Energy & Commodities

Schachter’s Eye on Energy – August 18th

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 (SER) newsletter covering the general energy market and 30 energy, energy
service and pipeline & infrastructure companies with regular updates. We hold
quarterly subscriber webinars and provide Action BUY and SELL Alerts for paid
subscribers. Learn more.

EIA Weekly Data: The EIA data on Wednesday August 18th was mostly negative for crude oil
prices as Commercial Crude Inventories fell by 3.2Mb (forecast was for a decline of 1.6Mb). The
main reason for the decline was that Exports rose by 768Kb/d, or by 5.4Mb on the week and
Net Imports fell by 813Kb/d, or by 5.7Mb on the week. Had there been a flat Net Import number,
Commercial Crude Inventories would have risen by 2.5Mb on the week. Refinery Utilization rose
0.4% to 92.2% last week (last year was 80.9% and in 2019 was 95.9%). Gasoline Inventories
rose by 0.7Mb while Distillate Fuel Inventories fell by 2.7Mb. US crude oil production rose by
100Kb/d to 11.4Mb/d last week and is heading towards 12.0Mb/d, which we see as likely in
Q4/21.

Total Product Demand reversed last week’s data and rose by 1.95Mb/d to 21.5Mb/d versus the
1.65Mb/d decline of last week. Overall demand is now above mid-August 2019 levels when
consumption was 21.0Mb/d. Gasoline consumption fell 97Kb/d to 9.33Mb/d (9.63Mb/d
consumed in mid-August 2019). Jet Fuel Consumption rose by 396Kb/d to 1.67Mb/d (below the
pre-pandemic level of 1.9Mb/d of mid-August 2019). Cushing Inventories fell last week by 0.8Mb
to 33.6Mb compared to 52.7Mb last year.

Baker Hughes Rig Data: The data for the week ending August 13th showed the US rig count
with a rise of nine rigs to 500 rigs (up by three rigs last week). Of the 500 US rigs active, 397
were drilling for oil and 102 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 131% from 172 rigs last year.
The natural gas rig count is up a more modest 46% from last year's 70 rigs.

Canada had an eight rig increase last week (versus a three rig increase in the prior week) to
164 rigs. Canadian activity is now up 3.0x from 54 rigs last year. There were 100 oil rigs working
last week, up from 19 last year. There are 63 rigs working on natural gas projects now, up from
35 last year.

The material increase in rig activity in both the US and Canada over the last year 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+ has turned on the spigots and there should be increasing amounts of crude oil arriving
in the market over the coming months (Russia even shipped 193Kb/d to the US last week
versus nothing for the past two years). Starting in September when 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 this fall.

A new more virulent Covid variant ‘Kappa’ is now occurring around the world. This originated in
both Belgium and Colombia and has now reached the US. This and other new variants may
have a viral load 1,000 times higher than the Alpha variant. They are reported to have high
capability of transmitting and also may be more severe to those infected. The worry is that as
the virus mutates this fall and winter that more severe strains will break out and the current
vaccines may be insufficient. This fourth wave is now feared to become worse than the third
wave.

Bearish pressure on crude prices:

1. The CDC says travellers should avoid France, Iceland, Israel and Thailand due to very
high levels of Covid-19. International travel is again being impacted, meaning lower
consumption of Jet Fuel. Flight capacity within China is down sharply as well. Imports of
crude into China fell from 10.4Mb/d to 9.7Mb/d in July as demand declined. This is now
the fourth month of imports below 10.0Mb/d and overall refining levels are at their lowest
in 14 months. China’s new lockdowns will surely impact world supply chains. China has
closed the third largest port due to an outbreak of the Delta mutation.

2. 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.

3. Australia has locked down two-thirds of the country, lowering consumer spending by
15% since the new lockdowns started. The worst caseloads are in the big cities of Sydney and
Melbourne. New Zealand is on a full lockdown again.

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, Guatemala, Greece, Honduras, Indonesia, Iran, Iraq, Japan, Malaysia,
Mexico, Morocco, New Zealand, Saudi Arabia, South Africa, South Korea, Sri Lanka, Thailand
and Vietnam are all seeing rising caseloads and are tightening movement and putting in
curfews. This list is up four countries from last week. Death counts are now up to 4.37M
worldwide and are over 622K in the US.

5. The US is seeing a rapid rise among both the vaccinated and unvaccinated. Intensive
care beds are now being rationed as caseloads reach last winter’s wave. Five US States
(Oregon, Hawaii, Louisiana, Mississippi and Florida) set new records for Covid cases and
hospitalizations. The US plans to offer a third, ‘booster’ shot to all Americans starting on
September 20th. It will be offered eight months after second vaccines have been given. On the
economic front, US retail Sales fell 1.1% in July versus a forecast of a decline of 0.3%. US

Consumer Sentiment fell to 70.2 from 81.2 last month (the forecast had been for 81.0). This was
the lowest reading since December 2011.

1. The IEA cut their demand forecast by 550Kb/d and expects a surplus of crude in 2022.

Bullish pressure on crude prices:

1. Rising vaccination levels of the adult US population toward herd immunity level has lifted
summer travel both by air and land. The US now has 50.9% of Americans completely
vaccinated but only 56.6% with an initial dose.

2. Weather impacts (hurricane season has started) may necessitate shutting in some of the
offshore Gulf of Mexico production. The most severe part of the hurricane season starts next
month. Tropical storm Grace (the seventh hurricane event of 2021) is heading towards the Gulf
Coast.

3. 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 has, in many cases, low water levels.
NYMEX natural gas prices are now at US$3.86/mcf. AECO prices have drifted lower but are still
at an attractive C$2.99/mcf.

CONCLUSION:

WTI has fallen over 13% from an early June high of US$76.98/b to US$66.63/b today (down
US$2.26/b from last week’s report) as the ‘Delta’ variant spreads and ‘Kappa’ rears up, slowing
down many economies around the world.  A breach of the low of US$65.01/b (the mid-July low)
should set up a decline to the US$60/b level during September/October. We see even lower
crude prices in Q4/21 if worldwide economic activity slows more materially. Our downside WTI
crude case is for US$48-54/b if the pandemic worsens and the two largest economies of the US
and China are under health duress.

Energy Stock Market: The S&P/TSX Energy Index trades currently at 117 (down five points
from last week) and is down 28 points from 145 in mid-June, or down so far by over 19%. The
level to watch was the low of 118.46 from last week, which has now been breached. Our next
downside target is the 111 area. A bust of US$65/b for WTI would likely mean a decline in the
Energy Index to the 100 level or lower, or down by an additional 14%. This is likely to occur in
September. Just falling to the 100 level means a nasty decline of over 31% from the mid-June
high. Much lower levels are possible later this fall. The energy sector will face attacks (becoming
the climate battle punching bag) by the Liberals, NDP and the Green Party as the Federal
election cycle is underway. Canadian energy stocks may face more pressure than energy
stocks in the US during our election cycle.

If WTI breaks US$60/b then 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.

Subscribe to the Schachter Energy Report (SER) and receive access to our two monthly
reports, all  archives, Webinars, Action Alerts, TOP PICK recommendations when the next BUY
signal occurs, as well as our Quality Scoring System review of the 30 companies that we cover.
We go over the markets in much more detail and highlight individual companies' financial results
in our reports. Our August SER Monthly Report comes out next Thursday and continues the
review of Q2/21 results with the coverage of ten companies. The next Interim Report will focus
on the remaining results of Q2/21 for the final 10 companies on our Coverage List. If you want
access to our reports then you will need to become a subscriber. Go to
https://bit.ly/34iKcRt to subscribe.

I will be on holiday next week so there will not be an issue of ‘Eye on Energy’. Our next
weekly publication will be out on Wednesday September 1st.

Canada Could Boost Oil Pipeline Capacity As Soon As September

Canada’s oil sands producers may find welcome relief to years of pipeline capacity constraints when the first new pipeline in years could enter into service as early as next month.

Enbridge said in a filing with the Canada Energy Regulator last week that its Line 3 replacement program in the United States “could be completed within the next 30 to 60 days which will allow the Line 3 replacement pipeline to commence service as early as September 15, 2021.”

Enbridge’s Line 3 Replacement project will replace the existing 34-inch pipe with new 36-inch pipe for 13 miles in North Dakota, 337 miles in Minnesota, and 14 miles in Wisconsin. The average annual capacity of Line 3 after replacement is planned to be 760,000 barrels per day (bpd), which would be a capacity increase of 370,000 bpd compared to the capacity of the original Line 3.

The Line 3 replacement is already in service in Canada, but it is not yet operational in the United States. Construction of the new Line 3 in Minnesota started…read more.

What Will The Gas Station Of The Future Look Like?

Two-thirds of Americans are interested in electric cars. Sales of EVs hit a record of more than 300,000 in the first half of the year. Everything seems to be going well for EVs and their makers. And yet, gas station owners are having trouble justifying the costs of installing EV chargers because the economics don’t make sense.

The Wall Street Journal’s Jennifer Hiller wrote in a recent article that some gas station owners are adding EV chargers to ensure their future market share in a more EV-dominated future. Many others, however, find it hard to justify spending more than $100,000 to buy and install a charging unit.

This seems to be one more example of the vicious circle the EV industry has found itself in, despite the Biden administration’s pledge to fund the installation of 500,000 charging stations across the United States. To compare, there are some 150,000 fuel stations in the country, according to the National Association of Convenience Stores. So, the plans are great. But they will also be challenging for gas stations. And yet, owners are still reluctant to cough up the money needed to add charging points. The reason may be that EVs still make up a tiny portion of total car sales, so any investment made in the installation of a charging point would take a while before returns start coming in. Carmakers have ambitious goals, and so does…read more.

Schacter’s Eye on Energy – Aug. 11th

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 (SER) newsletter covering the general energy market and 30 energy, energy service and pipeline & infrastructure companies with regular updates. We hold quarterly subscriber webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more

EIA Weekly Data: The EIA data on Wednesday August 11th was mostly negative for crude oil prices as Commercial Crude Inventories fell by a modest 0.4Mb (forecast was for a decline of 1.3Mb). The main reason for the modest decline was that Exports rose by 759Kb/d, or by 5.3Mb on the week. Had there been a flat Net Import number, Commercial Crude Inventories would have risen by 4.9Mb on the week. Refinery Utilization rose 0.5% to 91.8% last week (last year was 81.0% and in 2019 was 94.8%). Gasoline Inventories fell 1.4Mb and Distillate Fuel Inventories fell by 0.4Mb.

US Crude Production rose last week by 100Kb/d to 11.3Mb/d. Over the coming months we see US crude production continuing to lift and getting close to the 12.0Mb/d levels, as the rig count continues to rise and companies are increasing field activity due to their higher cash flows. Private energy companies are the most focused on growth and are taking advantage of cheap land and access to equipment. We expect the majority of public and private energy companies to indicate a go-forward strategy of increased drilling activity with production growth in 2H/21 and even more growth in 2022.

Total Product Demand surprisingly fell by 1.65Mb/d to 19.5Mb/d. Demand is now materially below mid-August 2019 levels when consumption was 22.1Mb/d. Is this due to Covid worries and reticence to travel? Gasoline consumption fell 345Kb/d to 9.43Mb/d (9.93Mb/d consumed in mid-August 2019). Jet Fuel Consumption fell 367K/d to 1.28Mb/d (much below the pre-pandemic level of 2.02Mb/d of mid-August 2019). This across the board consumption decline is why we are expecting lower crude prices in the coming months. Cushing Inventories fell last week by 0.3Mb to 34.6Mb compared to 53.3Mb last year.

Baker Hughes Rig Data: The data for the week ending August 6th showed the US rig count with a rise of three rigs to 491 rigs (down by three rigs last week). Of the 491 US rigs active, 387 were drilling for oil and 103 were focused on natural gas activity. This overall US rig count is up 99% from 247 rigs working a year ago. The US oil rig count is up 120% from 176 rigs last year. The natural gas rig count is up a more modest 49% from last year’s 69 rigs.

Canada had a three rig increase last week (versus a four rig increase in the prior week) to 156 rigs. Canadian activity is now up 3.3x from the low of 47 rigs last year. There were 95 oil rigs working last week, up from just 13 last year. There are 60 rigs working on natural gas projects now, up from 34 last year.

The material increase in rig activity in both the US and Canada over the last year 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+ have turned on the spigots and there should be increasing amounts of crude oil arriving in the market over the coming months (Russia even shipped 212Kb/d to the US last week versus nothing a year ago or two years ago). Starting in September when 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 weekly repetitive rises of some significance in US storage levels, WTI crude should decline below US$60/b this fall. 

A new more virulent variant ‘Kappa’ is now occurring around the world. This originated in both Belgium and Colombia and has now reached the US. Those who died in Belgium had been fully vaccinated. This and other new variants mutations may have a viral load 1,000 times higher than the Alpha variant, warned Dr. Anthony Fauci. They are reported to have high capability of transmitting and also may be more severe to those infected. The worry is that as the virus mutates this fall and winter that more severe strains will break out and the current vaccines may be insufficient.

Bearish pressure on crude prices:

  1. The White House on Wednesday called on OPEC to boost production even further (than the 400Kb/d per month announced by OPEC+) as high gasoline prices at the pump causes consumer anxiety. US Gasoline prices are up US$1/gallon from last year to an average of US$3.19/gal. In California prices exceed US$5/gal. The US is requesting a bigger boost in production as rising inflation could derail the nascent US economic recovery.
  2. Southwest Airlines says the Delta variant is impacting bookings and cancellations (of close in trips) are accelerating. They see September revenue likely down 15-25%.
  3. The CDC says travellers should avoid France, Iceland, Israel and Thailand due to very high levels of Covid-19. International travel is being impacted, meaning lower consumption of Jet Fuel. Flight capacity within China is down sharply as well. China cancelled all large-scale exhibitions and events for the remainder of August. Imports of crude into China fell from 10.4Mb/d to 9.7Mb/d in July as demand declined. This is now the fourth month of imports below 10.0Mb/d. Sinopec has announced refinery runs will be down nearly 10% this month. China’s new lockdowns will surely impact world supply chains. Nike and Adidas AG have announced shutting down some of their Asian factories.
  4. 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.
  5. Australia has locked down two-thirds of the country, lowering consumer spending by 15% since the new lockdowns started. The worst caseloads are in the big cities of Sydney and Melbourne.
  6. Countries such as Argentina, Australia (military sent in to enforce Zero Covid lockdown) Bangladesh, China (14 of 32 provinces seeing spikes – including Wuhan where the outbreak started, as well as in the capital Beijing), Cuba, Guatemala, Indonesia, Iran, Iraq, Japan, Malaysia, Mexico, Morocco, Saudi Arabia, South Africa, South Korea, Sri Lanka, Thailand and Vietnam are seeing rising caseloads and are tightening movement and putting in curfews. This list is up five countries from last week. Death counts are now up to 4.3M worldwide and are over 617K in the US.
  7. The US is seeing a rapid rise among both the vaccinated and unvaccinated. Intensive care beds are now being rationed as caseloads reach last winter’s wave. Some of the disturbing trends are:
  • The Texas Governor is asking for help (while still banning masks) as case loads rose to 17,000 new cases last Saturday and hospitalizations have doubled from two weeks ago. Patients in Houston are being transferred out of the city and as far away as to North Dakota hospitals.
  • Florida’s caseload rose to 157,000 cases last week, the highest number in the US. The state’s record level of hospitalizations is now at 10,000 beds. Florida also now has the highest number of children hospitalized. The state has asked the Feds for 300 more ventilators.
  • The US now has a seven day average of 127,000 cases and there still are 100M unvaccinated people in the US. Over 50% of new cases in the US are reported being in children.

Bullish pressure on crude prices:

  1. Rising vaccination levels of the adult US population toward herd immunity level has lifted summer travel both by air and land. The US now has 50.2% of Americans completely vaccinated and 55.8% with an initial dose. Worldwide crude demand rose by 1.5-2.0Mb/d during the summer travel months. This demand increase should last into early September.

 

  1. Weather impacts (hurricane season has started) may necessitate shutting in some of the offshore Gulf of Mexico production. The most severe part of the hurricane season starts next month. Tropical storm Fred (number six hurricane event for the year) is heading now to Puerto Rico and may hit Florida thereafter.

 

  1. Extreme heat waves, 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 has, in many cases, low water levels. NYMEX natural gas prices are now at US$4.08/mcf. AECO prices have drifted lower but are still at an attractive C$2.98/mcf.

CONCLUSION: 

WTI has fallen nearly 11% from an early June high of US$76.98/b to US$68.78/b today as the ‘Delta’ variant spreads and ‘Kappa’ rears up, slowing down many economies around the world.  A breach of the recent low of US$65.01/b (expected later in August) should set up a decline to the US$60/b level during September. We see even lower crude prices in Q4/21 if worldwide economic activity slows more materially. Our downside WTI crude case is for US$48-54/b if the pandemic worsens and the two largest economies of the US and China are under health duress.  

Energy Stock Market: The S&P/TSX Energy Index trades currently at 122 and is down 23 points from 145 in mid-June, or down so far by 16%. The level to watch now is the low of  118.46 from last week. A close below this level would set up the next support level of the 111 area. A bust of US$65/b for WTI would likely mean a decline in the Energy Index to the 100 level or lower, or down by an additional 18%. This is likely to occur in September. Just falling to the 100 level means a nasty decline of over 31% from the mid-June high. Much lower levels are possible later this fall. If WTI breaks US$60/b then 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.

Subscribe to the Schachter Energy Report (SER) 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 30 companies that we cover. We go over the markets in much more detail and highlight individual companies’ financial results in our reports. Our August Interim Report went out last week and started the review of Q2/21 results with the coverage of ten companies. Our next two SER reports will focus on the remaining results of Q2/21 for the 30 companies on our Coverage List.

We are holding our quarterly SER Black Gold webinar tomorrow night for subscribers at 7PM MT and will discuss our views on the energy and stock markets as well as cover the results of the companies that have reported Q2/21 results to date. Some companies have reported good results, others OK results and some not so good results. We will go over the company results from each group during the 90 minute webinar. 

If you want to join the webinar or access our reports then you will need to become a subscriber. Go to https://bit.ly/34iKcRt to subscribe.

Giving Up Oil Is Impossible: Alberta Premier

Giving up oil and other fossil fuels is “patently unrealistic”, Alberta Premier Jason Kenney said in comments on the IPCC climate report released yesterday, which warned that humankind’s window for addressing climate change was closing fast.

The report attributed—with a high to an extremely high degree of likelihood—the accelerated and increasingly dramatic changes in the planet’s climate to our use of fossil fuels and the resultant emissions.

“The notion that we can shut off a major, industrialized economy with the flick of a switch is patently unrealistic,” Alberta’s Kenney said, as quoted by CBC News, adding that giving up fossil fuels for a country with the geographical location—and climate—of Canada would come at a cost that will be measured in human lives.

Kenney went on to note that most of the world was dependent on fossil fuels, and there was “no credible way” to eliminate this dependence in the observable future.

“It is a utopian notion that we can suddenly end the use of hydrocarbon based energy,” the Alberta Premier said. “The challenge is to shrink carbon and CO2 output, and Alberta is increasingly a world leader in that respect.”…read more.

U.S. Jet Fuel Stocks Continue To Rise As Production Outpaces Demand

Despite a marked rise in U.S. air travel numbers this year compared to 2020, jet fuel inventories have climbed in recent months as refiners boosted production, while jet fuel demand is still lower than pre-pandemic levels.

Refiners in the United States have raised jet fuel production by almost 8 percent, or 102,000 barrels per day (bpd), since the first week of May, the Energy Information Administration (EIA) said on Wednesday.

However, as of July 23, the combined total U.S. jet fuel inventory was 9.9 percent higher than the five-year (2016–2020) combined average due to increased jet fuel production and lower product supplied.

To compare, as of the same day, July 23, U.S. gasoline inventories were down 0.6 percent, and the combined total distillate fuel oil inventory was 6.8 percent below the five-year combined average.

Airline travel across the United States is picking up, but not at the same rate as car travel, which has led the recovery in gasoline consumption…read more.