Op/Ed

Schachter’s Eye On Energy – September 29th

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 also hold quarterly webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more

EIA Weekly Data: The EIA data on Wednesday September 29th surprised energy bulls with increases in Commercial Crude OIl Stocks of 4.6Mb (forecast was for a decline of 2.5Mb), an increase in Total Stocks of 10.9Mb (excluding SPR changes), an increase in US crude production of 500Kb/d as Offshore US crude production (recovers post the hurricanes), and Total Demand fell by 754Kb/d to 20.4Mb. We have been highlighting these potentials over the last number of issues and they all are now occurring. This should put a cold shower on the crude oil bulls and drive crude prices down below US$70/b in the near future to below US$60/b as we have been forecasting.

In detail:

  • Last week 500Kb/d came back on and overall US production is now 11.1Mb/d, just below the 11.5Mb/d produced before the first hurricane closed offshore production. There are still 400Kb/d to come back on stream. Some of the production, approximately around  200-250Kb/d, may take some time to return as Shell announced that major infrastructure repairs are needed.
  • Commercial Crude Oil Stocks rose by 4.6Mb on the week and would have risen by 870Kb more if not for net exports falling by 124Kb/d. Gasoline Inventories rose by 0.2Mb and Refinery Activity rose 0.6 points to 88.1% from 87.5%, as Gulf Coast refineries increased activity. This is now above pre-pandemic levels of 86.4%, this time in 2019. In the coming months we expect to see US crude oil production rising and reaching 12.0Mb/d as the drilling pace picks up sharply and much of the remaining shut in offshore production returns.
  • Demand for all products fell last week. Total Product Demand fell 754Kb/d to 20.4Mb/d as consumption of propane and other oils fell. This compares to 21.2Mb/d consumed at this time in 2019 before the pandemic. Gasoline consumption picked up 502Kb/d to 9.4Mb/d (same as in 2019 at this time) while Jet Fuel Consumption fell 60Kb/d to 1.43Mb/d (1.5Mb/d consumed in 2019 at this time). Cushing Inventories rose by 0.2Mb/d to 34.0Mb compared to 56.1Mb last year and 40.7Mb two years ago.

This was a very bearish report and as we see more seasonal inventory builds in the coming weeks crude oil should fall over US$10/b during Q4/21.

Baker Hughes Rig Data: The data for the week ending September 24th showed the US rig count rose by nine rigs (rose nine rigs in the prior week). Of the total of 521 rigs working last week, 421 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 100% from 261 rigs working a year ago. The US oil rig count is up 130% from 183 rigs last year at this time. The natural gas rig count is up a more modest 32% from last year’s 75 rigs, now at 99 rigs. The Permian saw an increase of one rig (up five last week) to 260 rigs and is up 108% from 125 rigs last year at this time.

Canada had a rise of eight rigs (up 11 rigs in the prior week) to 162 rigs. Canadian activity is now up 128% from 71 rigs last year. There were 96 oil rigs working last week, up from 33 last year. There are 65 rigs working on natural gas projects now, up from 38 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 over the coming months once the impact of the hurricane/storm season is over. The data from the many companies and their plans for the rest of 2021 and forecasts for 2022 support this rising production profile expectation.

Conclusion:

We should see weaker crude oil consumption reports and weekly builds in Commercial Crude Stocks around the world as inventories rebuild to meet the winter 2021-2022 needs. Normal fall season builds are 2-3Mb per week. If we see any increases over 5Mb in any week, that would put meaningful downward pressure on crude prices. The current spike in prices was speculative in nature and is not sustainable. Bulls may see this week as an aberration but if we see repeats of builds and strong builds over 2-3Mb/week, then crude prices are very vulnerable. Just remember how Lumber rose from US$441 in October to US$1733 in May 2021 and then fell to US$448 in August when demand waned as high prices killed off demand.

Bearish pressure on crude prices:

  1. The Mu variant is following the deadly Delta variant and is gaining victims around the world. This variant started in Colombia and now is impacting 39% of all people infected with the pandemic disease. This variant is now seen in more than 40 countries and in 49 US States. A London immunologist at the Imperial College in London says “that the early research indicates it appears to be highly effective at evading immunity”. Delta caseloads are growing around the world. Just note the challenges faced in Alberta. Formal vaccine documents are to be the norm in Canada going forward. In the US the death rate is now back over 2,000/day and over 688K deaths have been reported. Worldwide the death count is now 4.75M.
  2. The Saudis are pricing crude oil for October delivery to Asia at US$1/b lower than previous months, as the fight for market share in the patchy economies in the area continues. China demand is especially sloppy. China plans on selling 7.4Mb from their state crude reserves on September 24th to cool off prices. Russia has announced that they plan on adding nearly 7% in additional production in 2022. OPEC meets next Monday (October 4th) and plans to approve their 400Kb/d increase in production for November. However major consuming nations are pressuring them to increase production even further as high prices are negatively impacting their economies. The King and Crown Prince are being pressured to increase production by the Presidents of the US and China and we don’t see the Saudis ignoring this pressure. OPEC countries like Saudi Arabia, Iraq, Kuwait and the UAE together could add 3-4Mb/d quite quickly if they want to.

Bullish pressure on crude prices:

  1. Forest fires and the lack of wind in the North Sea and other areas have crippled wind power from onshore and offshore facilities, cutting off much of this renewable electricity supply. This has driven natural gas prices to over US$20/mcf in Europe and over US$30/mcf in parts of Asia (NYMEX today US$5.62/mcf – AECO C$2.48/mcf). Prices for natural gas should drift over the near term but should exceed recent highs if this winter is colder than normal and storage is low. Goldman Sachs sees Brent rising another US$10/b in Q4/21 to US$90/b.
  2. Some OPEC countries like Nigeria, Libya and the Congo are having problems keeping crude oil production up due to their lack of funding for operations.
  3. The UK has a shortage of energy product delivery drivers and is now opening its border to 5,000 EU accredited individuals. In addition they plan on utilizing the military logistics system to increase deliveries. Hoarding has occurred as people worry about running out of fuel for their vehicles. Recently a purchase limit of 30 pounds worth of petrol has been implemented by many petrol stations.
  4. Russia has held back supplies of natural gas to Europe as they pressure Germany to open the new NordStream 2 pipeline. The Greens and the Free Democrats, planning to join the new Government, are against the project. Opening the pipeline should end the shortage of natural gas on the continent. Once the political maneuvering is over this should start up.

CONCLUSION: 

WTI has risen to US$75.48/b due to the rising price of natural gas, the shortage of electricity in many OECD and developing countries, and massive speculative interest. It appears that high prices again are the solution for high prices as was seen in Q2/08 when crude spiked to US$147/b and then fell to US$34/b in Q1/09, and in April 2020 when prices went negative and ended the rout in crude prices, recovering to US$42/b just a few months later. Many industrial plants in China have been closed due to the high cost of fuel and the Government’s plan to lower emissions in the Beijing area for the upcoming winter Olympics from February 4th to the 20th. Clean air is needed for the event and China wants to show it is making progress on its climate initiatives. This will dampen China’s consumption of fossil fuels going forward. Supplier plants producing items for Apple and TESLA have suspended production. Supply chain issues are getting worse.

A breach of US$70/b is likely before the end of October. The health of the largest world economic zones (the US, China and the EU) and how large the seasonal crude oil storage builds are will impact how much crude prices will retreat. During Q4/21 we see WTI prices breaching US$60/b. This may sound heretical to energy bulls but just remember that the pendulum does swing and that inflection point is here now. Proof is evident from today’s EIA report.

Energy Stock Market: The S&P/TSX Energy Index currently trades at 144 as natural gas stocks rose sharply over the last week following the whirlwind of gaping natural gas prices in the spot market.

We expect that as crude oil prices decline, the recent low for the Energy Index at 109.72 will be breached. The key level to watch is US$61.74/b. If this occurs in Q4/21 then the Energy Index should head towards 100. We recommend caution, lowering exposure and holding cash for the next low risk entry point. The energy and energy service companies with the most downside are those with stretched balance sheets and have missed production, revenue or EBITDA forecasts. Take profits on decent up days and raise cash.

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 October Interim Report comes out on Thursday October 7th and covers the weakening general stock market and its expected impact on the energy sector.

The Evergrande Chinese property developer insolvency problem appears to be the catalyst for the overall stock market decline in China and many other countries around the world. The US$305B of debts that they can’t pay has large portions owed to foreign investors and lenders. Interest payments due last week were not paid and after the 30 day grace period is over it will  push the entity into bankruptcy or Beijing controlled restructuring. The size of this problem is massive as they were building 1.6M apartments and homes that they don’t have funds to finish and as well, have taken large deposits from buyers. Protests at company offices are picking up by irate home buyers and suppliers. In any year they employ over 3M people in their construction activities and directly employ over 200,000 people. This could spiral out of control and become the ‘Lehman’ event to start a new financial crisis. Banks and other financial institutions as well as local governments are very vulnerable. Beijing is in the process of setting up protective barriers to contain the damage this could do to the real estate wealth focus of the country.

Other market pressures are the debt ceiling battle in the US, rising bond yields which lower the value of the stream of earnings, the problem of Congress’s approval of the two stimulus bills and the planned 40 new or increased taxes to pay for the social infrastructure’s US$3.5T price tag. This is very politically tough as the Republicans won’t support the social infrastructure Biden proposal and some Democrats are also opposed.  Liberals and progressives want a bigger package and moderates want to see it lower and paid for. The next few weeks could see defeats which could rock the financial markets.

We cover this in detail in our Schachter Energy Report. Over the next few months any of these events could lead to a domino effect of over leveraged companies getting into trouble and financial markets declining materially. The Dow Jones Industrials Index now at 34,460 could fall to below 30,000 in Q4/21 and to <25,000 in Q1/22. We have already seen two big down days of more than 500 points for the Dow Jones Industrials Index and expect many more in the coming months. Yesterday the Dow fell 1.6% or 569 points while the overvalued NASDAQ fell 2.8% or 423 points.

If you want to receive ongoing coverage of this possibility, become an SER quarterly or annual subscriber. For new people, the quarterly offering is a good way to peruse our product before you determine which subscription format makes the most sense for your needs.

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

If you enjoy reading our weekly ‘Eye on Energy’ feel free to forward it off to friends and colleagues. We always welcome new subscribers to our complimentary macro energy newsletter.

Trading Desk Notes For September 25th, 2021

Evergrande Monday

The Dow Jones futures contract dropped >1,300 points from last Friday’s highs to Monday’s lows and then rallied back > 1,300 points to Thursday’s highs – a ~2,600 point round trip in five trading sessions.

Here’s my take: The leading stock indices had rallied >100% from the March 2020 lows without so much as a 5% correction since October 2020. Monetary and fiscal stimulus had been the principal drivers of the rally; the rally was showing many signs of speculative excess, and any “catalyst” could trigger a correction. Looking ahead, the market could see that the Fed was going to start “taking away the punch bowl” (even if only a spoonful at a time), and the increasingly dysfunctional environment in Washington meant that fiscal stimulus was going to be scaled back. (Fiscal fatigue, as my friend Kevin Muir, calls it.)

In August, I wondered if developments in China would be contagious, but North American markets seemed “complacent,” with stock indices inching higher and higher while volatility metrics were near multi-year lows.

Last week I wrote: “The answer (to the contagious question) appeared to be “No,” in August, but now that the “stress” of September has arrived, the answer might be, “Yes, but with a delay.

It was easy to imagine contagion within the over-levered Chinese real estate market, especially considering the recent “anti-capitalist” bend of the CCP (“homes are for living in – not for speculation”). It was also not difficult to imaging that contagion within China could trigger corrections in other markets.

The critical question seems to be, “What will the CCP do?” They are reshaping Chinese society (“common prosperity for all”) and seem more concerned with policy compliance than short-term market reactions. I expect more companies will “fail” with executives arrested, but I do not expect the CCP will allow chaos.

The market seems to have drawn the same conclusion (as Evergrande moved from a page 16 story in August to a front-page feature on Monday) and has bounced back from the lows.

What’s next?

The stock indices have historically been weak in September (especially the 2nd half), and then they rally into year-end. That may happen, but I can also imagine that the decline from the early September All-Time highs is only the first leg of a more significant correction.

An alternative view to the seasonal norm would be that this week’s rally has been a “reflexive” bounce from a market that is “used to” going up and that if it rolls over without making new highs and takes out this week’s lows, a deeper correction may develop.

Interest rates

As the S+P futures plunged ~180 points from last Friday’s highs to this Monday’s lows, Treasury bonds barely moved – they stayed inside the relatively narrow range they’ve been in since mid-July. I thought that was curious. Where was the “haven” bid for bonds when the stock market was in free fall? Even the Japanese Yen was getting a little “haven” bid.

Then the bonds rallied on Wednesday following what seemed to be a hawkish tilt from the Fed. I was genuinely perplexed. But bonds sold off hard on Thursday and Friday.

Not only were nominal yields rising, but real yields were also rising.

The yield curve has been flattening (don’t worry about inflation, the economy is slowing?)

volatility spike

I think of the S+P futures market as the best barometer for market risk on/off sentiment, but I also watch several different volatility metrics. S+P Vol gapped higher as markets got “back to work” after Labor day, then jumped to a 4-month high on Evergrande Monday, only to quickly retreat as the stock market rallied Tuesday through Friday.

Energy

Uranium prices have corrected after their sharp rally, New York Nat Gas has backed off from its highs, but crude oil and gasoline are aggressively bid.

Currencies

The US Dollar has sustained its rally from early September – especially against European currencies and the Yen.

The Canadian Dollar: strength/weakness in the S+P often impacts the CAD – this week, the CAD traded almost tick-for-tick with S+P futures. The relative strength/weakness of the USD Vs. other currencies also affects the CAD – but this week, as the USD was steady, the CAD rallied against most other currencies, perhaps because the commodity indices rallied to fresh 7-year highs – with a big boost coming from energy prices.

The Commitments of Traders report issued by the CFTC on Friday after the close (based on Tuesday, Sept 21 data ) shows the net long USD position to be the largest since Q1 2020. Large speculators were the shortest CAD they have been in over a year (remember they were hugely long in mid-June just after the CAD hit a 6-year high.) The AUD has a record net short position.

My short term trading

I started the week with a net short CAD position (short futures and short OTM puts.) I had been unable to bring myself to sell S+P futures in the hole the previous Friday but thought that the CAD would drop if the S+P kept falling.

The CAD tumbled with the S+P on Monday, and I wrote deeper OTM puts against my futures position. That was the high point of the week as far as my unrealized gains were concerned.

Monday evening (Pacific Time), I realized that I had a risk management problem. There was “no market” for my options. I had lowered the stop on my short futures position, but if the stop was hit, I would be net long the CAD (due to the short options) – with no way to cover them.

Sometime after midnight (as the European markets opened), bids and offers appeared in the CAD options – but the bid/offer spreads were WIDE and implied Vol had jumped – sharply increasing the prices of the options I was short. Mama Mia!

I covered all my CAD positions Tuesday and made a little money on the trade. By then, I had the idea that the panic that had caused the sharp sell-off on Monday had run its course, and I started buying Dow and S+P futures. I had my stops too tight and took small losses.

As much as I was right on my idea that the panic was over, I lost money buying the indices because the intra-day price swings were so much bigger and faster than they had been before the panic – and I couldn’t adjust how wide I needed to place my stops.

At the end of the week, my net P+L on realized trades was flat. I had come into the week bearish; the market had dropped, I had changed to bullish, the market had rallied, and, net, I didn’t make any money. Have I ever told you that trading is not a game of perfect? I ended the week flat.

On my radar

I think there has been a change in market psychology. As noted above, this week’s rally from Monday’s lows might have been reflexive. If the market rolls over and, especially if it takes out this week’s lows, I would be looking for opportunities to short stock indices, buy the USD, and I might even buy bonds!

Thoughts on trading

My trading time horizon got too short this week. My sweet spot is more of a swing trading time frame – a few days to a few weeks. I had experimented with shorter-term time frames where I would enter a market close to the point where I would stop myself out – using only price action to make trading decisions. (No supply/demand analysis etc.) I thought this would likely generate lots of small losses with occasional big wins. It probably works well for some people, but it doesn’t seem to suit me.

Finding the right time frame (that suits you) is one of the most important things for a trader. I don’t think all of my trading has to happen within the same time frame – the market doesn’t always move at the same speed – but I think there has to be a “pace” to my trading that allows for reflection – not just intuition.

I’ll wrap up this week’s Notes with a quote from Denise Shull’s recent interview on RTV. She runs the ReThink Group, providing performance coaching for traders and professional athletes. She said, “People think they make decisions based upon their analysis – but actually, they make decisions based upon how they “feel” about their analysis.”

Subscribe: You have free access to everything on this site. Subscribers receive an email alert when I post something new – usually 4 to 6 times a month.

Victor Adair retired from the Canadian brokerage business in 2020 after 44 years and is no longer licensed to provide investment advice. Therefore, this blog, and everything else on this website, is not intended to be investment advice for anyone about anything.

Schachter’s Eye On Energy – September 22

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 22nd highlighted the continued return of US offshore production. Last week 500Kb/d came back on and overall US production is now 10.6Mb/d. There are still 900Kb/d to come back on stream to get back to the 11.5Mb/d of overall US crude production from before the hurricane season started. Some of the production, 200-250Kb/d, may take some time to return as Shell announced that major infrastructure repairs are needed. Commercial Crude Oil Stocks fell 3.5Mb on the week, below the fear number of a 6Mb decline. US exports rose 185Kb/d, or by 1.3Mb last week impacting the crude stock inventory. Gasoline Inventories rose by 3.5Mb as Refinery activity rose 5.4 points to 87.5% from 82.1%, as Gulf Coast refineries increased activity. We expect to see US crude oil production rising and reaching 12.0Mb/d before year end as the drilling pace picks up sharply and most of the remaining shut in offshore production returns.

Demand for all products rose last week. Total Product Demand lifted 1.23Mb/d to 21.1Mb/d as consumption of distillates and propane rose. Gasoline consumption picked up only a modest 4Kb/d to 8.9Mb/d while Jet Fuel Consumption rose by 111Kb/d to 1.49Mb/d. Cushing Inventories fell last week by 1.5Mb to 33.8Mb compared to 54.3Mb last year and 40.9Mb two years ago.

Baker Hughes Rig Data: The data for the week ending September 17th showed the US rig count rose by nine rigs (rose six rigs in the prior week). Of the total of 512 rigs working last week, 411 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 101% from 255 rigs working a year ago. The US oil rig count is up 130% from 179 rigs last year at this time. The natural gas rig count is up a more modest 37% from last year’s 73 rigs at 100 rigs. The Permian saw an increase of five rigs to 259 rigs and is up 111% from 123 rigs last year at this time.

Canada had a rise of 11 rigs (down nine the prior week) to 154 rigs. Canadian activity is now up 140% from 64 rigs last year. There were 95 oil rigs working last week, up from 30 last year. There are 59 rigs working on natural gas projects now, up from 34 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 over the coming months once the impact of the hurricane/storm season is over. The data from the many companies that reported Q2/21 results and their plans for the second half of 2021 support this rising production profile expectation.

Conclusion:

Now that the summer driving season is over, we should soon see weaker crude oil consumption and weekly builds in Commercial Crude Stocks around the world as inventories rebuild to meet the winter 2021-2022 needs. Normal fall season builds are 2-3Mb per week but if we see any increases over 5Mb in any week, that would put meaningful downward pressure on crude prices. The current spike in prices is speculative in nature and is not sustainable in our view.

Bearish pressure on crude prices:

  1. The Mu Variant is spreading around the world. This variant started in Colombia and now is impacting 39% of all people infected with the pandemic disease. This variant is now seen in more than 40 countries and in 49 US States. A London immunologist at the Imperial College in London says “that the early research indicates it appears to be highly effective at evading immunity”. Delta caseloads are growing around the world. Just note the challenges faced in Alberta. Formal QR code vaccine passports are to be the norm in Canada going forward.
  2. The Saudis are pricing crude oil for October delivery to Asia at US$1/b lower than previous months, as the fight for market share in the patchy economies in the area continues. China demand is especially sloppy. China plans on selling 7.4Mb from their state crude reserves on September 24th to cool off prices. Russia has announced that they plan on adding nearly 7% in additional production in 2022.

Bullish pressure on crude prices:

  1. Hurricanes, extreme heat waves, forest fires, crippling droughts and shortage of electricity for air conditioning across the US and Canada, are all 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 have backed off and are now at US$4.83/mcf as air-conditioning demand wanes. AECO prices have taken a two for one sale to C$2.02/mcf but still attractive for this time of year. Prices for natural gas should continue to drift over the near term but should exceed recent highs this winter.
  2. Some OPEC countries like Nigeria, Libya and the Congo are having problems keeping crude oil production up due to their lack of funding for operations.

CONCLUSION: 

WTI has fallen over the last week from a high of US$73.14/b to US$71.49/b as US offshore production has returned and mixed economic news has come out of the two largest energy consumers; the US and China. With more US offshore production expected to return in the coming weeks and significant new crude oil wells coming on from the active drilling in the shale basins, we see US production reaching 12.0Mb/d before year end. A breach of US$70/b is likely before the end of this month. October is likely to be a nasty month for prices depending upon the health of the largest world economic zones (the US, China and the EU) and how large the seasonal crude oil storage builds are. During Q4/21 we see WTI prices breaching US$60/b. 

Energy Stock Market: The S&P/TSX Energy Index currently trades at 132, down slightly on the week. We expect that as crude prices decline the recent low for the Energy Index at 109.72, will be breached. The key breach level is US$61.74/b and the Energy Index should head towards 100.

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. Take profits on decent up days and raise cash.

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 SER Monthly Report comes out tomorrow Thursday September 23rd and covers the weakening general stock market.

The Evergrande Chinese property developer insolvency problem could be the catalyst for the expected decline we see ahead. They have over US$300B of debts that they can’t pay and large portions are owed to foreign investors and lenders. Near term interest payments if not paid later this week could push the entity into bankruptcy or Beijing controlled restructuring. The size of this problem is massive as they are building 1.6M apartments and homes that they don’t have funds to finish and as well, have taken large deposits from buyers. Protests at company offices are picking up by irate home buyers and suppliers. In any year they employ over 3M people in their construction activities and directly employ over 200,000 people. This could spiral out of control and become the ‘Lehman’ event to start a new financial crisis. We cover this in more detail in our Schachter Energy Report. Over the next few months this could lead to a domino effect of over leveraged companies getting into trouble and financial markets declining materially. The Dow Jones Industrials Index now at 34,350 could fall to below 30,000 in Q4/21 and to <25,000 in Q1/22. If you want to receive ongoing coverage of this possibility,  become an SER quarterly or annual subscriber. For new people, the quarterly offering is a good way to peruse our product before you determine which subscription format makes the most sense for your needs.

On Monday, September 20th, the Dow Jones Industrials Index fell 614 points to 33,970 as this disaster in China was prominent in the news. If more excessively debt-laden entities fail and banks and lenders take big hits, then counterparty risk could be a material problem for the markets. We do not see this as a one day event. Multiple large point declines are likely to occur in Q4/21.

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

If you enjoy reading our weekly ‘Eye on Energy’ feel free to forward it off to friends and colleagues. We always welcome new subscribers to our complimentary macro energy newsletter. 

Schachter’s Eye On Energy – September 15th, 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 15th continued to be impacted by Hurricane Ida followed by Hurricane Nicholas (now a tropical storm). Demand fell while US production only recovered 100Kb/d. Total US production was 10.1Mb/d (up 100Kb/d on the week) but is down from 11.5Mb/d, produced before the recent hurricanes. It was expected that half of the shut in offshore crude oil production would be back on by now but the continued storm season has delayed the restart. It may take into late September for the refineries and offshore production facilities to return to normal operating levels. Commercial Crude Oil Stocks fell 6.4Mb on the week versus the forecast of 3.5Mb.  Gasoline Inventories fell 1.9Mb. Refinery activity rose 0.2 points to 82.1% from 81.9%, as some Gulf Coast refineries restarted. Some of the refineries still remain without electricity. We expect to see US production rising and reaching 12.0Mb/d before year end.

Demand for all products fell last week. Total Product Demand fell a modest 43Kb/d to 19.9Mb/d. Gasoline consumption fell a sharp 716Kb/d to 8.89Mb/d with Jet Fuel Consumption falling by 246Kb/d to 1.38Mb/d. Cushing Inventories fell last week by 1.1Mb to 35.3Mb compared to 54.3Mb last year and 38.7Mb two  years ago.

Baker Hughes Rig Data: The data for the week ending September 10th showed the US rig count rose by six rigs (fell 11 rigs last week) as Hurricane Ida subsided and Louisiana was able to bring back four rigs. Of the total of 503 rigs working last week, 401 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 98% from 254 rigs working a year ago. The US oil rig count is up 123% from 180 rigs last year at this time. The natural gas rig count is up a more modest 42% from last year’s 71 rigs at 101 rigs. The Permian saw an increase of four rigs to 254 rigs and is up 105% from 124 rigs last year at this time.

Canada had a decline of nine rigs (up five rigs the prior week) to 143 rigs. Canadian activity is now up 2.75x from 52 rigs last year. There were 87 oil rigs working last week, up from 19 last year. There are 56 rigs working on natural gas projects now, up from 33 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 over the coming months once the impact of the hurricane/storm season is over. The data from the many companies that reported Q2/21 results and their plans for the second half of 2021 support this rising production profile expectation.

OPEC Monthly Oil Market Report:

The OPEC Monthly Oil Market Report for September was released on the 13th. The highlights were a 110Kb/d reduction in their forecast for demand in Q4/21 from 99.82Mb/d to 99.70Mb/d due to the Delta variant’s impact on consumption. We think this reduced forecast is still too high. Overall production rose by 151Kb/d to 26.76Mb/d with increases from Angola (43Kb/d), Iraq (90Kb/d), Saudi Arabia (69Kb/d) and UAE (55Kb/d). This was offset by production declines in Nigeria of 114Kb/d. This increase of 151Kb/d was far below the 400Kb/d that OPEC+ had promised and has added to the speculative spike in crude prices. OPEC expects demand to rise in 2022 to 100.8Mb/d from 96.7Mb/d this year. We see demand now at around 97Mb/d as the biggest consuming nations, the US and China, have weakening demand (note the weaker US demand for gasoline and jet fuel in the EIA report coverage). The OPEC forecast for 2022 is in our view, very optimistic. It assumes that there are no new waves of the pandemic or mutations that can evade the current vaccines.

Conclusion:

Now that the summer driving season is over, we are seeing weaker consumption and soon after the storm 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. Normal fall builds are 2-3Mb per week but if we see any builds over 5Mb in any week, that would put meaningful downward pressure on crude prices. The current spike in prices is speculative in nature and is not sustainable in our view.

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 prices will occur. Cancellations of passenger flights in the US have caused many US airlines to lower September capacity by 8-10%. The recent Labour Day holiday season may increase case counts in the coming weeks. Consumer Confidence in the US has fallen sharply in recent weeks. In August it fell to 113.8 from 125.1 in July and is the lowest level since February 2021. In China, retail sales grew only a very modest 2.5% (just inflationary levels not volume growth) and was below the 7% forecast. China’s construction spending fell 3.2% last month.
  2. The Mu Variant is spreading around the world. This variant started in Colombia and now is impacting 39% of those infected with the pandemic disease. This variant is now seen in more than 40 countries and in 49 US States. A London immunologist at the Imperial College in London says “that the early research indicates it appears to be highly effective at evading immunity”.
  3. The Saudis are pricing crude oil for October delivery to Asia at US$1/b lower than previous months as the fight for market share in the patchy economies in the area continues. China demand is especially sloppy. To arrest the higher prices, China plans on selling 7.4Mb from their state crude reserves on September 24th to cool off prices.

Bullish pressure on crude prices:

  1. Hurricane Ida and now Nicholas shuttered 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. Only 100Kb/d has since recovered. It may take weeks for all this production to be reinstated.
  2. Hurricanes, extreme heat waves, forest fires, crippling droughts and shortage of electricity for air conditioning across the US and Canada are all 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$5.56/mcf. AECO prices are at an attractive C$4.66/mcf. US natural gas prices have spiked as one facility in the Gulf coast that produces LNG for export is now closed due to the storms. Russia also seems to be having production problems and their exports to Europe have suffered and prices in that market have rocketed higher.

CONCLUSION: 

WTI has lifted to US$72.63/b (up US$2.17/b today) due to the continued shut-in of most of the US offshore crude production and OPEC adding less new volumes in August versus expectation. With the summer driving season over and the normal fall build season starting shortly, we expect WTI crude oil prices to reverse and go down again. We see a breach of US$60/b as likely in the next few weeks. 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 oil storage builds are. 

Energy Stock Market: The S&P/TSX Energy Index currently trades at 133, up 5 points on the day due to the sharp increase in crude prices. We expect as crude prices reverse that the  recent low for the Energy Index at 109.72, when crude fell to US$61.74/b, will be breached. Once WTI breaches US$61.74/b, we should be heading towards 100 for the Energy Index.

When, not if, in our view, 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. Take profits and raise cash.

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 SER Monthly Report comes out on Thursday September 23rd and covers the recent increase in crude prices as well as the weakening general stock market.

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Trading Desk Notes For September 11, 2021

Stock indices trended lower all week to end the week right on their lows. Option Vol spiked higher

In late August, my primary trading view was that the summer’s complacent, pro-risk market sentiment was due for a correction. “Everybody” was a buyer. Stock index option Vol was at the rock-bottom lows of the past few years.

The DJIA closed this week ~760 points (~2%) below last Friday’s close. The S+P and DJIA futures registered five consecutive lower daily closes for the first time since February 2020.

The US Dollar rallied this week as sentiment turned risk-off

The US Dollar Index hit a 9-month high on August 20th as stock indices reversed up from a 3-day mini-correction. For the next two weeks, the USDX trended lower as stocks rallied. The negative correlation between stock indices and the USDX has been strong for the past couple of months – which means when the market is in a Pro-risk mood stocks rally and the USDX falls – and vice versa!

The Canadian Dollar has had a very tight negative correlation with the USDX since April.

Historically, the CAD is negatively correlated to the USDX, but the relationship has been especially tight since April. The CAD has also had a strong historically positive correlation with commodity and stock indices – which means that when the market is in a Pro-risk mood the CAD goes up, along with commodity and stock indices and the USDX goes down – and vice versa!

The CAD fell as stock indices fell early this week but rallied in anticipation of the Canadian employment report on Friday. The report was in line with bullish expectations, but the CAD fell back as stock indices tumbled and both markets ended the day on their lows.

Gold Traded lower this week as the USD was bid

Copper had its biggest one-day jump in months

Copper seems to be influenced from time to time by the swings in equity market risk sentiment, and it did weaken early this week, but it surged higher on Friday even as the stock indices made new lows for the week. Perhaps the soaring price of aluminum (following the coup in bauxite-rich Guinea) contributed to copper’s gains.

This week’s close on WTI crude oil was the best since late July

WTI has chopped back and forth mostly between $68 and $70 for the past ten days after rallying more than $8 from the August lows. US production cuts and refinery shutdowns due to hurricane IDA have been a factor, as has anticipation of Covid’s impact on consumption.

Nat Gas and Uranium continued their powerful rally.

My short-term trading

I ended last week short Dow futures. I was stopped out of the trade, for a small loss, during the Sunday overnight session, but re-shorted the market during the holiday Monday session. I covered that trade for about a 200 point gain on Tuesday. I got short again Thursday and picked up another 200 or so points.

I was happy to not be short during the Thursday overnight session as the market rallied over 200 points on Biden’s push for more vaccinations and his telephone conversation with Xi.

My “Big Miss” for the week was not getting short again on Friday when the market jumped higher on the cash opening but almost immediately reversed course and the DJIA fell ~500 points to register its lowest close in six weeks.

In keeping with my observation that trading is not a game of perfect, I bought equity index futures a couple of times during the week looking for a bounce. The net result of those trades was a small loss.

My net P+L gain on the week (this is always realized gains or losses, and does not include unrealized gains or losses) was ~1.5%. In hindsight, I could have done better just sitting with the short trade I put on Monday – but, I didn’t. I’m flat at the end of the week, but looking forward to next week!

As noted in the “On my radar” section of last week’s notes, I was looking for a correction once we got past Labor Day – but the correction came at me faster than I expected and even though I had a good week I feel I should have done better. Welcome to trading!

On my radar

I’ve been looking at the bond market. The chart below shows that clients of JPM are short bonds. Maybe they think interest rates and/or inflation are going up, maybe they think the economy is going to heat up. Maybe they got short bonds last year and are still holding the trade. But the chart shows that they’ve increased their short position over the last five months, so those trades are probably underwater. If the stock market falls will the bond market rise? If the bond market rises will the people who are short bonds start buying back their positions? Should I be buying bonds?

Apple introduces their new phone and watch next week. AAPL hit new ATHs this week and also had its biggest down week since February. If the new product debut is not well received that could be a problem for the market.

The Yen has a very large spec net short position that was mostly put on Between January and April when the Yen fell against the USD. Since then the Yen has gone sideways. If the pro-risk market sentiment that has taken stocks to All-Time Highs starts to wobble will the Yen get a “safe haven” bid? Will those Yen shorts become buyers? Is the best trade to buy Yen against the USD or against the Euro?

In this chart, a rising market means the Euro is going up Vs. the Yen.

The S+P is down ~90 points (2%) from last week’s All-Time Highs. So far, the “dip” is less than what we saw in each of June, July and August. (The last time the S+P fell by more than 10% was September 2020.) I think there is more to go, maybe much more, but that brings up the subject of “time horizon.

This chart, created by Strategas Research Partners, was in the FT this week. In a nutshell, it shows that the flow of capital into the stock market YTD has been MUCH bigger than in any recent years. One of the reasons given for why all of this money is flowing into equities is because of the persistence of the rally, up over 100% from the March 2020 lows, with barely any pullback.

When I look at this chart I think of Bob Farrell’s 10 Rules – especially Rule #5: The public buys the most at the top and the least at the bottom.

This next chart shows that most of the retail money flowing into the stock market is passive – which means that people make regular monthly purchases, regardless of price, because they believe that, over time, the market only goes up. Passive money buys the indices, which, these days, are heavily weighted by a handful of Big Tech stocks.

I think passive investors will be “slow” to bail out of the market if it goes down. They won’t even notice a 5 or 10% decline. They will just keep buying. I wonder if the stock market goes down for six consecutive months if they will start selling. I don’t know.

So, getting back to “time horizon,” it’s possible that we’ve seen the high for the year. Short-term speculators will look for opportunities to get short. Longer-term investors (especially those with a long-only mandate) may get more defensive, sell some stocks to buy other stocks. Passive investors will just keep buying the indices. The financial market commentariat will find “reasons” why the market is weaker.

Thoughts on trading

I know I could be/should be a better golfer than I am. I feel the same way about trading, even though I know in my heart-of-hearts that trading, just like golf, is not a game of perfect.

One of my core beliefs about trading is that you have to find a way to trade that suits you. That probably means a lot of years of trial and error, but that’s how it goes. I know I will never be a “check-list” trader; a guy who has a list of conditions that a trade must meet before he pulls the trigger. I’m intuitive. I’m more like a poet than an engineer. But I also have a healthy respect for risk. I will probably always trade “too small” because I don’t want to get hit with a devastating loss. Some guys swing for the fences, I just try to keep getting on base.

I’ve noticed that when I get on a winning streak that my time horizon gets shorter. If I was trading week-to-week swings I start looking to take advantage of intra-day swings. That usually ends with a flurry of small not-well-thought-out trades – that result in net losses!

I read about retail buying a lot of short-dated options – to gain extra leverage. I almost always look at buying options as a way to reduce, not increase leverage or risk. I’m not comfortable when I’m naked short premium because I imagine I’m taking a big risk to earn a small premium. (I know some folks like to be naked short options, and that works for them.) If I’m right about the direction of a market move I want to earn a profit that is much bigger than what I think my potential loss will be if I’m wrong.

I’m more comfortable doing a covered write. For instance, I’ll buy futures and sell short-dated OTM calls against the futures. The short calls reduce the risk on the futures and also give me the opportunity to take in some time premium. However, the short calls also cap the max gain I can make on the trade, but if the market moves in my direction I can just do the trade again; buy more futures at a higher price and write more calls at a higher strike.

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Victor Adair retired from the Canadian brokerage business in 2020 after 44 years and is no longer licensed to provide investment advice. Therefore, this blog, and everything else on this website, is not intended to be investment advice for anyone about anything.