positive issues for higher crude prices:

  • Winter is here in earnest and demand is rising for heating oil and demand rises during the Christmas period as driving picks up.
  • While OPEC has lowered the near term demand forecast for crude oil they see demand rising in 2021 to 95.89Mb/d from 89.99Mb/d in 2020. The forecast for Q4/20 is for consumption of 93.47Mb/d and by Q4/21 is forecast at 97.29Mb/d.
  • A war premium is now included in crude prices due to two recent attacks on oil facilities in the Middle East.

Negatives issues for lower crude prices:

  • OPEC’s agreement earlier this month was a disaster. Instead of delaying any production increases to Q3/21, they agreed to a production rise in January of 500Kb/d. They also plan to review production quotas monthly (next meeting January 4th) with plans to increase production by 500Kb/d for the next three months if they see the demand being there and prices have held up.
  • 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 for the Christmas holiday season. Italy has imposed a total lockdown over Christmas.The UK speedier mutant variant is worrisome as it has now spread to other countries. The US is seeing an acceleration of cases and deaths despite now 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. There are now 18.3M cases (up from 16.8M cases last week) in the US with 324K deaths (up from 305K last week). Yesterday showed another death rate at over 3,000 (the fifth day this month over 3,000). Worldwide the caseload is 78.2M and deaths at 1.72M.

World-wide crude and product inventories are now 475Mb over the five year average. If OPEC agrees to add 500Kb/d in February and more each of the next two months, then crude should breach US$40/b. 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 into early 2021. We see significant downside risk but that the plunge may not occur now until we are into January 2021. 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 late in Q1/21. Traders may want to harvest some of the great gains since the BUY signal triggered in March on strong up days. OPEC+ production is too high and is rising when it should have been held flat with no cheating.  

Energy Stock Market: The S&P/TSX Energy Index now trades at 91.57 down modestly from 93.32 from last week. The S&P/TSX Energy Index started the year at 146 so it is down 36% year-to-date. A bit over two weeks ago the high for the Index was 98.49 and we may see a bounce back to this level or slightly higher into early 2021. Tax loss selling has not occurred this year. We now see the decline occurring in Q1/21. We discuss this in our December 17th SER issue and go over numerous examples (for the Index and for individual stocks). The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low in late October) 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.

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.

We will be taking a week off for vacation next week so our next issue of ‘Eye on Energy’ will be on Wednesday January 6, 2021.

We wish you and yours a safe, healthy and enjoyable holiday season.

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

Why Apple Could Emerge As Tesla’s ‘First True Competitor’

Apple Inc’s ambitions in the transportation space mean the iPhone maker could emerge as Tesla Inc’s “first true competitor,” Loup Ventures analyst Gene Munster said Monday.

Regardless of the approach the Tim Cook-led company takes, it has transportation industry ambitions that could result in “meaningful revenue” and pitch the tech giant head-on with Tesla, wrote Munster.

A Marriage Of Titans: “Apple building a car is not news,” the analyst noted — mentioning the company’s self-driving car project, Project Titan, that started in 2014.

In that era, Munster says, the company had three avenues, “First, build an Apple-branded car. Second, build software and license it to other automakers. Third, acquire Tesla.”

The analyst dismissed all likely Project Titan outcomes, noting that the Apple-Tesla marriage, on the table five years ago, did not occur because both the firms felt strongly about design…CLICK for complete article

Iron ore price leaps to highest since 2011

Iron ore prices leaped to more than nine-year highs on Friday amid trading spikes and a frenzy for the steelmaking ingredient in China, which the country’s steelmakers have called  “unreasonable” and “abnormal.”

According to Fastmarkets MB, benchmark 62% Fe fines imported into Northern China (CFR Qingdao) were changing hands for $164.39 a tonne on Friday, up nearly 4% from Thursday’s peg.

Iron ore is now trading at the highest level since October 2011 and is up 78% in 2020.

On the Dalian Commodities Exchange, futures prices hit a new all-time high on Friday, shooting up more than 6% to 1,076 yuan. The contract was launched in 2013.

China forges more steel than the rest of the world combined and is set to break records with iron ore imports – primarily from Australia and Brazil – increasing to above one billion tonnes this year…CLICK for complete article

Schachter’s Eye on Energy – Dec. 16th

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 December 16th was mixed. Commercial inventories fell 3.1Mb on the week to 500.1Mb but this was all due to US exports recovering by 793Kb/d or by 5.6Mb on the week. With no change in exports there would have been a gain in inventories again this week. Crude inventories are now 53.3Mb or 11.9% above last year’s level of 446.8Mb. Gasoline inventories rose by 1.0Mb while distillates rose by 0.2Mb. US domestic crude production fell 100Kb/d last week to 11.0Mb/d and is down 1.8Mb/d from last year’s 12.8Mb/d.

Consumption rose last week. Total usage rose by 801Kb/d to 19.3Mb/d with gasoline consumption rising by 375Kb/d. Post the Thanksgiving holiday period Jet Fuel Consumption fell by 160Kb/d to 1.15Mb/d. Total Demand now is 2.48Mb or 11.3% below last year’s level of 21.8Mb/d.  Gasoline Demand is down 15.3% from the 9.4Mb/d consumed last year and Jet Fuel is 44.1% below demand of 2.06Mb/d last year.

Refinery Runs fell 0.8 points to 79.1% from 79.9% in the prior week and down from 90.6% last year. Total Stocks are now 93.0Mb or 7.3% above the 1.27Bb in storage last year. Cushing Oil Inventories rose a modest 0.2Mb to 58.4Mb and are higher compared to 40.2Mb last year at this time. If Cushing inventories exceed 60Mb then there will be concern about excess inventories in the domestic market. In early 2021, this could occur resulting in significant crude price pressure.

OPEC Monthly Report (December 14, 2020): OPEC’s production level increased by 707Kb/d in November to 25.1Mb/d. The largest increase came from Libya which raised its production by 656Kb/d to 1.11Mb/d. They are now at 1.3Mb/d and should be at 1.6Mb/d by early 2021. In addition Iran raised production by 39Kb/d to 1.99Mb/d and Venezuela by 25Kb/d to 407Kb/d. Both plan to add further production for China and India as they see the incoming Biden administration not being as tough on sanctions as Trump’s. With the announcement that OPEC will add 500Kb/d in early January 2021 there is likely to be a glut in Q1/21. If OPEC raises production by 500Kb/d in each of the first few months of 2021, a glut will become a noticeable reality. OPEC lowered demand in Q4/20 by 200Kb/d to 93.47Mb/d, they lowered demand in Q1/21 by 1.0Mb/d to 93.97Mb/d and lowered demand in Q2/21 by 63Kb/d to 95.68Mb/d. Only in Q4/21 do they see demand rising by 200Kb/d from their prior forecast. In Q4/21 they see demand at 97.29Mb/d. Only in 2022 do they see demand returning to over 100Mb/d as last seen in late 2019. OPEC now sees OECD total inventories 262Mb above late 2019 levels (4.74Bb versus 4.48Bb) with 69 days of in the America’s inventories versus a normal 60 days, Europe is glutted with 90 days of inventories versus a normal rate of 67 days,  and Asia/Pacific at 58 days versus a normal 52 days. This last area is the positive for energy.

Baker Hughes Rig Data: Last week Friday, the Baker Hughes Rig Survey showed an increase in the US rig count. It rose by 15 (up three rigs in the prior week) to 338 rigs working, but remains down 58% from 799 rigs working a year ago. The US oil rig count rose by 12 (up five rigs last week) to 258 rigs but is down 61% from 667 rigs working last year. The Permian saw an increase of four rigs to 168 rigs working but remains 58% below last year’s level of 400 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.

Canada saw a big increase in the rig count last week, up nine to 111 rigs working. The rig increase now has activity down only 27% from a year ago when 153 rigs were working. The rig count for oil is now at 52 rigs (up 12 last week) but down 46% from 96 rigs working last year. The natural gas rig count fell by three last week to 59 rigs working but remains up by 4% for the year versus the 57 rigs working last year.

Natural gas prices have recovered significantly as colder weather hits across North America (with the NorthEast particularly hit hard). AECO is now at $2.74/mcf up from $2.10/mcf last week. NYMEX has recovered to US$2.66/mcf from US$2.49/mcf last week. We expect much higher prices over the coming winter months.

Conclusion: We are now back to crude price levels seen in March 2020 just before the pandemic caused lockdowns of worldwide economies. WTI today is at US$47.45/b down 17 cents on the day.

Positive issues for higher crude prices:

  • Vaccine deliveries are occurring now in Europe, Canada and the US and should start around the world later this month once approved by the local drug authorities. Anyone who wants one in Canada or the US should have it by Q3/21. The second vaccine from Moderna should see approval shortly and distribution before month end. This one does not have the same cold storage requirements and is likely to go to the northern Territories in Canada, First Nations and smaller communities. A similar approach should be taken around the world.
  • While OPEC has lowered the near term demand forecast for crude oil they see demand rising in 2021 to 95.89Mb/d from 89.99Mb/d in 2020. The forecast for Q4/20 is for consumption of 93.47Mb/d and by Q4/21 is forecast at 97.29Mb/d.
  • Asian demand remains the strongest in the world and is now above last year’s consumption levels for both China (up 0.6% to 13.3Mb/d) and India (up 2.7% to 4.58Mb/d).
  • A war premium is now included in crude prices due to two attacks on oil facilities in the Middle East. Two small Iraqi oil wells were attacked by terrorists in Northern Iraq. In the second and more consequential attack Houthi rebels sent an explosive laden boat that assaulted a Singaporean flagged tanker. The ship may have lost some crude volumes but no one aboard was hurt. The Yemen civil war continues to flow over the border and this is the fourth incident in a month.

Negatives issues for lower crude prices:

  • OPEC’s agreement earlier this month was a disaster as instead of delaying any production increases to Q3/21, they agreed to a production rise in January of 500Kb/d. They also plan to review production quotas monthly (next meeting January 4th) with plans to increase production by the same amount each month. Of the January increase the Saudis took 125,000 b/d and the Russians 125,000 b/d, leaving a miniscule amount for the remaining members. Cheating is guaranteed to continue as many of the smaller OPEC players are desperate for funds to run their economies.
  • The demand for energy may wane in the coming months as the pandemic spread causes more shutdowns of economies. Lockdowns and early curfews are occurring across the US, Canada and most of Europe with tightened restrictions for the Christmas holiday season. The Netherlands today started a five week lockdown. Hong Kong and South Korea are also tightening social distancing rules and curbs as they see increased caseloads and deaths. There are now 16.8M cases (up from 15.3M cases last week) in the US with 305K deaths (288K last week). Yesterday showed another death rate over 3,000 (3,019 deaths and the CDC is warning that the death rate by early 2021 could be over 350K). Worldwide the caseload is 73.6M and deaths near 1.64M.

World-wide crude and product inventories are now 475Mb over the five year average. If OPEC agrees to add 500Kb/d in February then crude should breach US$40/b and fall to the US$32-36/b area during Q1/21. The next downside near-term support level is US$43.92/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 and now very overbought. We see significant downside risk but that the plunge may not occur now until we are into 2021. 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 Q1/21. Traders may want to harvest some of the great gains since the BUY signal triggered in March. OPEC+ production is too high and is rising when it should have been held flat with no cheating.  

Energy Stock Market: The S&P/TSX Energy Index now trades at 93.32, virtually unchanged from last week. The S&P/TSX Energy Index started the year at 146 so it is down 36% year-to-date. Last week the high for the Index was 98.49 and we may see a bounce back to this level or higher into year-end or early 2021 under our revised thesis (as the market facts change then we have and will continue to amend our views). Tax loss selling is not occurring this year as was expected. We now see the decline occurring in Q1/21. We discuss this in our upcoming December SER issue out later this week and go over numerous examples (for the Index and for individual stocks). The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low in late October) during Q1/21. A breach of 84.95 should start this downward trend. In our December SER we start to include monthly articles from a guest contributor (Professional Engineer and oil industry veteran, Ron Barmby) which will cover climate change issues that affect the energy sector. We hope you learn much from this new product offering.

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.

Schachter’s Eye on Energy – Dec. 9th

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 December 9th was very negative. Commercial inventories rose (a record for 2020 of) 15.2Mb versus the assumption of a decline of 1.4Mb on the week.The reason was that US crude and product exports fell a dramatic 1.6Mb/d to 1.83Mb/d (last week exports were 3.46Mb/d). Overall this reflects 11.4Mb of the build. Is this a one time event or is there now such a glut of global oil that US exports are being hurt? Crude prices started this morning at US$46.24/b and have fallen over US$1/b so far today to US$45.21/b at the time of this report (low so far today US$44.95/b). Crude inventories are now 55.3Mb or 12.3% above last year’s level of 447.9Mb. Gasoline inventories rose by 4.2Mb while distillates rose by 5.2Mb, all very bearish for WTI prices. US domestic crude production was flat at 11.1Mb/d on the week but down 1.7Mb/d from 12.8M last year.

Consumption during the Thanksgiving period rose modestly last week. Total usage rose by 67Kb/d to 18.5Mb/d however gasoline consumption fell by 373Kb/d. The bright spot was Jet Fuel Consumption, which rose by 176Kb/d to 1.31Mb/d as more people flew to visit family and friends during the holiday period. Total Demand rose 167Kb/d above last year’s level of 18.4Mb/d.  Gasoline Demand is still down 14.4% from the 8.9Mb/d consumed last year and Jet Fuel remains 17% below demand of 1.58Mb/d last year.

Refinery Runs rose 1.7 points to 79.9% from 78.2% in the prior week but down from 90.6% last year. Total Stocks (excluding the SPR) rose by 19.9Mb and now are 98.2Mb above last year or 7.7% above the 1.28Bb in storage last year. Cushing Oil Inventories fell by 1.4Mb to 58.2Mb and are higher compared to 40.4Mb last year at this time.

Baker Hughes Rig Data: Last week Friday, the Baker Hughes Rig Survey showed an increase in the US rig count. The US rig count rose by three (up 10 rigs in the prior week) to 323 rigs working, but remains down 60% from 799 rigs working a year ago. The US oil rig count rose by five (up 10 rigs last week) to 246 rigs but is down 63% from 663 rigs working last year. The Permian saw an increase of three rigs to 164 rigs working but remains 59% below last year’s level of 400 rigs working. Over US$45/b for WTI seems to be a price point where producers see economic returns from drilling.

Canada saw no change in the rig count last week (up 1 in the prior week) to 102 rigs working. The rig increase now has activity down only 26% from a year ago when 138 rigs were working.. The rig count for oil is now at 40 rigs (up two on the week) and is down 59% from 87 rigs working last year. The natural gas rig count fell by two last week to 62 rigs working but remains up by 22% for the year versus the 51 rigs working last year.

Natural gas prices have drifted lower as warm weather has lowered consumption. AECO is now at $2.10/mcf down over 25% in recent weeks. NYMEX has also retreated and is now at US$2.49/mcf. We expect much higher prices once the depths of winter arrive later this month.

Conclusion: We are now back to crude price levels seen in March 2020 just before the pandemic caused lockdowns of worldwide economies. The positive view of vaccines coming shortly has ignited investor interest in the sector.

Positive issues for higher crude prices:

  • The first vaccine deliveries have started in the UK and should start around the world later this month once approved by the drug authorities. Anyone who wants one in Canada or the US should have it by Q3/21. Today Canada was the third country to approve the Pfizer/BioNTech vaccine.
  • While OPEC has lowered the near term demand forecast for crude oil they see demand rising in 2021 to 96.26Mb/d from 90.01Mb/d in 2020. The forecast for Q4/20 is for consumption of 93.67Mb/d and by Q4/21 is forecast at 97.09Mb/d.
  • Asian demand remains the strongest in the world and is now above last year’s consumption levels.

Negatives issues for lower crude prices:

  • OPEC’s agreement was a disaster as instead of delaying any production increases to Q3/21, they agreed to a production rise in January of 500Kb/d. They also plan to review production quotas monthly (next meeting January 4th) with plans to increase production by the same amount each month if appropriate. Of the January increase the Saudi’s took 125,000 b/d and the Russian 125,000 b/d, leaving a miniscule amount for the remaining members. Cheating is guaranteed to continue as many of the smaller OPEC players are desperate for funds to run their economies.
  • Iraq has signed a multi-billion dollar deal with a Chinese oil company and will receive up front money in exchange for long term oil supplies. Chinese entities have done this regularly with struggling oil producers in Angola, Ecuador, Iran and Venezuela.
  • Germany had record case loads this week and plans to put in more restrictions. The US coastal states are back as Covid hotspots. Canada is tightening up with Alberta imposing its tightest restrictions to date, starting on Sunday December 13th. There are now 15.3M cases (up from 13.8M cases last week) in the US with 288K deaths (272K last week). Worldwide the caseload is 68.3M and deaths near 1.56M. Christmas holiday gatherings will be limited in many places around the world due to the rise in caseloads. Without substantial and effective mitigation measures Dr. Fauci sees the middle of January ‘could get really bad and a really dark time for us’.
  • Libya is getting its production up sharply now that their civil war is over. They are now producing 1.3Mb/d, an impressive feat, up from the October level of 454K/d and they expect to be producing 1.6Mb/d during early 2021. This will mean over a 1.4Mb/d increase in production in just four months as they produced only 155Kb/d in September.

OPEC has been unsuccessful in its meetings on November 30th and December 1st to get an extension of the production cut by up to six months. We had expected them to delay the planned 2.0Mb/d increase in production in January for two quarters, which they hoped would lower the excess stock levels. World-wide crude and product inventories are now 475Mb over the five year average. If they agree to add 500Kb/d in February then crude should breach US$40 and fall to the US$32-36/b area during Q1/21. The next downside near-term support level is US$42.57/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 and now very overbought with the S&P Energy Bullish Percent Index at 92%, an outright sell signal for traders. We see significant near-term 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 may now occur during Q1/21. Traders may want to harvest some of the great gains since the BUY signal triggered in March. OPEC+ production is too high and is rising when it should have been held flat with no cheating.  

Energy Stock Market: The S&P/TSX Energy Index now trades at 93.59. The S&P/TSX Energy Index started the year at 146 so it is down 36% year-to-date and there should be some tax loss activity shortly. The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low in late October) during Q1/21. A breach of 85 should start this downward trend. In the meantime consolidation continues in the Canadian energy market with players having assets in the same core areas seeing positive reasons for merging. Today’s big merger is an all stock deal.

I will be on BNN’s Commodities show with Andrew Bell next week Wednesday December 16th at 9:00AM MT. The discussion of that day’s EIA report, the outlook for energy commodity prices and stocks are the topics likely to be discussed.

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.

 

 

 

 

Schachter’s Eye on Energy – Dec. 2nd

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 and subscribe

EIA Weekly Data: The EIA data on Wednesday December 2nd showed commercial stocks falling by 700K to 488.0Mb as exports rose by 625Kb/d, or 4.4Mb on the week. If not for this export increase we would have seen a rise in stocks due to weaker demand. The forecast was way off from the expected decline of 2.4Mb. Inventories remain high at 40.9Mb or 9.2% above last year’s level of 447.1Mb. Gasoline inventories rose by 3.5Mb while distillates rose by 3.2Mb. US crude production continues to recover, rising 100Kb/d to 11.1Mb/d as US production returned after the last hurricane closed down offshore production in the Gulf of Mexico and Permian production recovers as drilling activity picks up.  Consumption fell last week with Total Demand down 688Kb/d to 18.47Mb/d, Gasoline usage fell 156Kb/d to 7.97Mb/d while Jet Fuel saw consumption fall by 35Kb/d to 1.13Mb/d. We had expected consumption to rise due to the US Thanksgiving holiday season but this did not occur. Total Demand remains 12.5% below last year’s level of 21.1Mb/d, Gasoline Demand is down 11.7% from the 9.0Mb/d consumed last year and Jet Fuel remains 42% below demand of 1.96Mb/d last year.

Refinery Runs fell 0.5 points to 78.2% from 78.7% in the prior week and down from 91.9% last year. Total stocks (excluding the SPR) remained high at 95.5Mb above last year or 7.6% above the 1.26Bb in storage last year. Cushing oil inventories fell by 300Kb to 59.6Mb and compared to 43.8Mb last year at this time.

Baker Hughes Rig Data: Last week Friday, the Baker Hughes Rig Survey showed an increase in the US rig count. The US rig count rose by 10 (down two rigs in the prior week) to 320 rigs working, but remains down 60% from 802 rigs working a year ago. The US oil rig count rose by 10 (down five rigs last week) to 241 rigs and is down 64% from 668 rigs working last year. The Permian saw an increase of five rigs to 161 rigs working but remains 60% below last year’s level of 405 rigs working.

Canada saw a rise of one rig this week (12 in the prior week) to 102 rigs working. The rig increase now has activity down only 19% from a year ago when 126 rigs were working. In the breakdown the most encouraging data point was rigs drilling for natural gas has risen by five rigs to 64 rigs active, up 31% from 49 rigs working last year. Natural gas stocks in Canada have performed better than oily names during the last few months. The liquids rich Montney area is getting the most drilling activity. The rig count for oil is now at 38 rigs (down four on the week) and is down 51% from 77 rigs working last year.

Natural gas prices are quite profitable for producers now with AECO at $2.66/mcf and with NYMEX at US$2.87/mcf. We expect much higher prices once the depths of winter arrive later this month. Natural gas is our commodity of choice at this time. 

Conclusion: As we write this, WTI for January is at US$45.32/b flat versus last week. We are now back to crude price levels seen in March just before the pandemic caused lockdowns of the economies. The positive view of vaccines coming in 2021 has ignited investor interest in the sector.

Positive issues for higher crude prices:

  • The first vaccine deliveries and vaccinations are expected to occur later this month in the US. Anyone who wants one should have it by Q3/21 according to the CDC. The UK has become the first western country to approve a vaccine (the Pfizer vaccine) and will start vaccinations in hospitals and in nursing homes shortly. Canada should start seeing vaccines in January and the Prime Minister expects over 50% of all Canadians can be vaccinated by September.
  • While OPEC has lowered the near term demand for crude oil they see demand rising in 2021 to 96.26Mb/d from 90.01Mb/d in 2020. The forecast for Q4/20 is for consumption of 93.67Mb/d. The level for Q4/21 is forecast at 97.09Mb/d.

Negatives issues for lower crude prices:

  • The US, Canada, Germany, UK, France, Italy, Russia and Austria are reporting record increases in Covid case loads. Red Zones are occuring all across Canada and total lockdowns are likely in some of these extremely stressed areas. Alberta has initiated a second state of public emergency as case-load goes to record highs. Pandemic lockdowns mean less activity and lower energy consumption. There are now 13.8M cases in the US with 272K deaths. Worldwide the caseload is 64.1M and deaths near 1.49M.

 

  • In most US states and Canadian provinces the number of new cases has increased to record levels. Many places have hospitals that are maxed out on their ICU beds. The worry is what will they do when all the beds are all occupied? A larger problem is staffing as many health care workers have come down with the virus and others are just burned out. In the US they have brought in national guard and military units to help.

 

  • Libya is getting its production up sharply now that their civil war is over. They are now producing 1.3Mb/d, up from the October level of 454K/d and they expect to be producing 1.6Mb/d during early 2021. This will mean over a 1.4Mb/d increase in production in just four months as they produced only 155Kb/d in September.

 

  • The UAE (Abu Dhabi particularly) is chomping at the bit to raise production as it has found 24Bb of new conventional oil reserves (total now 107Bb) and wants to raise production from its current 2.44Mb/d to 4-5Mb/d by the end of this decade. It is considering leaving OPEC as it is frustrated with  the Saudi controlled quota allocation. If they withdraw this could trigger an all out market share war that could turn into another price war.

 

OPEC has been unsuccessful in its meeting on November 30th and December 1st to get an extension of the production cut by three to six months. They now plan on another meeting tomorrow. We had expected them to delay the planned 2.0Mb/d increase in production in January for two quarters, which they hoped would lower the excess stock levels. World-wide OECD crude and product inventories are now 237Mb, above the five year average of 2.94Bb. The problem is that Gabon (49Kb/d over their quota), Iraq (270Kb/d over their quota), Nigeria (70Kb/d over quota), Kazakhstan (381Kb/d over quota) and Russia (430Kb/d over quota) are all non-compliant, with production above their current allocations. Iran and Venezuela both found ways to get around US sanctions and plan to increase production shipments to China going forward. The dance is two fold. First, what will global crude oil demand be in Q1/21 as consumption remains weak now and the speed of vaccination and return to more normal demand is unknown? Second, with many OPEC producers desperate for revenues, will the agreed to allocations be followed? If not, would the Saudi’s start another market share price war? Market expectations are for a successful deal but we are not so confident that it will be attained or if announced then complied with.

If no deal is arrived at tomorrow or an extension deal is done only for one quarter, then we expect crude prices to retreat with a first downside target of US$43/b. As we see the OPEC+ compliance level going forward and see data on consumption (i.e. weekly EIA data), as more inventory data is known, price determination can be realized.  We expect to see OPEC+ members cheating and inventories world-wide to rise. As a result we expect to see crude fall later this month to below US$40/b and in Q1/21 to decline into the US$32-36/b range.  We remind readers that WTI fell to US$33.64/b just a month ago. Russia wants to see production increases of 500Kb/d each month starting in January which is opposed by the Saudi’s. Some face saving compromise will be announced but is unlikely to be complied with almost immediately.

Energy and energy service stocks and now very overbought. We see significant near term 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

Continue to hold cash and remain patient for the next low risk BUY window expected either during tax loss selling season during Q4/20 or during Q1/21 when it is clear that the vaccine roll out may not be as fast as desired, OPEC+ production is too high and that a timely additional stimulus package in the US is unlikely. Tax loss season for 2020 should start shortly and go into week three of December. 

Energy Stock Market: The S&P/TSX Energy Index now trades at 88.52 (down from last week’s high of 93.48). The S&P/TSX Energy Index started the year at 146 so it is down 40% year-to-date and there should be significant tax loss activity this month. The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low in late October) during December. A breach of 80 should start this downward trend.

Our November 26th webinar was a great success with record live attendance and more viewings via the archive thereafter. We discussed the best energy and energy service ideas to invest in during the upcoming tax loss selling season and how tax loss seasons have unfolded in prior years. We covered our favourite 10 ideas for investors to consider (three oil names, four natural gas ideas and three energy service ideas). For information on these ideas and to listen to the archive of the webinar one needs to become a subscriber. 

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