Energy & Commodities

Texas Freeze Creates Global Plastics Shortage

 

First, it was a demand slump across pretty much every manufacturing industry because of the pandemic. Then a surge in demand for electronics caused a shortage of microchips, which hit the automotive industry particularly hard. Now, the Texas Freeze has caused a global shortage of plastics. The Wall Street Journal reported this week that the cold spell that shut down oil fields and refineries in Texas is still affecting operations, with several petrochemical plants on the Gulf Coast remaining closed a month after the end of the crisis. This creates a shortage of essential raw materials for a range of industries, from carmaking to medical consumables and even house building.

The WSJ report mentions carmakers Honda and Toyota as two companies that would need to start cutting output because of the plastics shortage, which came on top of an already pressing shortage of microchips. Ford, meanwhile, is cutting shifts because of the chip shortage and building some models only partially. GM, on the other hand, has started building some pickup trucks without a fuel management module because of the shortages, which will affect the fuel economy performance of these cars.

Yet, the automaking industry is just one victim of the abnormal circumstances on the planet and the Gulf Coast. Another is the construction industry. The WSJ reports, citing industry insiders, that following the petrochemical shutdowns, builders are bracing for shortages of everything from siding to insulation.

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Schachter’s Eye on Energy – March 17th

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 March 17th was bearish for prices as both crude inventories rose and Gasoline demand waned. Commercial Crude inventories rose by 2.4Mb compared to a forecast of 2.1Mb and would have been higher by 1.5Mb if not for net crude imports falling by 219Kb/d. US production was flat at 10.9Mb/d,and is 2.2Mb/d below last year’s 13.1Mb/d of production. In the coming weeks this could recover another 1.1Mb/d to reach 12.0Mb/d as rig activity remains strong and some of the weather related production shut-ins come back on line. Private operators are driving the growth in production at the current time as large public companies are under pressure to pay down debt and provide shareholder returns.

Refinery Utilization recovered 7.1 points to 76.1% from 69.0% but remains below last year’s 86.4%. Overall Commercial Crude inventories are 47.1Mb above last year or up by 10.4% to 500.8Mb. This is the build problem we have been warning about. Inventories should continue to build until we start the summer driving season. This could add 40-60Mb of additional stocks in storage. Total Product consumed rose a modest 261Kb/d to 18.93Mb/d.  Gasoline demand fell 264Kb/d to 8.44Mb/d. Gasoline inventories rose as a result of the greater refinery activity, by 0.5Mb. Jet Fuel consumption rose by 161Kb/d to 1.01Mb/d as the spring break travel season started. A post-pandemic high of 1.34M people travelled by air last Friday according to the US Transportation Security Administration (TSA). Overall US consumption of all products is 12% below a year ago, Gasoline demand is down by 13% and Jet Fuel demand down by 42%. Inventories at Cushing fell 600Kb to 48.2Mb and are up from 38.4Mb a year ago.

Baker Hughes Rig Data: The data for the week ended March 12th showed the US rig count off by one rig (one rig up in the prior week). Canada had a decline of 25 rigs (22 rigs lower last week) as we have ended the winter drilling season and breakup season has started. Canadian activity is 34% below last year when 175 rigs were working. In the US there were 402 rigs active, but that is down 49% from 792 rigs working a year ago. The US oil rig count fell by one rig. The Permian saw an increase of one rig to 212 rigs working and activity is 49% below last year’s level of 418 rigs working. The rig count for oil in Canada fell by 22 rigs to 58 rigs working and is down 50% from 115 rigs working last year. The natural gas rig count fell by three rigs to 58 rigs active and is down from 60 rigs working at this time last year.

Conclusion:

Crude oil prices have fallen nearly US$4/b from the high two weeks ago of US$67.98/b after the Saudi announcement of extending their official 1.0Mb/d production cut through April. This positive lift to crude has now been reversed as it appears that there has been significant OPEC cheating (Iran, Iraq, Libya, Nigeria and Venezuela) at the same time as the US brought back on 1.2Mb/d (from 9.7Mb/d to 10.9Mb/d). In the coming weeks we expect to see further US production additions and if there is OPEC cheating, as remains likely, world inventories will grow in Q2/21 and prices will have reason to retreat meaningfully. Today WTI is down due to the  inventory build, concern about one of the vaccines’ efficacy in Europe, Germany’s exponential growth in infections from the more problematic mutations, and a bearish forecast by the IEA. WTI is now trading at US$63.93/b, down $0.87/b on the day.

Iran in the meantime is selling more oil into China and has plans to increase sales to India in the coming months as they see the Biden administration wanting a nuclear deal and willing to ignore Iran’s cheating on sanctions. The buyers love the lower prices ($3-5/b below Brent) that Iran is offering and as well payment terms are very generous with refiners not paying for the crude until after it is processed. Iran had been shipping indirectly to China on average 306Kb/d in 2020 but this rose to 600Kb/d in January 2021, to 850Kb/d in February and to 856Kb/d in March, according to Reuters and Chinese customs data. OPEC’s next meeting is on April 1st to discuss production levels for May.

Technically the support levels for WTI crude are now US$63.13/b (not much below where we are now) and then US$58.60/b. Energy and energy service stocks are overbought and have been chased by hot momentum money and quarterly window dressing as we near the end of Q1/21. We remain in the bear camp now. 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 many companies for Q4/20 have been released and were not strong enough to justify current lofty stock price levels. If crude prices retreat these stocks could get battered. Commercial hedgers have added to their short crude positions and now are short 1.72BB, and net short 644Mb. They clearly expect to be able to buy back their short positions at much lower price levels. Speculative holders are long 586Mb, up 30Mb over the last week.

We got a 100% SELL signal since January 14, 2021. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of 14 stocks and the prices at which we think should be harvested. We sent out a second SELL Alert on February 5th and added four additional ideas for harvesting. The next few months could see significant downside for the energy sector. The topping process for the general stock market is ongoing and some  event will prick this bubble. Rising interest rates appear to be the most likely reason as the US 10-Year Treasury yield has increased to a new 2021 high of 1.69% (up 5 BP today) more than triple the 0.52% of last August. 

Last week we got a second 100% Bullishness signal which is the first time in our career that we have seen back to back clear SELL signals in any one year. The danger is clear. 

Energy Stock Market: The S&P/TSX Energy Index now trades at 121 and is part of a lengthy, extended, and broadening topping process from the peak at 128. The S&P/TSX Energy Index is likely to fall substantially in the coming months. A breach of 117.81 should initiate the sharp decline. A more important support level to plunge through is 107.66.

I will be on MoneyTalks radio on the Corus (Global) network with Michael Campbell this  Saturday March 20th at 10AM MT. If interested in our discussion on the risks in the general stock market and the energy market specifically, please listen in. We are planning to add coverage of pipeline and infrastructure stocks as well as some special situations that will benefit from a strong economy in Western Canada once this current corrective phase is over.

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 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’ financial results 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 – March 10th

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 March 10th was clearly bearish for prices as both crude inventories rose and US production recovered meaningfully. Commercial Crude Inventories rose by 13.8Mb last week following a record build of 21.6Mb last week. The forecast this week was for a build of 816Kb. US production recovered, rising 900Kb/d in just one week, to 10.9Mb/d,but remains 2.1Mb/d below last year’s 13.0Mb/d of production. In the coming weeks this could recover another 1.1Mb/d to reach 12.0Mb/d as rig activity remains strong and some more weather related production shut-ins come back on line. Private operators are driving the growth in production at the current time as large public companies are under pressure to pay down debt and provide shareholder returns. Private companies see the less competitive landscape as attractive to build their companies. For example private company DoublePoint Energy is running more rigs than energy giant Chevron. In specific basins private companies have large footprints. In Haynesville 74% of rigs are operated by private companies, in the Eagle Ford 38% and in the Midland basin 41%.

Refinery Utilization recovered to 69.0% from 56.0% but remains below last year’s 86.4%. Overall Commercial Inventories are 46.6Mb above last year or up by 10.3% to 498.4Mb. This is the build problem we have been warning about. Inventories will continue to build until we start the summer driving season. Total Product consumed fell by 88Kb/d to 18.67Mb/d.  Gasoline Demand was the one bright spot rising by 578Kb/d to 8.73Mb/d as driving picked up with better weather driving conditions. Gasoline inventories fell as a result by 11.9Mb. Jet Fuel consumption fell by 436Kb/d to 849Kb/d. Overall US consumption of all products is 15% below a year ago, gasoline demand down by 8% and Jet Fuel demand down by 46%. Inventories at Cushing rose 500Kb to 48.8Mb and are up from 37.9Mb a year ago.

Baker Hughes Rig Data: The data for the week ended March 5th showed the US rig count up by one rig (five rigs up in the prior week). Canada had a decline of 22 rigs (nine rigs lower last week) as we have ended the winter drilling season and break up season has started. Canadian activity is 31% below last year when 203 rigs were working. In the US there were 403 rigs active, but that is down 49% from 793 rigs working a year ago. The US oil rig count rose by one rig. The Permian saw an increase of three rigs to 211 rigs working and activity is 49% below last year’s level of 415 rigs working. The rig count for oil in Canada fell by 12 rigs to 80 rigs working and is down 40% from 134 rigs working last year. The natural gas rig count fell by 10 rigs to 61 rigs active and is down from 69 rigs working at this time last year.

Conclusion:

Crude oil prices spiked up over the last week by nearly US$9/b to US$67.98/b as the Saudis held back from returning their shut in production (original cutback was for the two months of February and March with a 1.0Mb/d cut) that they were expected to bring back on in April. In addition the market was expecting a 500Kb/d increase from other OPEC+ members with Russia getting the largest allocation. Except for Russia and Kazakhstan all members rolled over their quotas. Russia received an increase of 130Kb/d and Kazakhstan an increase of 20Kb/d. So this approach was well received by oil markets and oil prices jumped. However, just this week the US added back 900Kb/d and with the addition of production by Russia alone, you have fully offset the Saudi quota move. In the coming weeks we expect to see further US production additions and if there is OPEC cheating as is likely, world inventories will grow in Q2/21 and prices will have reason to retreat meaningfully. Today WTI is down due to the big inventory build and is trading at US$63.43/b, down $0.58/b on the day. OPEC’s next meeting is on April 1st to discuss production levels for May.

Iran in the meantime is selling more oil into China and has plans to increase sales to India in the coming months as they see the Biden administration wanting a nuclear deal and willing to ignore Iran’s cheating on sanctions. The buyers love the lower prices that Iran is offering and as well payment terms are very generous with refiners not paying for the crude until after it is processed. Iran had been shipping 306Kb/d in 2020 but this has risen to 600Kb/d in January 2021 and to 850Kb/d in February according to Reuters and Chinese customs data.

Technically the support level for WTI crude is US$59.24/b now. Energy and energy service stocks are overbought and have been chased by hot momentum money and quarterly window dressing as we near the end of Q1/21. We remain in the bear camp now. 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 many companies for Q4/20 have been released and were not strong enough to justify current lofty stock price levels. If crude prices retreat these stocks could get battered.

We have had a SELL signal since January 14, 2021. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of 14 stocks and the prices at which we think they should be harvested. We sent out a second SELL Alert on February 5th and added four additional ideas for harvesting. The next two-three months could see significant downside for the energy sector. The topping process for the general stock market is ongoing and some surprise event will prick this bubble.

Energy Stock Market: The S&P/TSX Energy Index now trades at 123 and is part of a lengthy, extended, and broadening topping process. The S&P/TSX Energy Index is likely to fall substantially in the coming months. A breach of 107.66 should initiate the sharp decline.

I will be on MoneyTalks radio on the Corus (Global) network with Michael Campbell on Saturday March 20th at 10AM MT. If interested in our discussion on the risks in the general stock market and the energy market specifically, please listen in.

If you want to listen to our February 25th webinar in the archive please go to our subscriber page and become a subscriber. For new subscribers, the quarterly choice gives you three months to see if the product meets your needs. 

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 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’ financial results 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.

Trader Buys $36 Million of Copper and Gets Painted Rocks Instead

 

Commodities trader Mercuria Energy Group Ltd. struck a deal last summer to buy $36 million of copper from a Turkish supplier. But when the cargoes started arriving in China, all it found were containers full of painted rocks.

The saga unfolds like a gangland thriller, with the Swiss trading house saying it’s been the victim of cargo fraud. Before its journey from a port near Istanbul to China even began, about 6,000 tons of blister copper in more than 300 containers were switched with jagged paving stones, spray-painted to resemble the semi-refined metal.

The bizarre case highlights commodity traders’ vulnerability to fraud, even when security and inspection controls are in place. In 2014 and 2015, Mercuria took provisions to cover potential losses after metal contained in a warehouse in the Chinese port of Qingdao was seized by authorities as part of fraud investigation

Full Story

 

 

Schachter’s Eye on Energy – March 3rd

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 March 3rd was clearly bearish. Commercial Inventories rose by a colossal 21.6Mb on the week compared to a forecasted decline of 735Kb. The biggest part of the difference was due to US production rising by 300Kb/d to 10.0Mb/d and net imports rising by 1.665Mb/d or by 11.6Mb on the week offset by lower Refinery Utilization and lower product components being made. Overall Commercial Inventories are 40.5Mb above last year or up by 9.1% to 484.6Mb. This is the build problem we have been warning about. It is just starting and will be a factor until we get into the summer driving season. Total Product demand rose a modest 72Kb/d. The best component was Gasoline Demand which rose 942Kb/d to 8.148Mb/d as driving picked up with better weather driving conditions. However this consumption level is down 11% from 9.186Mb/d consumed last year. Refinery Utilization fell 12.6 points to 56.0% from 68.6% as most of the Texas refinery industry was shut down and maintenance season is starting. Last year at this time Refinery Utilization was 86.9%. Because of this lower utilization Motor Gasoline Inventories fell 13.6Mb and Distillate Inventories fell by 9.7Mb. Inventories at Cushing rose 500Kb to 48.3Mb and are up from 37.2Mb a year ago.

Baker Hughes Rig Data: The data for the week ended February 26th showed the US rig count up by five rigs as the effects of the freezing weather in Texas subside. Canada had a decline of nine rigs as we are ending the winter drilling season and as the weather warms up, the break up season will start. Activity is 32% below last year when 240 rigs were working. In the US there were 402 rigs active, but that is down 49% from 790 rigs working a year ago. The US oil rig count rose by four rigs and there was a one rig increase for natural gas drilling. The Permian saw an increase of four rigs to 208 rigs working and activity is 49% below last year’s level of 411 rigs working. The rig count for oil in Canada fell by eight rigs to 92 rigs working and is down 44% from 163 rigs working last year. The natural gas rig count fell by one rig to 71 rigs active and is down from 77 rigs working at this time last year.

Conclusion:

We believe that there is a total of US$14-16/b of downside risk for WTI. WTI crude is down US$3/b over the last week, from the high of US$63.75/b to today’s US$60.69/b. Crude is lifting today due to product levels having sharp declines and a rumour as I am writing this that some in OPEC are recommending no increase in supplies in April. We are skeptical that such a deal will occur. Russia and many OPEC countries want to add more volumes as they need revenues desperately.

The top line commercial inventories should swing prices negative at some point after the OPEC meeting. A breach of US$58.60/b should start a rapid decline to the US$50-52/b area as the speculative horde retail money exits another losing trade. OPEC meets tomorrow March 4, 2021 to ease curbs and are likely to increase production 500Kb/d in April to lower Brent and WTI crude prices without impacting the nascent economic recovery or giving incentive to the US shale industry to increase production.  Russia and Iraq are the most interested in seeing quotas raised with Russia alone wants to raise production by 250Kb/d. In addition, Saudi Arabia will be disclosing when they bring on their cut of 850,000 b/d that they removed in February. It was supposed to have been a 1.0Mb/d cut for February and March.

Technically the support level for WTI crude is US$58.60/b. Energy and energy service stocks are overbought and have been chased by hot momentum money. We are clearly in the bear camp now. 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 are being released and are not strong enough to justify current lofty stock price levels if crude prices retreat. Some oil companies still have very high debt loads and when oil prices retreat their debt/cash flow ratios will become more precarious. These will face the largest percent declines.

We have had a SELL signal since January 14, 2021. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of 14 stocks and the prices at which we think they should be harvested. We sent out a second SELL Alert on February 5th and added four additional ideas for harvesting. The next few months could see significant downside for the energy sector. The topping process for the general stock market is ongoing and some surprise events will prick this bubble.

Energy Stock Market: The S&P/TSX Energy Index now trades at 115 and is part of a lengthy, extended, and broadening topping process. The S&P/TSX Energy Index is expected to fall substantially in the coming months. A breach of 103.60 should initiate the sharp decline.

Our Q1/21 120-minute recorded webinar took place on Thursday February 25th at 7PM MT. There were two investment presentation sections. The first covered the downside parameters we see for the stock market depending upon which of the many mania bubbles burst. The second section discussed how to build an energy portfolio for the new Energy Bull Market that we foresee lasting into 2025 after the coming market correction. The different approaches that conservative, growth and entrepreneurial investors should consider were discussed. Individual ideas for each investor approach were also covered. 

We also have decided to expand our product and add coverage of the pipeline and infrastructure areas via a Level Two research product. This will occur over the coming months. Consideration of covering special situations that would benefit from a resurging western Canadian economy is also being considered as part of the expanded product offering.

If you want to listen to our webinar in the archive please go to our subscriber page and become a subscriber. For new subscribers, the quarterly choice gives you three months to see if the product meets your needs. 

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 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’ financial results 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/3jjCPgH to subscribe.