An Arctic Polar Vortex has brought near century lows in temperatures to most of North America (and even reached into northern Mexico) bringing frigid temperatures that have knocked out the electricity grids. Texas has been hardest hit with water, heat, refineries and power out due to the freezing temperatures. It may take three to four weeks to get remediation done on the 4Mb/d of oil production shut in. The price of crude spiked up US$4/b over the last few days to US$62/b. Electricity rates have also spiked to record prices (wholesale prices to US$10,000/MWh yesterday up from US$50/MWh before the cold blast hit Texas). The next few weeks should see big divergences from the norm as these issues plague the industry. Parts of Texas are now colder than parts of Alaska.
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 Thursday February 18th was moderately bullish. Commercial Inventories fell by 7.3Mb on the week compared to a forecasted decline of 2.43Mb/d. The difference was due to a rise in exports of 1.245Mb/d or 8.7Mb on the week. If not for this export increase storage would have risen. Motor Gasoline Inventories rose by 0.7Mb in the week as Refinery Utilization rose 0.1% to 83.1% from 83.0% in the prior week. While an increase it is below last year’s level of 89.4% as overall demand for product is pandemic and now weather impacted. US Domestic Crude Production fell by 200Kb/d to 10.8Mb/d as the freezing weather started to shut in production late last week . Compared to a year ago this is down 2.2Mb/d from last year’s 13.0Mb/d.
The bullish part of the report this week was on the consumption side. Total Product Consumption rose 484Kb/d to 20.67Mb/d. Finished Motor Gasoline Consumption rose by 549Kb/d to 8.41Mb/d but is down 511Kb/d from last year’s 8.92Mb/d. Jet Fuel consumption fell by 88Kb/d to 1.18Mb/d and remains down 207Kb/d from last year’s 1.38Mb/d. Cushing Oil Inventories fell by 3.0Mb. Inventories at Cushing are now at 45.0Mb down from 48.0Mb last week but are up from 38.2Mb a year ago.
Baker Hughes Rig Data: All of the following data is before the Arctic Polar Vortex hit the US and knocked out the electricity grid and the oil production of Texas. More than 4.2M people remain without power as of today. More than 4Mb/d or around 40% of US production is now shut in. The Permian (the largest producing field) has wells that produce large amounts of water with the oil and now have frozen surface valves. It may be two to three weeks for this to be resolved. On the natural gas side 17Bcf/d or 18% of US production is also shut in.
The data for the week ended February 12th showed a rise for the US and Canadian rig counts. In the US rigs rose by five (up eight rigs in the prior week) to 397 rigs working, but remains down 50% from 790 rigs working a year ago. The US oil rig count rose by seven (up four rigs the prior week) to 306 rigs but is down 55% from 678 rigs working last year. The Permian saw an increase of five rigs to 203 rigs working and remains 50% below last year’s level of 408 rigs working. Over US$45/b for WTI seems to be a price point where producers see economic returns from drilling. The increase in drilling activity has seen a rise in US domestic production of 100Kb/d to 11.0Mb/d. If prices remain at current levels then OPEC will face competition again from the easy to drill and bring on shale plays in the US. With a large infrastructure available and cheap drilling costs those firms with low cost land and decent balance sheets may show meaningful growth at current prices.
Canada saw an increase of five rigs last week with 176 rigs working. This is 31% lower than the 255 rigs active last year. The rig count for oil rose by six rigs to 101 rigs working but is down 41% from 172 rigs working last year. The natural gas rig count fell by one rig to 75 rigs active and is down 10% from 83 rigs working at this time last year.
Conclusion: WTI crude oil is up almost US$10/b to US$61.20/b since the start of February as very cold weather across North America brings temperatures down, electricity outages and heavy snow in many areas. Of this rally US$8/b is due to the infusion of speculative money from the Robinhood and Reddit novice retail horde. These horde investors seem finished with GameStop and other stock shorts, are done now with silver and have moved to crude oil and cannabis stocks to get their focused herd following price momentum moves. The Reddit/Robinhood gang of over 14M retail investors, are in the case of energy, trying to squeeze the Commercials (refiners, petrochemical companies and energy companies etc.) shorts who are short 1.64Bb (net short 617Mb at the end of last week). This plus the recent cold spell has lifted crude prices to levels that OPEC and Saudi Arabia are now concerned about. If oil prices remain at his level after the cold spell it would provide incentive to the US shale industry to ramp up production and deprive OPEC of more market share. Last week the US exported 3.86Mb/d or 27Mb on the week. This deprives OPEC of clients and market share. The Saudis are now talking about raising their and OPEC’s quota at their next meeting in March.
We believe that there is US$14-16/b of downside risk for WTI as markets begin to reflect the demand situation post-winter, the recovery in US production and OPEC cheating and/or raising approved production levels. When these hot money traders get bored with energy (as they did with GameStop, AMC and Blackberry etc.) we see WTI crude breaching US$50/b and moving into the mid-US$40s as rational behavior returns when winter nears its end.
Technically the near-term support level for WTI crude is US$54/b and then major support is at US46.15/b. Energy and energy service stocks are very overbought and some have rolled over with meaningful declines. 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 now being released and are so far not good. The bulk of the companies release over the next few weeks.
We now have a SELL signal in place 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 at what prices we think the ideas be harvested. We sent out a second sell signal on February 5th and removed four additional ideas for harvesting. The next few months could see significant downside for the energy sector.
Energy Stock Market: The S&P/TSX Energy Index now trades at 107 and is part of a broadening topping process. The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low of late October 2020) in the coming months. A breach of 103.60 should initiate the next sharp decline. The recent cold weather has lifted AECO natural gas to C$5.31/mcf (yesterday), the price spike we expected during the worst of winter. Natural gas stocks have been some of the best winners recently. The NYMEX US price at US$3.12/mcf has lifted as well, but not as much as Canadian prices.
Our SER February Monthly SER (to come out on February 19th) focused on our February 5th SELL signals and the rationale for selling the four additional ideas. Downside from here for the sector remains substantial in the 40-50% range.
Our Q1/21 webinar takes place next week Thursday February 25th at 7PM MT. There will be two investment presentation sections. The first will cover the downside parameters we see for the general market depending upon which of the many mania bubbles burst. The second section will discuss how to build an energy portfolio for the new Energy Bull Market that we foresee lasting into 2025. The different approaches that conservative, growth and entrepreneurial investors should consider will be discussed. Individual ideas for each investor approach will be covered.
If you want to join our webinar next week, you need to become a subscriber in the next week and register for the event.
Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all archived Webinars (and be able to join us for our 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’ 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.