Op/Ed

Schachter’s Eye on Energy for December 29

Each week Josef Schachter gives you his insights into global events, price forecasts and the fundamentals of the energy sector. Josef offers a twice monthly Black Gold  newsletter covering the general energy market and 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 Oil Data: The EIA data of Wednesday December 29th was positive for energy prices as demand was strong during the Christmas holiday season. US Commercial Crude Stocks fell 3.6Mb (Just above the forecasted decline of 3.2Mb). Refinery Utilization was at 89.7%, above the 79.4% level of a year ago but below the 94.5% of two years ago. Total Motor Gasoline Inventories fell 3.6Mb on the week while Distillate volumes fell 1.7Mb. US Crude Production was the only bearish data in the release with a rise of 200Kb/d to a new yearly high of 11.8Mb/d. The key bullish feature of the week was that Total Demand rose by 1.76Mb/d as Motor Gasoline demand rose by 739Kb/d and Propane demand by 552Kb/d. Gasoline consumption rose to  9.72Mb/d which is above the 9.30Mb/d consumed in 2019 at this time. Jet Fuel Consumption rose 130Kb/d to 1.59Mb/d versus 1.54Mb/d consumed in 2019. Both are now above pre-pandemic levels. Cushing Inventories rose 1.0Mb to 34.7Mb/d.

EIA Weekly Natural Gas Data: Weekly withdrawals started five weeks ago as winter demand initiated the withdrawal season. Last week Thursday’s data showed a withdrawal of a modest 55 Bcf, lowering storage to 3.362 Tcf as the weather was still mild. The biggest draws were in the Midwest (19 Bcf) and the Pacific (14 Bcf). The five-year average for last week was a withdrawal of 100 Bcf and in 2021 was 152 Bcf. Storage is now 1% above the five-year average, so the US is not facing a natural gas shortage as is seen in Europe and Asia. NYMEX today is US$4.10/mcf up 12 cents from a week ago, due to the frigid conditions. AECO spot is at $4.01/mcf. This week’s data (out tomorrow) and next week’s are likely to see large draws over 100 Bcf due to the cold weather and high heating needs. With the two key winter months for natural gas demand ahead of us (January and February) we should expect large price moves to the upside on very cold days. Spikes over $6/mcf are likely to occur when weekly withdrawals of over 200 Bcf are seen. After winter is over natural gas prices should retreat and if the general stock market decline unfolds as we expect, a great buying window could develop at much lower levels for natural gas stocks in Q2/22.

Baker Hughes Rig Data: The data for the week ending December 23rd showed the US rig count rose seven rigs (up three rigs the prior week) to 586 rigs last week. Of the total working last week, 480 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 68% from 348 rigs working a year ago. The US oil rig count is up 82% from 264 rigs last year at this time. The natural gas rig count is up a more modest 28% from last year’s 83 rigs, now at 106 rigs. The Permian saw an increase of six rigs last week (two rigs in the prior week) to 294 rigs and was up 70% from 173 rigs last year. The Permian is the hottest basin followed by the Haynesville with 48 rigs working.

Canada had a decline of 34 rigs as activity slowed during the holiday season to 133 rigs. Canadian activity is up 62% from 82 rigs last year. There were 20 less oil rigs working last week and the count is now 84 oil rigs working, up from 31 last year. There are 49 rigs working on natural gas projects now, down from 51 last year. The Canadian rig count will recover quickly once we get into mid-January.

The increase in rig activity over a year ago in both the US and Canada should continue to translate into rising liquids and natural gas volumes over the coming months. The data from many companies’ plans for 2022 support this rising production profile expectation. We expect to see US crude oil production reaching 12.0Mb/d during winter 2021-2022 (we are almost there with this week’s data up 200Kb/d to 11.8Mb/d). Companies are taking advantage of attractive drilling and completion costs and want to lock up experienced rigs and crews as staffing issues are getting tougher for the sector.

Conclusion:

Bearish pressure on crude prices:

  1. The US Federal Reserve is ending its bond purchases in March 2022 which will remove 6%+ of monetary stimulus from the economy. Forecasters now expect three increases in rates in 2022 and three in 2023, so that the terminal Federal Funds rate will rise to 2.3% from 0.25% currently. Note, a 1% rise in interest rates adds US$300B of interest costs and with deficits continuing for many years into the future, this will add to deficits and depress the US economy. Removing this stimulus will slow the US economy. Additionally the ‘Build Back Better’ Biden plan will be very difficult to pass in 2022 as it is a midterm election year.
  2. Omicron Covid-19 caseloads are growing around the world with record infection rates seen in many European countries. Lockdowns or access restrictions are expected to recommence in early 2022. A fourth booster shot for the elderly and front line medical staff is being started in many countries. While the US lowered the quarantine days from 10 days to five days, worker shortages remain a problem. Over 4,000 flights were cancelled over the Christmas holiday peak travel season. The winter wave is lifting infections and for the unvaccinated, higher hospitalizations. Hospital systems are near or at capacity and medical staff shortages are rising due to infections, burnout and quitting.  
  3. Energy demand (easily seen in this week’s EIA data) is under pressure as high prices for most food, rent, taxes, child care, health expenses, auto costs and other daily necessities make spending decisions tougher for consumers. This gouge in prices will surely impact consumers’ buying behavior in the coming months. The spending pie of consumers is shrinking and some spending habits of the past will have to be dropped. Demand destruction is on the way.
  4. China is buying more oil from sanctioned Iran which leaves less oil to be purchased from Saudi Arabia and other OPEC members. The main reason is price, which Iran is offering at US>$4/b less than the ICE Brent price.
  5. Venezuela surprisingly is lifting its production with the help of Iran which is selling (barter trade) diluent so that they can sell more exportable grades to China. Last month they produced 824,000 b/d of crude up 90% from a year ago, according to Reuters.

Bullish pressure on crude prices:

  1. OPEC meets again on January 4th and are unlikely to agree to lift February production above their 400,000 b/d long term plan despite pressure from the US, India and China.
  2. While approving an increase of 400,000 b/d of new production for January 2022, OPEC once again has not achieved their target as seen from their December Monthly Report which showed November production only rose 285,000 b/d. .
  3. The Iran deal is not seeing progress as the Iranians continue to want removal of sanctions to sell oil, but do not want to slow down their nuclear weapons program or allow intrusive UN inspections. The bulls are rejoicing that the 1-2Mb/d of new Iranian oil that could come on is now more unlikely.
  4. Libya has implemented a force majeure on exports as they face delayed elections (maybe one month) and violence. Four of their ports are closed and over 1Mb/d are impacted for the near term. OPEC reported production of 1.14Mb/d from Libya in November.
  5. Once the ground is frozen for tank battles, Russia is likely to invade Ukraine which will result in additional sanctions being added to pressure Russia to desist. Russia may face OECD blockages on sales of crude oil. Natural gas is a different story as Russia is the main provider. Large US LNG volumes are starting to arrive in Europe to alleviate the US$50/mcf price spike.

CONCLUSION: 

WTI had a large move over the last week lifting to US$75.61/b from US$71.44/b last week as the frigid cold weather lifted prices. Temperatures in parts of the US and Canada are colder than minus 40 degrees celsius with the windchill. 

We remain concerned about the health and strength of the US and China economies (the largest two in the world). We still see crude oil prices having US$20+/b of speculative value which should disappear as demand weakens once winter is over. Leveraged speculative longs in crude oil futures are vulnerable to nasty margin calls and this should add momentum to the recent downside pressure. 

As the worst winter weather subsides, the price of crude should retreat towards US$62-65/b. Our downside target for WTI in Q2/22 is US$48-54/b. This should set up an important low and then our key signals should turn bullish again. 

Energy Stock Market: The S&P/TSX Energy Index currently trades at 165, up five points from last week. Oil stocks are more vulnerable than natural gas stocks. Any energy companies in the sector with over-leveraged balance sheets may feel the most downside risk.

On behalf of the team here at Schachter Energy Research Services Inc. we would like to wish you and your family the very best for a very happy, healthy and successful 2022.  

Please note that we will be returning to Mount Royal University (MRU) on October 22, 2022 for our ‘Catch the Energy’ Conference if pandemic rules allow. We will be discussing the protocols on attendance, food service, masking and QR code verification with MRU in Q1/22 and will move forward with the event after having cancelled it for the last two years. We look forward to adding more companies and focus the event on attendees having safe and maximum, face to face time with management. More on this in the New Year.

Our next quarterly webinar will be held on Thursday February 24th at 7PM MT. Our first report of 2022 will be our Interim Report which will be released on Thursday January 13th. 

If you would like to access our 2022 Forecast Report (which came out December 16th), all previous reports and the webinar archives, go to https://bit.ly/34iKcRt to subscribe.

Please feel free to forward our weekly ‘Eye on Energy’ to friends and colleagues. We always welcome new subscribers to our complimentary macro energy newsletter.

Schachter’s Eye on Energy for December 22

Each week Josef Schachter gives you his insights into global events, price forecasts and the fundamentals of the energy sector. Josef offers a twice monthly Black Gold  newsletter covering the general energy market and 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 Oil Data: The EIA data of Wednesday December 22nd was initially seen as positive for crude prices. US Commercial Crude Stocks fell 4.7Mb (forecast a decline of 2.75Mb). With high Refinery Utilization at 89.6% (above the 78.0% level of a year ago but below the 89.8% of the prior week) Total Motor Gasoline Inventories rose 5.5Mb on the week while Distillate volumes rose 0.4Mb. US Crude Production declined 100Kb/d to 11.6Mb/d due to weather disruptions from tornado activity across the US Midwest. The key feature of the week was that Total Demand fell by 2.74Mb/d as Distillate heating oil demand fell by 1.074Mb/d and propane usage fell by 866Kb/d. These items can swing around quite widely so these declines are not disconcerting. Gasoline consumption fell 486Kb/d to 8.99Mb/d which is just above the 9.30Mb/d consumed in 2019 at this time. Jet Fuel Consumption fell 147Kb/d to 1.46Mb/d versus 1.54Mb/d consumed in 2019. Cushing Inventories rose 1.5Mb to 33.7Mb/d.

EIA Weekly Natural Gas Data: Weekly withdrawals started four weeks ago as winter demand commenced. Last week, there was a withdrawal of 88 Bcf, lowering storage to 3.417 Tcf. The biggest draws were in the Midwest (37 Bcf) and the East (25 Bcf). The five-year average for last week was a withdrawal of 109 Bcf and in 2021 was 122 Bcf. Storage is now only 1.8% below the five-year average, so the US is not facing a natural gas shortage as is seen in Europe and Asia. NYMEX today is US$3.98/mcf down from the high in early October of US$6.47/mcf. AECO spot is at $4.08/mcf, down >$2.50/mcf from 2021 highs. As to be expected, natural gas stocks have retreated from their 2021 highs. With the two key months for natural gas demand ahead of us (January and February) we should still expect large price moves to the upside on very cold days. Spikes over $6/mcf could occur when weekly withdrawals of over 200 Bcf are seen. After winter is over natural gas prices should retreat and if the general stock market decline unfolds as we expect, then a great buying window could develop at much lower levels for natural gas stocks in Q2/22.

Baker Hughes Rig Data: The data for the week ending December 17th showed the US rig count rose three rigs (up seven rigs the prior week) to 579 rigs last week. Of the total working last week, 475 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 67% from 346 rigs working a year ago. The US oil rig count is up 81% from 263 rigs last year at this time. The natural gas rig count is up a more modest 25% from last year’s 81 rigs, now at 104 rigs. The Permian saw an increase of two rigs last week (three rigs in the prior week) to 288 rigs and was up 66% from 174 rigs last year. The Permian is the hottest basin followed by the Haynesville with 47 rigs working.

Canada had a decline of 10 rigs as activity slows during the holiday season to 167 rigs. Canadian activity is now up 64% from 102 rigs last year. There were six less oil rigs working last week and the count is now 104 oil rigs working, up from 41 last year. There are 62 rigs working on natural gas projects now, up from 61 last year.

The increase in rig activity over a year ago in both the US and Canada should continue to translate into rising liquids over the coming months, especially with the DUC count (drilled but uncompleted well count) at very low levels. The data from many companies’ plans for 2022 support this rising production profile expectation. We expect to see US crude oil production reaching 12.0Mb/d during winter 2021-2022. Companies are taking advantage of attractive drilling and completion costs and want to lock up experienced rigs and crews as staffing issues are getting tougher for the sector.

Conclusion:

Bearish pressure on crude prices:

  1. The US Federal Reserve is ending its bond purchases in March 2022 which will remove 6%+ of monetary stimulus from the economy. Forecasters now expect three increases in rates in 2022 and three in 2023, so that the terminal Federal Funds rate will rise to 2.3% from 0.25% currently. Note, a 1% rise in interest rates adds US$300B of interest costs and with deficits continuing for many years into the future, this will add to deficits and depress the US economy. Removing this stimulus will slow the US economy. The UK and New Zealand are leading the interest rate rise movement.
  2. Covid caseloads are growing around the world with Omicron now exceeding Delta in many countries. In the US, 73% of cases are now Omicron. This new variant is impacting both the vaccinated and unvaccinated with the unvaxxed filling the ICU wards. ICU beds are nearing full capacity which may result in triage of patients which will raise the death toll. In the US, the death rate is over 808K deaths (up 8K in just one week). Worldwide, the death count is now 5.36M (up 50,000 in one week). Single case records are rising particularly in Denmark, Norway, the UK (78,610 cases – the highest since the pandemic started and 100,000 are expected in the coming weeks),  South Africa, South Korea, Vietnam, and Zimbabwe. New lockdown restrictions have been implemented in the Netherlands and are being considered in other EU countries. In the US single day case load records are being seen in New Hampshire, New Jersey and New York. President Biden has predicted the ‘winter of death‘ for the unvaxxed. Canadian Provinces are implementing gathering restrictions. Some countries see reduced efficacy from the current three doses and plan usage of a fourth dose for those over 60 years of age (Israel is already administering this new dose). The fast spread of Omicron has impacted driving habits and weaker demand for crude is occurring in many places in the world. 
  3. Energy demand (easily seen in this week’s EIA data) is under pressure as high prices for most food, rent, taxes, child care, health expenses, auto costs and other daily necessities make spending decisions tougher for consumers. This gouge in prices will surely impact consumers’ buying behavior in the coming months. The spending pie of consumers is shrinking and some spending habits of the past will have to be dropped. Demand destruction is on the way.
  4. China is buying more oil from sanctioned Iran which leaves less oil to be purchased from Saudi Arabia and other OPEC members. The main reason is price, which Iran is offering at US>$4/b less than the ICE Brent price. China imported 600Kb/d in November from Iran or 40% more than in October.

Bullish pressure on crude prices:

  1. While approving an increase of 400,000 b/d of new production for January 2022, OPEC has not achieved their target once again as seen from their December Monthly Report.
  2. The Iran deal is not seeing progress as the Iranians continue to want removal of sanctions to sell oil, but do not want to slow down their nuclear weapons program or allow intrusive UN inspections. The bulls are rejoicing that the 1-2Mb/d of new Iranian oil that could come on is now more unlikely.
  3. Libya has implemented a force majeure on exports as they face delayed elections (maybe one month) and violence. Four of their ports are closed and over 1Mb/d are impacted for the near term. OPEC reported production of 1.14Mb/d from Libya in November.
  4. If Russia invades Ukraine, sanctions will be added to pressure Russia to desist. Russia may face OECD blockages on sales of crude oil. This would be positive for China but would hurt Europe which would need to find other more expensive suppliers. Russia is adding pressure on Europe/NATO as they reversed its major Yamal natural gas pipeline from Germany and other western European countries towards Poland. Is this a short term commercial event as Russia says or more pressure on Germany to approve the Nord Stream 2 pipeline? Natural gas prices have reached the equivalent of US$50/mcf in some places in Europe due to supply shortages, low storage and Russia’s recent maneuvers.

CONCLUSION:

Pandemic fatigue is causing wider gyrations in crude prices. The good news is that the death rate is lower for the vaccinated and we are seeing surges in people lined up for initial or booster shots and crude prices rebound. Tightened restrictions and a rising death toll for the unvaxxed are scary days and the price of crude and the general stock market falter. There have been and will likely continue to be a large number of  400+ points up and down days occurring for the Dow Jones Industrials Index as market emotions react to the data each day.

WTI had a large move over the last week. From a low of US$66.12/b after the release of the EIA report last week to a high of US$73.00 as Omicron fears dissipated. The price as we write this piece is US$71.44/b up 32 cents on the day.

We remain concerned about the health and strength of the US and China economies (the largest two in the world). We still see prices having US$15-20/b of speculative value which should disappear as demand weakens once winter is over. Leveraged speculative longs in crude oil futures are vulnerable to nasty margin calls and this should add momentum to the recent downside pressure. In the next few weeks the price of crude should retreat below last week’s low of US$66.12/b towards US$62-65/b and then bounce around from there (like we have been seeing over the last week). Our target for WTI in Q2/22 once winter peak energy demand is over is US$48-54/b. This should set up an important low before our key signals should turn bullish again.

Energy Stock Market: The S&P/TSX Energy Index currently trades at 160, up eight points from last week as the price of crude recovered from the US$66/b price low of last week. The range last week for the Energy Index was 147-161, so we are near the top of that range currently. The level could reach 165 if the pandemic news is good but we see it breaching last week’s low of 147 during January. As crude prices retreat in the coming months we see downside for this Index to the 95-105 level during Q2/22, implying severe downside. Oil stocks are the most vulnerable (especially those that are now bullish and are unhedged) as are any energy companies in the sector with over-leveraged balance sheets.

On behalf of the team here at Schachter Energy Research Services Inc. we would like to wish you and your family the very best of the holiday season. Merry Christmas and have a very happy, healthy and successful 2022.

Please note that we will be returning to Mount Royal University (MRU) on October 22, 2022 for our ‘Catch the Energy’ Conference if pandemic rules allow. We will be discussing the protocols on attendance, food service, masking and QR code verification with MRU in Q1/22 and will move forward with the event after having cancelled it for the last two years. We look forward to adding more companies and focus the event on attendees having safe and maximum, face to face time with management. More on this in the New Year.

Our next quarterly webinar will be held on Thursday February 24th at 7PM MT. Our first report of 2022 will be our Interim Report which will be released on Thursday January 13th.

If you would like to access our 2022 Forecast Report (which came out last Thursday), all previous reports and the webinar archives, go to https://bit.ly/34iKcRt to subscribe.

Please feel free to forward our weekly ‘Eye on Energy’ to friends and colleagues. We always welcome new subscribers to our complimentary macro energy newsletter.

Trading Desk Notes For December 18, 2021

Are you de-risking into yearend?

Day-to-day and intra-day price action since Thanksgiving Friday has been very choppy. Big Cap Tech has been fading. Are Portfolio Managers de-risking before yearend to preserve stellar track records?

Big Cap Tech fading?

Big Cap Tech has been THE most significant part of YTD gains in the S+P and NAZ (NAZ is up ~21% YTD; without AAPL, GOOGL, MSFT, TSLA and NVDA, it is up only ~5.5%.) If the “Generals” are starting to fade while the “troops” are already weak, the indices may risk a bigger correction.

APPL hits $3 Trillion market cap

APPL hit an All-Time High Monday but ended the week on its lows.

MSFT touched a 7-week low this week – a classic lower high/ lower low double top on the daily chart.

TSLA is down ~25% from November All-Time Highs. Elon Musk has sold >$13 Billion worth of shares.

Volatility has been volatile

Liquidity will be THIN between now and Jan 3, 2022

Positioning

Suppose you were a Portfolio Manager and you’ve had an excellent YTD performance (primarily due to gains in Big Cap Tech). Would you be de-risking during December to lock in a strong 2021 track record – for the benefit of your clients, of course – and to attract a CHUNK of all that new cash that will be looking for a PM come January?

The Fed was hawkish – but stocks rallied – for a day

The Fed – prompted by non-transitory high and rising inflation – voted to accelerate the “tapering” of their bond and mortgage purchases – and, if the economy stays strong and inflation remains high, they may raise short-term interest rates by 0.25% three times in 2022.

A Fed policy error is the market’s biggest worry

The Biggest worry for 2022 (according to money manager surveys) is that the Fed will begin tightening monetary policy while the economy slips into recession, and bitter political divisions in Washington mean that there will be no more fiscal stimulus. (Note: 43 million Americans will be required to resume payments on student loan debt beginning February. The average monthly loan payment is $393, and the total student loan debt is $1.7 Trillion. This will effectively be a tax increase and a drag on consumer spending. Given that consumer spending is ~70% of GDP, then…)

Omicron

The market does not view the latest Covid variant as a significant threat. Any change in that assessment could tip the scales to a broader bearish sentiment.

The mountain of cash on the sidelines

Some people see “all that cash” as “dry powder” that will be FOMOed into the market and drive it much higher. Maybe, but I think that mountain of cash may be a sign that (primarily wealthy) people see a lot of risk in the stock market at these levels and are willing to sit patiently with a significant cash position. (Berkshire Hathaway, which is super-long cash, was bid to an ATH this week – while Big Cap Tech was sold.) The massive flow of funds into low-yielding Treasury bonds may be another sign of patient money de-risking – or preparing for a possible economic slowdown.

Emerging markets are markets you can’t emerge from in an emergency

The MSCI Emerging Markets ETF had its lowest weekly close since November 2020. For the DJIA to get back to November 2020 levels, it would need to drop >7,000 points (20%.) The NAZ would need to drop ~25%.

What do very highly paid portfolio managers expect the stock market to do in 2022?

For balance – here’s a very perceptive bullish “take” on the stock markets from JP Morgan’s top quant

European and Asian NatGas prices hit ATH this week

NatGas in Europe and Asia is `10X the price of North American NatGas. What are the knock-on effects of these extraordinarily high energy prices?

The US Dollar Index had its highest weekly close in 18 months

The USD is trading higher YTD against virtually every widely traded currency – except the Israeli Shekel and the Chinese RMB.

The Canadian Dollar: lowest weekly close against the USD in 13 months

The CAD bounce more than a full cent Wednesday/Thursday following the Fed meeting, but as stocks and crude oil weakened on Friday and the USD gained against most other currencies, the CAD weakened to ~7850.

Gold rebounded as much as $60 from a 2-month low following the Fed announcement. It gained ~$15 Friday to Friday

Immediately before any major scheduled market risk event – like this week’s Fed announcement – dealers/traders in all markets pull their bids and offers – the depth of market (DOM) thins out to practically nothing, and there is (relatively) NO liquidity. The risk event happens, the machines have their fun, prices spike or dive for a few seconds and then liquidity returns. Sometimes (!) stops get hit.

Comex Gold dropped ~$10, to more than a 2-month low within a few seconds following the Fed announcement and then rallied back ~$12 within 2 minutes. Comex traded about 800,000 ounces in those 2 minutes.

My short term trading

The only position I carried over from last week was short CAD. I had sold it when it fell back from the highs made following the BoC meeting Wednesday of last week. I covered the position for more than a one-cent gain on Tuesday when the CAD had an excellent opportunity to take out the early December lows – but didn’t.

I scalped the S+P from the short-side Tuesday when it broke below the previous three day’s lows. I covered the trade for a 20 point profit later that day. I wanted to be flat going into the Wednesday Fed announcement.

I took Barney for a two-hour walk Wednesday morning. I wanted to be away from my screens when the Fed announcement/press conference happened. I did NOT want to have a position on and be subject to the wild price swings that often follow such events. I wanted to let the market “settle down” before I made any new trades.

Following the Fed announcement/press conference, the S+P ran up ~140 points to new All-Time Highs in the Wednesday overnight session. I did not participate in that terrific move. The Thursday day session opened below the overnight highs, and I got short about an hour after the opening. I covered that trade for a ~90 point gain just after the Friday day session began. (Friday was a HUGE option expiry day – I expected a LOT of volatility and saw the early Friday dive to new lows for the week as a gift and closed my position.)

I re-shorted the CAD Thursday morning about the same time I shorted the S+P. It had bounced more than a full cent off its pre-Fed lows (tracking the S+P and WTI) and rolled over like the S+P. I covered that trade for ~30 point gain at the same time as I covered the short S+P early Friday.

I stayed out of the markets for the balance of Friday, and I’m flat going into the weekend. I had a good week (my P+L was up more than 2% on the week), and I didn’t want to give back any of those gains in what I expected to be a very choppy Friday due to the quad-witching OPEX. I was remembering that Peter Brandt likes to say, “It’s easy to make money trading, the hard part is hanging onto it.”

Thoughts on trading

I stay in touch with a few old trading friends. One of them knew I had shorted the S+P and the CAD Thursday and when he saw they were down hard Friday morning he sent me a note saying that he hoped I had shorted a bunch. I replied:

The old saying is that you never have enough on when you’re right! I want my size to be small enough so that each trade is just a trade – no big deal if it wins or loses. I’ve caught a couple of good moves – luckily missed getting clobbered on some other moves. I’m up about 2% on the week. I might stay flat now – this is a HUGE option expiry today – price action could continue to be choppy.

Using stops: Before initiating a position, I pick out a level where I want to be out if the market goes against me. After I take my position I place a GTC stop at that level. I see the stop as a “fail-safe” – if the market goes there, I’m out even if I’m away from my screens. (We know it’s not really a “fail-safe“- crazy things that I can’t control can happen – but I can control placing the stop – acknowledging that the trade could go against me and I’ve taken what steps I can to limit losses.)

If the market goes in my favour I will usually trail my stop behind the market (not with an eye to simply reducing the dollar amounts of risk, but to new levels that make sense – and that also reduce risk.) If the market moves quickly and a LOT in my favour (like the S+P did early Friday morning), I often take my profits and CXL the stop.

I have a long history of taking losses quickly, and profits quickly. (That may come from sitting in front of screens for 40 years and getting too caught up in short-term movements.) Some friends tell me that I need to learn how to stay with winning trades longer (I’d like to do that!) For instance, I could trail stops behind the market and only exit a profitable trade when my stop gets hit.

Maybe someday I’ll change, but if my goal is to make money (as opposed to “being right“) I’ll probably keep booking profits when I have the chance.

Quotes from the Notebook

“Inflation is not a coincidence – it is a policy.” Daniel Lacalle December 2021

My comment: I agree 100%. Daniel’s quote is a subset of “Don’t fight the Fed.” If the Fed wants inflation bad enough they will do “whatever it takes” to get it. The BoJ might also want to create inflation, and they have tried, without much success, to get it, but just because they have not succeeded doesn’t mean they have not made a policy decision. You want to be on the right side of any major policy decision.

“For most investments, sizing is more important than entry-level.” Harley Bassman, repeatedly over the years

My comment: I’ve watched several video interviews with Harley, listened to many of his podcasts and read commentary on his website for years. He is an innovative, successful veteran trader who has forgotten more about the bond market than most people will ever learn. He is not a day trader – he is an old-school value investor, and that’s his way of saying risk management is more critical to long-term success than where/when you decide to pull the trigger.

A Small Request

If you like reading the Trading Desk Notes, please do me a favour and forward a copy or a link to a friend. Also, I genuinely welcome your comments. Please let me know if there is something you would like to see included in the TD Notes.

There will be no Trading Desk Notes next week. It’s Christmas. I’ll be back the following week.

Barney“Hey Papa, is it time for our morning walk?”

Barney was 13 pounds when he came to live with us six weeks ago. He is now 25 pounds, and just over three months old!

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 for December 15th

Each week Josef Schachter gives you his insights into global events, price forecasts and the fundamentals of the energy sector. Josef offers a twice monthly Black Gold  newsletter covering the general energy market and 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 Oil Data: The EIA data of Wednesday December 15th was initially seen as positive for crude prices. US Commercial Crude Stocks fell 4.6Mb (forecast a decline of 2.1Mb). A key component was a rise in Exports of 1.375Mb/d or 9.63Mb on the week. If not for this large export increase there would have been a build of over 5Mb. As a result of these events crude has now fallen below US$70/b. Refinery Utilization was unchanged at 89.8% from the prior week. Total Motor Gasoline Inventories fell 0.7Mb while Distillate volumes fell 2.9Mb. US Crude Production was unchanged at 11.7Mb/d. Total Demand rose by 3.35Mb/d as Distillate heating oil demand rose by 1.32Mb/d due to the cold weather. Gasoline consumption rose by 509Kb/d to 9.47Mb/d which is just above the 9.41Mb/d consumed in 2019 at this time. Jet Fuel Consumption rose 387Kb/d to 1.61Mb/d versus 2.06Mb/d consumed in 2019. Cushing Inventories rose 1.3Mb to 32.2Mb/d.

OPEC December Monthly: On December 13th OPEC released their December Monthly Forecast Report (November data). As we have seen in the past few months they have not added the 400Kb/d in their stated monthly production increase. In October, they only added 213Kb/d and in November only 285Kb/d. Some countries like Angola continue to have underinvested in their industry and saw declines of 38Kb/d in November.

The biggest increase came from Saudi Arabia at 101Kb/d, followed by Iraq at 91Kb/d and then by Nigeria at 85Kb/d. Surprisingly Kuwait only added 29Kb/d, even though they could have easily added 156Kb/d more, just to get back to 2019 pre-pandemic levels. Sanctioned Iran saw production fall by 9Kb/d to 2.47Mb/d and Venezuela saw a modest rise of 15Kb/d to 625Kb/d (down from 796Kb/d in 2019).  OPEC sees 2021 consumption at 96.6Mb/d (Q4/21 at 99.5Mb/d). For 2022 they see world demand at 100.8Mb/d up 4.15Mb/d with Q4/22 at 102.63Mb/d. If there is no recession in the US and/or China they might be right but we see slowing economies in both areas. Our 2022 world demand forecast is for 97-98Mb/d or 3-4Mb/d less than OPEC’s positive economic view. The health of world economic activity is the key divergence between energy bull and near term bears like us.

EIA Weekly Natural Gas Data: Weekly withdrawals started three weeks ago as winter demand picked up. Last week, there was a withdrawal of 59 Bcf, lowering storage to 3.505Tcf. The five year average for last week was a withdrawal of 87 Bcf. Storage on a five-year basis was 3.595Tcf so storage is only 2.5% below the five-year average. NYMEX today is US$3.88/mcf down from the high in early October of US$6.47/mcf. AECO spot is at $3.48/mcf, down $3/mcf from 2021 highs. As to be expected, natural gas stocks have retreated from their 2021 highs. With the two key months for natural gas demand ahead of us (January and February) we should still expect large price moves to the upside on very cold days. Spikes over $6/mcf should be seen on both sides of the border when weekly withdrawals over 200 Bcf on a cold week occur. After winter is over natural gas prices will retreat and if the general stock market decline unfolds as we expect, then a great buying window could develop at much lower levels for natural gas stocks in Q2/22.

Baker Hughes Rig Data: The data for the week ending December 10th showed the US rig count rose seven rigs (unchanged the prior week) to 576 rigs last week. Of the total working last week, 471 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 73% from 323 rigs working a year ago. The US oil rig count is up 83% from 258 rigs last year at this time. The natural gas rig count is up a more modest 33% from last year’s 79 rigs, now at 105 rigs. The Permian saw an increase of three rigs last week (five rigs in the prior week) to 286 rigs and was up 70% from 168 rigs last year.The Permian is the hottest basin followed by the Haynesville with 46 rigs working.

Canada had a decline of three rigs (after a rise of nine rigs in the prior week) to 177 rigs. Canadian activity is now up 59% from 111 rigs last year. There were three less oil rigs working last week and the count is now 110 oil rigs working, up from 52 last year. There are 67 rigs working on natural gas projects now, up from 59 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 over the coming months, especially with the DUC count (drilled but uncompleted well count) at very low levels. The data from many companies on their plans for 2022 support this rising production profile expectation. We expect to see US crude oil production reaching 12.0Mb/d during winter 2021-2022. Companies are taking advantage of attractive drilling and completion costs and want to lock up experienced rigs and crews as staffing issues are getting tougher for the sector.

Conclusion:

Bearish pressure on crude prices:

  1. The US is slowing its bond purchases which will remove 6%+ of monetary stimulus from the economy when completed in March 2022. The FOMC meeting (which ends today) is expected to announce a speed up of the tapering of bond purchases. They may also show their intent to increase interest rates starting in 2022. Some forecasters expect three increases in rates in 2022 and three in 2023, so that the terminal rate rises to 2.3% from 0.25% currently. Note, a 1% rise in interest rates adds US$300B of interest costs and with deficits continuing for many years into the future, this will add to deficits and depress the US economy. Recent economic data in the US is slowing. Retail Sales out Wednesday showed a rise of 0.3% down from 1.8% in the previous month against an expected rise of 0.8%. The PPI rose to a 40 year record high of 9.6% on Tuesday. The PPI for finished goods rose to an all time high of 13.6% exceeding the previous high of 12.9% seen in October 1980, just before the Fed Chairman of that time Paul Volcker jacked up interest rates quickly to stem the rampant inflation and caused a severe recession. The current Fed Chairman is boxed in and may be forced to reverse his accommodating stance. How he shifts and how fast he shifts will determine the vigor of the US economy in 2022.
  2. China is seeing slower growth as well due to a prolonged property slump and sluggish consumer spending. Retail Sales only rose 3.9% in November (year over year) down from 4.9% (year over year) in October and below the annual inflation rate.
  3. Covid caseloads are growing around the world with Omicron now exceeding Delta in many countries. This new variant is impacting both the vaccinated and unvaccinated with the unvaxxed filling the ICU wards. Concern is rising that in the next one to two months hospitals will need to triage again. In the US, the death rate is over 800K deaths. Worldwide, the death count is now 5.31M. Single case records are rising in Europe particularly in Denmark, Norway and Switzerland.
  4. Energy demand is under pressure as high prices for most food, rent, taxes, child care, health expenses, auto costs and other daily necessities make spending decisions tougher for consumers. This gouge in prices will surely impact consumers’ buying behavior in the coming months. The spending pie of consumers is shrinking and some spending habits of the past will have to be dropped. Demand destruction is on the way.
  5. The International Energy Agency (IEA) in a report released this week sees a surge in Covid-19 cases denting global demand for oil at the same time as they see supply exceeding demand by 1.7Mb/d starting in Q1/22. This view is in stark contrast to OPEC’s and consistent with ours.

Bullish pressure on crude prices:

  1. While approving an increase of 400,000 b/d of new production for January 2022, OPEC has not achieved their target once again as seen from the December Monthly Report released earlier this week.
  2. The Iran deal is not seeing progress as the Iranians continue to want removal of sanctions to sell oil but do not want to slow down their nuclear weapons program or allow intrusive UN inspections. The bulls are rejoicing that the 1-2Mb/d of new Iranian oil that could come on is now more unlikely.
  3. If Russia invades Ukraine, sanctions will be added to pressure Russia to desist. Russia may face OECD blockages of sales of crude oil. This would be positive for China but would hurt Europe which would need to find other more expensive suppliers.
  4. JP Morgan and other US investment banks see world demand exceeding pre-pandemic levels in Q2/22. Their fearless forecasts see US$80/b in early 2022 and US$100/b in 2H/22.

CONCLUSION: 

WTI fell today to an intra-day low (so far) of US$69.39/b and is now hovering just below US$70/b. From the late October high of US$85.41/b WTI crude has fallen 18%. Today’s Federal Reserve conference call will be critical to the go forward health of the US economy and for crude prices. Tightening of the economy is the antithesis for energy bulls. With our concern about the strength of the US and China economies (the largest two in the world) we still see prices having US$15-20/b of speculative value which should disappear as demand weakens once winter is over. Leveraged speculative longs in crude oil futures are vulnerable to nasty margin calls and this should add momentum to the recent downside pressure. In the next few weeks the price of crude should retreat to US$62-65/b and then bounce around for a while. Our target for WTI in Q2/22 once winter demand is over is US$48-54/b. This should set up an important low before our key signals should turn bullish again. 

Energy Stock Market: The S&P/TSX Energy Index currently trades at 152, down 12 points or over 7% from last week. From the start of the crude price decline, the Index has fallen from 172 or down by 12%. As crude prices retreat in the coming weeks we see downside for this Index to the 95-105 level during Q2/22, implying severe downside. Oil stocks are the most vulnerable as are any companies in the sector with over-leveraged balance sheets.

Our December Joint Monthly Report comes out tomorrow Thursday December 16th. We go over the history of bear markets and why we see us just entering another one. The magnitude of the declines are discussed in comparison to other overvalued markets since 1900 and we project potential downside targets for the overall stock markets and the energy sector during this market decline/plunge. A key section is our 2022 Fearless Forecasts.

Once this bear phase exhausts itself, a lengthy and powerful new Bull Market will arise and energy will be a prime beneficiary. We intend to send out multiple Action Alert BUY ideas once the next low risk entry point arrives.

Our next quarterly webinar will be held on Thursday February 24th at 7PM MT.

If you would like to access this upcoming 2022 Forecast Report and all previous reports and the webinar archives, go to https://bit.ly/34iKcRt to subscribe. 

Please feel free to forward our weekly ‘Eye on Energy’ to friends and colleagues. We always welcome new subscribers to our complimentary macro energy newsletter.

Trading Desk Notes For December 11, 2021

Bullish enthusiasm came roaring back this week – the S+P registered an All-Time High close – the DJIA rallied >2,000 points from last week’s lows

The S+P hit All-Time Highs Monday, November 22, but closed down on the day. Three sessions later, waves of heavy selling in illiquid conditions on Thanksgiving Friday caused the index to close 163 points below Monday’s high – the biggest down week since January (and a Weekly Key Reversal Down on the chart.)

The following week saw violent intra-day price swings. Late in the day on Friday, December 3, the S+P traded ~250 points below the previous week’s highs, volatility levels had soared to near the highest levels YTD – and then, the tide turned, the index bounced and closed ~40 points off its lows.

The Sunday, December 5th afternoon futures session opened higher, and by mid-morning Tuesday, the S+P had rallied ~170 points from Friday’s lows. The market chopped sideways within a narrow range the next three days, and Friday registered an All-Time High close (~27 points below the November 22 ATH.)

The “cash” DJIA (not the futures) registered a big “Island Reversal” on the charts. Some folks see that as a bullish pattern.

AAPL surged to New All-Time Highs this week with a market cap of ~$3 Trillion – up ~ $500 Billion from month-ago levels. (See a great list of global company market caps at https://companiesmarketcap.com/)

ARKK (last year’s darling) is down ~44% from its February highs – while the S+P is up ~18% since mid-February.

Concentration

Everybody knows that a handful of Big Cap tech stocks account for ~25% of the weighting of the S+P 500 – but here’s another look at concentration: The Nasdaq total YTD return is ~21%. Five stocks (AAPL, MSFT, GOOGL, TSLA, NVDA) account for ~2/3 of those returns. The Nasdaq total YTD return is less than 6% without those five stocks.

Passive capital flows boost Big Cap stocks

One of the reasons Big Cap companies keep getting bigger is that a tidal wave of money has flowed into the markets this year. More than half of that money has gone into passive investments, which track/mimic the indices. (There has also been a flow of capital leaving actively managed investments for passive investments.)

The PMs who “manage” passive funds allocate money according to the index weightings. So, for every dollar of new money they invest in S+P tracking funds, ~16 cents goes into AAPL, MSFT, and AMZN. It’s a bit like a perpetual motion machine; the more money coming in, the bigger the biggest cap stocks get relative to other stocks.

Active capital flows boost options volume (and meme stocks)

The smaller half of the tidal wave of money flowing into the markets goes into “active investments.” This covers everything that is not “passive” and includes both managed and self-directed “investments.” “Active” could range from old-fashioned mutual funds with stock picking, “value-seeking” portfolio managers to YOLO kids rolling the dice on short-dated OTM options.

Interest Rates

Prices of long-dated Treasuries have been trending higher for the past several weeks (yields have been falling), and they rose to new YTD highs when the stock market rattled investors’ nerves last week. With the stock market rising this week, bond prices fell.

With the CPI at 6.8% and the ten-year Treasury yield at 1.47%, the 10 Year Real Yield = negative 5.33%. This is not the best “measure” of inflation (for instance, the 10-year Tips/Treasury breakeven rate is 2.52%), but MSM will feature this (sensational) number.

Currencies

The US Dollar Index has been relatively steady at ~96 for the past four weeks, a 16 month high. Speculators have accumulated the largest net long USD position in the currency futures market since June 2019.

The Canadian Dollar fell for six consecutive weeks as the USD rallied and commodities (especially crude oil) fell, but it bounced a bit this week (WTI rallied ~$10 from last week’s lows and stock markets surged higher.)

The CAD may have rallied ahead of Wednesday’s BoC meeting in anticipation of a more hawkish tone, but that hawkish tone was not forthcoming, and the CAD fell Wednesday through Friday.

Commodities

The broad Goldman Sachs Spot Index reached a 7-year high in October as crude oil hit a 7-year high. The index drifted lower and then took a sharp drop late in November as WTI crude extended its decline from ~$85 to ~$62. The index bounced back the past few days as investor sentiment improved and WTI bounced ~$10.

My Short-Term Trading

Last week I bought the S+P and the CAD a few times – expecting investor sentiment to bounce after the sharp tumble that began on Thanksgiving Friday. Net, net my P+L was down ~0.50% on the week. I was early on my “rebound” call.

As noted above, the S+P made its low last week late Friday and rallied ~40 points into the close. When the market opened higher Sunday afternoon, I maintained my BTD mentality, but I waited for the Monday day session (for confirmation) before buying the S+P.

The market rallied during the Monday day session and soared in the overnight session. I covered the trade mid-day Tuesday for a gain of ~120 points (roughly equivalent to ~1,200 Dow points.)

I shorted the S+P a couple of times later in the week, thinking the market had rallied too far, too fast, but I was stopped for small losses on those trades.

I shorted the CAD when it fell back following the Wednesday BoC meeting. I’ve remained short CAD, which is the only position I hold going into the weekend. My P+L is up ~1.25% on the week, not counting unrealized gains on the short CAD.

On my radar

I’ve generally been bullish on the USD this year, but I haven’t capitalized on that view. (There is always room for improvement in trading!) Over the years, I’ve noticed that currency trends often go WAY further than what seems to “make sense,” and then turn on a dime and go the other way. Those reversals often happen around the end of the year, so I’ll watch for that over the next month or two.

Too many people believe that it’s easy to make money buying stocks – so we may see a correction there.

Thoughts on trading

Stories: Last week I wrote that I don’t like to “buy” stories. For instance, I don’t want to buy copper (simply) because the “story” says electrification demand and limited new mine supply automatically means that copper prices will go up.

That doesn’t mean that I ignore stories. Stories have a life cycle, and I think it is essential to know where they are in their cycle. For instance, George Soros liked to say that when he saw a bubble forming, he bought the market in anticipation of the bubble growing and taking prices much higher.

I’m skeptical of stories because they cause people to focus on the “why” to buy rather than the “when” to buy. A good story is also seductive, which may encourage poor risk management practices – and I genuinely believe that good risk management contributes more to long-term trading success than any crystal ball.

When I hear a good story my first thought is always: “Who doesn’t already know that?”

Wizards: In the past two weeks, I’ve referred to the RTV interview Jack (Market Wizards) Schwager recently did with Peter Brandt. In that interview, Jack talks about what the “Wizards” have in common. He said that most of them started their trading career with poor performance, and it took years for them to “find their way” to becoming super successful, and they had to change their methodology as markets changed.

Jack also noted that some wizards had no problem managing other people’s money. Other wizards could not do it – they felt bad/guilty every time they took a loss, which killed their ability to trade freely.

Reminiscences: My bedtime reading lately has been Reminiscences Of A Stock Operator by Edwin Lefevere. I bought my first copy of that book more than 40 years ago (it was written over 100 years ago) and I have re-read it every couple of years. I had forgotten how good it is. It is the story of a trader learning how to trade (he “reads the tape“) but at another level, it is a fantastic and very honest, story about The Trading Life. I recommend it to you.

Quotes from the notebook

“It is normal/typical to think, “I’ve missed the move…I can’t buy it here after it has rallied so much!” But most money is made not by picking bottoms but by going with the trend and especially as the trend accelerates near the end of the move.” John Burbank, RTV interview with Alex Gurevich 2019

My comment: I picked this quote because I wish I were more like that! Some guys make it look easy!

When a market is going down, you have no idea how far down, down is!

It’s not a problem until it’s a problem, and then it’s really a problem.

There is never just one cockroach.

Do more of what is working and less of what is not working.

Dennis Gartman, many times, over the years

My Comment: Dennis was a trader in the old “South Room” at the CBOT, trading GNMAs and T-Bonds, in the late 1970s when I first visited the Chicago trading floors. I didn’t meet him then – we didn’t meet until the early 1990s (when his daily letter used to come by fax), and we became good friends over the years. He put a lot of work into writing his daily letter and passed along many good insights and observations – such as the quotes above.

A Small Request

If you like reading the Trading Desk Notes, please do me a favour and forward a copy or a link to a friend. Also, I genuinely welcome your comments. Please let me know if there is something you would like to see included in the TD Notes. Thanks, Victor

Barney is getting ready to show me around the golf course.

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.