Energy & Commodities

Schachter’s Eye On Energy – September 1st, 2021

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 September 1st was mixed for crude oil prices. On the positive side for crude prices, Commercial Crude Inventories fell by 7.2Mb (forecast was for a decline of 3.1Mb) as Hurricane Ida preparation increased demand. Offsetting this bullish number was that Gasoline Inventories rose by 1.3Mb, and US crude oil production rose by 100Kb/d to 11.5Mb (up 1.8Mb/d from a year ago). Our target of 12.0Mb/d for US production during Q4/21  is getting a lot closer to reality. Refinery Utilization fell 1.1% to 91.3% last week (last year was 76.7% and in 2019 was 94.8%) as refiners shut down in advance of the approaching devastating hurricane.

Demand for Jet Fuel, Distillates, Fuel OIl and Propane rose prior to the landfall of Hurricane Ida, with Total Product Demand rising by 1.0Mb/d to 22.8Mb/d. Overall demand is now above late-August 2019 levels when consumption was 21.6Mb/d. Gasoline consumption rose a modest 5b/d to 9.58Mb/d (9.47Mb/d consumed in late-August 2019). Jet Fuel Consumption rose a robust 398Kb/d to 1.80Mb/d (now only slightly below the pre-pandemic level of 1.88b/d of late-August 2019). Cushing Inventories rose last week by 0.8Mb to 34.5Mb compared to 52.5Mb last year.

Baker Hughes Rig Data: The data for the week ending August 27th showed the US rig count with a rise of five rigs to 508 rigs. Of the 508 US rigs active, 410 were drilling for oil and the rest 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 227% from 180 rigs last year at this time. The natural gas rig count is up a more modest 35% from last year’s 72 rigs. The Permian saw an increase of two rigs to 249 rigs and is up 99% from 125 rigs last year at this time.

Canada had a nine rig decline last week to 147 rigs as the spring/summer programs are completed. Canadian activity is now up 2.7x from 54 rigs last year. There were 85 oil rigs working last week, up from 19 last year. There are 62 rigs working on natural gas projects now, up from 35 last year.

The material increase in rig activity over a year ago in both the US and Canada 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+ is meeting later today to ratify production levels for October. We expect that they will affirm the increase in production of 400Kb/d as part of the plan to add 2.0Mb/d before year-end under their most recent agreement. Forecasts now see OPEC+ adding more crude in 2022, moving their volumes by 2H/22 back to levels produced prior to the Covid pandemic start which required them to cut production by 10Mb/d. They still have 4-5Mb/d of capacity that can be added next year to meet the growth in demand that they see occurring. Some forecasts now see an excess of 2-2.5Mb/d starting after winter 2021-2022 ends.

Starting in the next few weeks of September now that 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 later in September. Normal fall builds are 2-3Mb per week but if we see any builds over 5Mb in any week, that would push meaningful pressure on crude prices.

Bearish pressure on crude prices:

  1. The EU is recommending that non-essential travel to the US be halted due to the rapid rise in US caseloads. This will lower air travel and the demand for Jet Fuel, and as a result lower Crude oil demand will occur. Cancellations of passenger flights in the US have caused many US airlines to lower capacity by 8-10% starting this month.
  2. The US ADP jobs report was quite disappointing with a rise of only 374K jobs. The forecast had been for over 600K jobs and the expectation is that the official jobs report out this Friday would be over 700K jobs (July showed an increase of 832K jobs). If it is another low number that would be disappointing especially since the Federal unemployment support of US$300 per week ends this weekend. This funding support has been utilized by 12M people.
  3. 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. Vietnam has the most aggressive lockdowns announced this week.
  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, Greece, Indonesia, Iran, Iraq, Japan, Malaysia, Mexico, Morocco, New Zealand, Philippines, Saudi Arabia, South Africa, South Korea, Sri Lanka, Thailand, Venezuela, and Vietnam are all seeing rising caseloads and are tightening movement and putting in curfews. This list is up by two new countries from last week. Death counts are now up to 4.51M worldwide and are over 639K in the US. The total worldwide caseload is now 217.1M people of which the US has 39.1M cases.

Bullish pressure on crude prices:

  1. Rising vaccination levels of the adult US population toward herd immunity level has lifted travel.
  2. Hurricane Ida (a Category 4 Hurricane) necessitated shutting in most of the offshore Gulf of Mexico oil and gas production. Over 1.7Mb/d of crude was shut in which equates to over 90% of offshore production.
  3. Hurricane Ida, 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 utilities have low water levels due to the drought. NYMEX natural gas prices are now at US$4.57/mcf. AECO prices have drifted lower but are still at an attractive C$3.50/mcf.

CONCLUSION: 

WTI has lifted from US$61.74/b two weeks ago to US$67.75/b today due to Hurricane Ida and the shutting in of most of the US offshore crude production. With the summer driving season over and the normal fall build season starting shortly, we expect WTI crude oil prices to start to go down again. We had forecasted that WTI would decline below US$65/b in August (which it did) and now see a breach of US$60/b as likely before the end of September. How low we go will depend upon the health of the largest economies (The US, China and the EU) and how large the seasonal crude storage builds are. Our worst case downside for WTI crude is for US$48-54/b during Q4/21. 

Energy Stock Market: The S&P/TSX Energy Index trades currently at 122 and is down 16% from the high of 145 in mid-June. With the decline in crude in the first two weeks of August to US$61.74/b, the Energy Index fell to a low of 109.72 (a 24% decline from the high). Once WTI breaches US$61.74/b later this month, we should be heading towards 100 for the Energy Index.

The energy sector is facing attacks (becoming the climate battle punching bag) by the Liberals, NDP and the Green Party as the Federal election cycle is now underway. Canadian energy stocks are likely to face more pressure than energy stocks in the US during the September election cycle.

When, not if, WTI breaks US$60/b 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 September Interim SER Report comes out next Friday (due to the holiday on Monday) and continues the review of Q2/21 results with the coverage of the last ten companies on our list.

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

Oil Could Rise Further As OPEC Suggests Keeping Output Cuts In Place

Crude oil prices could rise further if OPEC+ stops adding barrels to global supply, which is a possibility after the cartel’s next meeting, according to the Kuwaiti oil minister.

“The markets are slowing. Since COVID-19 has begun its fourth wave in some areas, we must be careful and reconsider this increase. There may be a halt to the 400,000 (bpd) increase,” said Mohammad Abdulatif al-Fares, as quoted by Reuters.

OPEC+ had agreed to boost oil production by 400,000 bpd every month beginning August until the group’s combined output reached pre-agreement levels towards the end of next year. But now that demand concerns are once again coming to the fore, OPEC+ is signaling that it is always ready to change tack…read more.

India To Boost LNG Import Capacity By 12%

India is planning to expand its import capacity for liquefied natural gas by 12 percent by building a new floating import terminal in the western state of Gujarat.

The terminal is due to become operational next year, Reuters reports, and will bring India’s total LNG import capacity to 47.5 million tons annually.

India last year consumed 25.7 million tons of liquefied natural gas, a 14-percent increase on 2019, according to Wood Mackenzie. Demand is likely to continue to grow in the coming years although there will be constraints related to prices. Just as with oil, India is no fan of expensive commodities, so if the current rally on the spot LNG market persists, Indian buyers’ appetite for the superchilled fuel will likely be dampened, at least temporarily…read more.

Canada sees supply of main crops dropping 26% on drought impact

Canada, the world’s biggest canola grower and a major wheat producer, forecasts a 26 per cent drop in supplies of its main crops as drought ravages output and inventories shrink.

Grain and oilseed exports are expected to fall in the marketing year that started Aug. 1 for most crops, and inventories will drop due to low supplies, Agriculture and Agri-Food Canada said in a monthly report on Thursday. By the end of July, nearly three quarters of Canada’s agricultural area was abnormally dry or in a drought.

Erratic weather globally is helping push prices of staple crops including wheat to multiyear highs. The outlook for the sharp drop in Canadian supplies also comes with a forecast for the nation’s grain prices to remain high at a time that food inflation is already being felt in consumers’ wallets…read more.

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.