Op/Ed

Schachter’s Eye on Energy for November 17th

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 Data: The EIA data of Wednesday November 17th was mixed. US Commercial Crude Stocks fell 2.1Mb (forecast 135K decline) as Net Imports fell 490Kb/d, reducing inventories by 3.43Mb. If this had not occurred there would have been a 1.1Mb build. The key subcomponent Exports showed a rise of 573Kb/d which indicates exports rose by 4.0Mb last week, lowering US Commercial Crude levels. Refinery Utilization Rose by 1.2 points to 87.9% from 86.7% in the prior week. Total Motor Gasoline inventories fell 0.7Mb while Distillate volumes fell 0.8Mb. US Crude Production declined 100Kb/d to 11.4Mb/d. Total Demand rose by 2.34Mb/d to 21.63Mb/d as Other Oils demand rose by 2.20Mb/d. Gasoline consumption fell 18Kb/d to 9.24Mb/d which is just above the 9.19Mb/d consumed in 2019 at this time. Jet Fuel Consumption rose 206Kb/d to 1.38Mb/d versus 1.66Mb/d consumed in 2019 at this time. Cushing Inventories rose 200Kb to 26.6Mb/d.

Baker Hughes Rig Data: The data for the week ending November 12th showed the US rig count rose by six rigs up by six rigs in the prior week. Of the total of 556 rigs working last week, 454 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 78% from 312 rigs working a year ago. The US oil rig count is up 93% from 236 rigs last year at this time. The natural gas rig count is up a more modest 40% from last year’s 73 rigs, now at 102 rigs.

Canada had a rise of eight rigs (a decline of six rigs in the prior week) to 168 rigs. Canadian activity is now up 89% from 89 rigs last year. There were six more oil rigs working last week and the count is now 101 oil rigs working, up from 39 last year. There are 67 rigs working on natural gas projects now, up from 50 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, especially with the DUC count (drilled but uncompleted well count) at very low levels. The data from many companies on their plans for Q4/21 and forecasts for 2022 support this rising production profile expectation. We expect to see US crude oil production reaching 12.0Mb/d before the end of 2021. 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. Covid caseloads are growing around the world. In the US, the death rate is over 764K deaths (up 8,000 during the last week). Worldwide, the death count is now 5.11M. Deaths are rising in Europe particularly in Austria (imposing lockdowns on the unvaccinated with fines of $30K if they leave homes when not essential), Bulgaria, Croatia, Germany, Netherlands, Romania, Russia, Slovakia, Slovenia, and Ukraine.
  2. Many US corporate and government employees are not planning on getting vaccinated and are now being put on unpaid leave and may soon lose their jobs. Eighty million individuals have a shotgun decision by January 4th (delayed by one month to cover off Christmas deliveries) when the cut-off kicks in. NO JAB, NO JOB is the vaccination mantra. The US military, police and firefighters are being significantly affected.
  3. 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 behaviour 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. Real US GDP grew 6.7% in Q2/21 and was seen at only 2% in Q3/21. Recent economic releases indicate that we may already be in the early stages of a recession. The US$1.2T infrastructure bill signed into law by President Biden will only add to US inflationary pressures.
  4. The UAE and the IEA now see 2022 as having sufficient supplies and that inventories will start to build after winter 2021-2022 is over. We concur!
  5. China has seen a rising wave of new infections in 19 of its 31 provinces. 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 2022 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. China’s General Administration of Customs reported yesterday that imports of crude oil in October were down by 1.5Mb/d from 10.5Mb/d to 9.0Mb/d as the smog issue was being focused on. They are breaking US sanctions by buying 560Kb/d from Iran and 57Kb/d from Venezuela, leaving less oil to non-sanctioned OPEC members under the deal provisions. In Monday’s virtual meeting between President Xi and President Biden they discussed using their Strategic Petroleum Reserves (SPR’s) to lower prices in their domestic markets and send a warning signal to OPEC+ that current prices are unacceptable. If they cut back or ordered nothing from OPEC for some set period of time, OPEC would be in big trouble quickly.
  6. Iran is returning to the negotiating table on November 29th and if progress is made, then at some point in the future they may get sanction relief and be able to add 1-2Mb/d fairly quickly.

Bullish pressure on crude prices:

  1. Speculative long investors (options traders, hedge and commodity funds) and a short squeeze on bearish positions in the futures and options markets on crude have spiked up prices. Energy bulls like Bank of America see US$120/b by June 2022.
  2. Spot natural gas prices in Europe have backed off after President Putin confirmed that Russia would meet all European winter needs once they open the Nord Stream 2 Pipeline, which is now being filled and undergoing pressure tests before certification. This new pipeline doubles Russia’s annual export capacity to Europe. The most recent problem/delay is that German regulators want Nord Stream to set up a German company with a headquarters and manpower before completing the regulatory requirements. This was supposed to be completed in January 2022 in time for the worst of winter natural gas needs but may now be delayed by four months. Natural gas prices in Europe have lifted again and this is supportive of crude prices.
  3. In the US, NYMEX today is now at US$5.12/mcf – and in Canada AECO is C$4.37/mcf as storage levels have been built up sufficiently for a normal winter. US storage injections for the last six weeks have been above the five year average and over 2020 injection levels.

CONCLUSION: 

WTI is down nearly 2.5% or US$2.03/b today to US$78.73/b as the US and China bring pressure on OPEC+. We see prices as having US$20-25/b of speculative value which should disappear as demand weakens in the US and China as they both could be headed into recessions. If the data comes out supporting recession conditions, the oil price slide could be quick and painful. Leveraged speculative longs in crude oil futures are vulnerable to nasty margin calls in the future. 

Energy Stock Market: The S&P/TSX Energy Index currently trades at 165, flat with last week. The S&P Energy Bullish Percent Index backed off from the 100% SELL level to 80.9% now. Energy stocks could fall 30-40% in the coming months with leveraged entities the hardest hit.

Our November Schachter Energy Report Monthly comes out Thursday November 25th with details on the general stock market and its expected impact on the energy sector as well as reviews and updates on 25 companies that have released their Q3/21 report since our Interim Report.

We held our 90 minute Q4/21 quarterly Black Gold Webinar on Wednesday November 10th at 7PM MT. It was very well received. We discussed in detail our view on the general stock market, the energy market and our bearishness on both areas for the near term. We  also discussed the companies that had already reported their Q3/21 results. They are broken up into presentations on those that reported good results (11 companies) and those with not so good reports (nine companies). We had two Q&A sessions to go over our presentation materials and subscriber questions. 

Become a subscriber if you would like to access the archive of the webinar and all our previous SER reports. 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 November 13, 2021

The hotter-than-expected US CPI report rocked the markets Wednesday morning

Gold spiked nearly $50 within 90 minutes of the CPI report and ended the week ~$100 (6%) above last week’s lows.

Speculators in the gold futures market were net long a modest-sized position (relative to their position the past few years) as of Oct 26. I expect there has been a substantial increase since!

Silver spiked ~$1.10 within 90 minutes and ended the week ~$2.40 (10%) above last week’s lows.

Short-term US interest rates spiked on the news. The Eurodollar futures contract trades at a discount to par, so falling prices on this chart indicate rising interest rates.

This next chart shows the spread between the Dec 2021 and the Dec 2022 Eurodollar contract. As recently as early October, the Dec 2022 contract was only a 30 point discount to Dec 2021 (implying that short rates come Dec 22 would only be 30 bps higher than Dec 21), but the spread has “gone out” to ~ 70 points in the last six weeks as s/t interest rates have been rising sharply on expectations that persistent and rising inflation would “inspire” the Fed to raise rates next year (at least 2 x 0.25%.)

Bond yields jumped (prices fell) on the CPI number – but the pressure was greater on the short end of the yield curve.

The US Dollar soared against (essentially) all other currencies on the CPI report, with the benchmark US Dollar Index ending the week at a 16-month high. The USDX has rallied nearly 7% from the January 6, 2021 nadir (a 32-month low), which I have previously described as a cathartic inflection point (the day the mob stormed the Capitol Building in Washington, DC.)

It is unusual to see gold and the USD both rising at the same time. (A geopolitical scare may cause this to happen as capital seeks safety in both gold and the USD.) Perhaps gold traders were thinking of, “inflation hedge,” while FX traders assumed that the CPI report would push the Fed to be much more hawkish than other central banks. Or, perhaps, the drop in real yields to historic lows inspired gold traders to bid aggressively for gold, regardless of the strong Dollar.

This chart shows the relationship of gold (black bars) and real yields (yellow = 5-year tenor, blue = 10-year tenor.) In late 2018 real yields for both tenors were positive ~1.15%, but now 5-years are negative ~1.83%. It is a “busy” chart, but it illustrates that falling real yields are generally positive for gold.

Prices on the TIPS (Treasury Inflation-Protected Security) chart rally as real interest rates fall. This chart shows that real rates have fallen sharply in November (as inflation metrics rose.) The CPI report created the spike at the top of the chart as real rates dropped to record (negative) lows.

The S+P, DJIA and NAZ dropped to a one-week low late Wednesday, but they had little immediate reaction to the CPI report.

Inflation – transitory – or not?

As recently as last week’s Fed meeting, Chairman Powell maintained that inflationary pressures were a little stronger and lasted a little longer than the Fed had expected – but their baseline view was that the inflationary surge would prove to be transitory. Given that, the Fed was not anticipating higher interest rates during the next 12 months.

Many analysts are expecting the Fed to raise rates in 2022. The futures market is pricing in at least two interest rate increases (25 bps) next year. On Friday, the University of Michigan reported that “Consumer sentiment fell in early November to its lowest level in a decade due to an escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation.

President Biden has declared that “Reversing this trend is a top priority for me.” Leading Republicans are blaming Biden’s economic policies for the surge in inflation – too much government stimulus.

Will there be a “fall guy,” and will it be Jay Powell? Powell’s term as Fed Chair ends in February. Biden has indicated that he will decide whether to re-appoint Powell before Thanksgiving (November 25.) If Powell is replaced, the new Chair will probably be either more dovish and/or tougher regarding regulations. What will that do to the markets you trade?

There is a school of thought that the Dems will try to “re-shape” the Federal Reserve during Biden’s term (like the Republicans “re-shaped” the Supreme Court during Trump’s term) to make it more “in-line” with the progressive agenda. Throwing Powell under the bus might give Biden some negotiating points with the progressive wing of the Democratic party – those folks haven’t been winning much lately.

The Canadian Dollar rallied ~4 cents from the Sept lows (7750) to the October highs (8150), as stock and commodity markets were strong. The CAD rallied following the more-hawkish-than-expected Bank of Canada meeting on Oct 27 but has dropped ~ 2 cents since then as commodities (especially crude oil) have weakened and as the USD has rallied against nearly all currencies.

WTI crude oil traded between $80 and $85 this week. The market has traded broadly sideways between $78 and $85 for the last four weeks – after rallying from ~$62 in August (a 37% rally.)

The broad commodity indices (with a heavy crude oil weighting) have rallied ~100% from the Covid Crisis lows to a 7-year high, but they have been sideways-to-lower the past few weeks. The Agricultural weighted indices have rallied ~50% from last year’s lows to a 4-year high and have been breaking out to new highs the past few weeks. Higher food prices ahead?

My short term trading

I started this week with two positions I established last Friday: long the Yen and short the S+P. Both trades went nicely in my favour early this week (showing decent profits), and I moved my stops to reduce P+L risk. I was stopped on the Yen for a tiny loss on Wednesday when the USD soared following the CPI report. I was stopped on the S+P for a small gain on Friday as stock indices rallied back from Wednesday’s lows.

It is frustrating to see decent (unrealized) profits turn into small losses or only modest gains. (There is always that “little voice” that asks, “Why didn’t you exit the trade with a good profit when you had the chance?”)

My answer to that question, for both the Yen and the S+P, is that my time frame, when I established the trades, was for a potentially bigger move – that even though the positions were showing a nice profit, I had to “stay with the trade,” rather than taking a quick profit. I had to give the trade a chance to develop into a much bigger gain. (See Quotes from the Notebook below.)

I have no open positions at the end of the week. My P+L for the week was essentially flat.

On my radar

For the past couple of weeks, I’ve been looking for opportunities to fade “irrational exuberance,” especially in the equity markets. I thought the breakdown in Tesla this week might trigger a breakdown in the broader indices after its spectacular run higher the past few weeks. At Wednesday’s close, I thought there was a good chance prices could develop downside momentum. But – that didn’t happen this week.

From a longer-term perspective, if the major indices fall below their late September / early October lows, downside momentum may develop.

I will continue to look for opportunities to short equities, but I’m disappointed that my “obsession” with “irrational exuberance” has kept me from looking at opportunities in other markets. For instance, I’ve generally been bullish on the USD, but I haven’t “put on the trade.”

Thoughts on trading

Last week I wrote about why I read so much research, listen to podcasts and watch videos. I’m not looking for specific “buy this – sell that” recommendations – I’m looking to get an idea; to see a market from a different point of view, that will cause me to think, “If that’s the case, then the trade to make will be X.”

For example, I remember hearing Martin Armstrong say (probably in 1984) that the DJIA was making new All-Time highs – in US Dollar terms, but not in Swiss franc terms. It had never occurred to me to think of the DJIA in terms of Swiss francs – but I realized that people who thought about investing from an international perspective definitely did – and if the DJIA were making new All-Time highs in all currencies, that would probably “draw” more money (from around the world) to the DJIA – and drive it even higher.

This happened “in spades” in the late 1990s during the “dot-com” boom. The US stock market was soaring, and capital flowed to the USA to participate in the boom. This accelerated the boom and drove the USD higher – a classic virtuous circle.

I have not wanted to make “buy this – sell that” recommendations on this blog because I believe that deciding to enter a trade is only a tiny part of successful trading – that what you do with a trade, once you have it on, is much more important. For instance, if I recommended that my readers buy X, with a stop at point Y and a profit target at point Z, that might be exactly how I see the market then. But as time passes, and new information arrives, and prices change, I will probably change my mind about what to do with the trade.

I have hoped that readers will get some ideas from this blog to help them with their own trading. They might get an idea for a specific trade or for a way to manage risks, or they might see an opportunity in a market they have never traded before.

Quotes from the Notebook

It never was my thinking that made big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine–that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.

Edwin Lefevre – Reminiscences of a Stock Operator -1923

My comment: This is a classic. Edwin wrote Reminiscences as a Roman a clef about Jesse Livermore – the Boy Wonder from the bucket shops who made and lost fabulous fortunes several times. If you want to manage your own money as a trader/investor (as opposed to turning it over to someone else to manage for you), then I think you absolutely must read this book. It’s 100 years old, but the wisdom is timeless.

It seems to me that there are two ways to make more money trading: either trade bigger size or position for bigger moves. I’ve always been pretty good at taking losses quickly, but I’ve not been good at “sitting” with a winning trade. I’m going to try to get better at that.

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 truly welcome your comments. Would you please let me know if there is something you’d like to see included in the TD Notes? Thanks, Victor

Barney keeps growing – 15 pounds this week

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 November 12th

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 Data: The EIA data of Wednesday November 10th was mostly bearish. Commercial Crude Stocks rose by 1.0MB while Refinery Utilization Rose by 1.4 points to 80.1% from 78.5% in the prior week. Last week Total Motor Gasoline inventories fell 1.6Mb while Distillate volumes fell 2.6Mb. US Crude Production was maintained at the pandemic high of 11.5Mb/d. Total Demand fell by 708Kb/d to 19.29Mb/d. With Commercial Crude Stocks now at 435.1Mb in inventory, coverage is  22.6 days of Total demand, down from 24.2 days last year but up from 20.9 days in 2019 and 19.7 days of coverage in 2018. So there is no shortage of crude in the US market. 

In detail:

  • Demand for all products fell modestly last week. Total Product Demand fell 708Kb/d to  19.290Mb/d (demand was 20.18Mb/d at the same time in 2020, 21.5Mb/d in 2019 and 22.39Mb/d in 2018). Other Oils demand fell by 679Kb/d to 2.71Mb/d. Gasoline consumption fell 245Kb/d to 9.26Mb/d (and is below the 9.32Mb/d consumed in 2019 at this time). Jet Fuel Consumption fell 91Kb/d to 1.59Mb/d (versus 1.75Mb/d consumed in 2019 at this time). Cushing Inventories were flat versus the prior week at 26.4 Mb/d. Gulf Coast volumes are at 247.3Mb and are up 17.1Mb from 230.2Mb in pre-pandemic 2019 . In discussions with infrastructure companies, crude storage is being focused on the Gulf Coast so as to move the light oil volumes offshore (biggest market Asia) from the nearby prolific Permian and Eagle Ford basins. Over time Cushing should see growing storage as Canadian heavy crudes are moved down to this storage hub.

Baker Hughes Rig Data: The data for the week ending November 5th showed the US rig count rose by six rigs (up by two rigs in the prior week). Of the total of 550 rigs working last week, 450 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 83% from 300 rigs working a year ago. The US oil rig count is up 99% from 226 rigs last year at this time. The natural gas rig count is up a more modest 41% from last year’s 71 rigs, now at 100 rigs.

Canada had a decline of six rigs (a rise of two rigs in the prior week) to 160 rigs. Canadian activity is now up 86% from 86 rigs last year. There were three less oil rigs working last week and the count is now 95 oil rigs working, up from 37 last year. There are 65 rigs working on natural gas projects now, up from 49 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, especially with the DUC count (drilled but uncompleted well count) at very low levels. The data from many companies on their plans for Q4/21 and forecasts for 2022 support this rising production profile expectation. We expect to see US crude oil production reach 12.0Mb/d before the end of 2021.  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:

We expect to see additional weekly builds in Commercial Crude Stocks over the next few weeks before winter fuel demand in December picks up. 

Bearish pressure on crude prices:

  1. Covid caseloads are growing around the world. In the US, the death rate is over 756K deaths (up 9,000 during the last week). Worldwide, the death count is now 5.06M. Deaths are rising in Europe particularly in Austria (may impose lockdowns on the unvaccinated), Bulgaria, Croatia, Germany, Romania, Russia, Slovakia, Slovenia, and Ukraine.
  2. Many US corporate and government employees are not planning on getting vaccinated and are now being put on unpaid leave and may soon lose their jobs. Eighty million individuals have a shotgun decision by January 4th (delayed by one month to cover off Christmas deliveries) when the cut-off kicks in. NO JAB, NO JOB is the vaccination mantra. The US military, police and firefighters are being significantly affected as many personnel are not planning on getting the vaccine in the required timeline and are planning court battles.
  3. 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 behaviour 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. Consumer Confidence is weakening and is nearing levels that have forewarned of recessions. Consumer spending rose at a low annual rate of 1.6% down from 12% in Q2/21. Real US GDP grew 6.7% in Q2/21 and was seen at only 2% in Q3/21. Recent economic releases indicate that we may already be in the early stages of a recession. Today the US CPI came out at the highest level in 30 years at up 6.2%. Wholesale prices (PPI) rose even faster and are up 8.6% from October of last year. The US$1.2T infrastructure bill when signed into law by President Biden will only add to US inflationary pressures.
  4. China has seen a rising wave of new infections in 19 of its 31 provinces. 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 2022 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 over the next four to six months. Thermal coal prices have fallen 55% in the last few weeks. Chinese PMI has fallen below 50 for the second month in a row. China’s General Administration of Customs reported yesterday that imports of crude oil in October were down by 1.5Mb/d from 10.5Mb/d to 9.0Mb/d as the smog issue was being focused on.
  5. Iran is returning to the negotiating table on November 29th and if progress is made, then at some point in the future they may get sanction relief and be able to add 1-2Mb/d fairly quickly.
  6. Iraq wants to boost its productive capacity materially and is working on deals with Saudi Arabia worth tens of billions of dollars to increase oil production, natural gas fields for electricity, and build water desalination and solar energy stations in the country. If concluded this could be a big game changer for the country which is trying to get out of Iran’s orbit and move back to their traditional allies.

Bullish pressure on crude prices:

  1. Speculative long investors (options traders, hedge and commodity funds) and a short squeeze on bearish positions in the futures and options markets on crude have spiked up prices. Energy bulls like Bank of America see US$120/b by June 2022.
  2. President Biden’s moral suasion move to get OPEC+ to add more oil (ask of 600-800Kb/d monthly increases) fell on deaf ears. They plan to keep to their 400Kb/d monthly increase instead.
  3. Spot natural gas prices in Europe have backed off after President Putin confirmed that Russia would meet all European winter needs once they open the Nord Stream 2 Pipeline, which is now being filled and undergoing pressure tests before certification. Russian pressure seems to have worked on getting Europe to move quickly to certify the new line. This new pipeline doubles Russia’s annual export capacity to Europe. In the US, NYMEX today is now at US$4.86/mcf – and in Canada AECO is C$4.78/mcf as weather is mild and storage levels have been building. US storage injections for the last five weeks have been above the five year average and over 2020 injection levels.

CONCLUSION: 

WTI is down US$2.51/b today to US$81.64/b as the Commercial Crude Oil Stocks built and demand data was weaker than expected. We see prices as having US$20-25/b of speculative value which should disappear as Commercial Crude Stocks continue their seasonal build and demand weakens as the US and China head into recessions. We seem to be moving from stagflation to recession in 2022 around the world. If the data comes out supporting recession conditions, the oil price slide could be quick and painful. Leveraged speculative longs in crude oil futures are vulnerable to nasty margin calls in the future. 

Energy Stock Market: The S&P/TSX Energy Index currently trades at 165. The S&P Energy Bullish Percent Index backed off from the 100% SELL level to 85.7% now. Energy stocks could fall 30-40% in the coming months with leveraged entities the hardest hit.

Our November Schachter Energy Report Monthly comes out tomorrow Thursday November 25th with details on the  general stock market and its expected impact on the energy sector as well as reviews and updates on over 20 companies that have released their Q3/21 report since our Interim Report.

We are holding our 90 minute Q4/21 quarterly Black Gold Webinar tonight Wednesday November 10th at 7PM MT. We will discuss in detail our view on the general stock market, the energy market and our bearishness on both areas for the near term. We will also go over those companies that have reported their Q3/21 results so far. They are broken up into presentations on those that reported good results (11 companies) and those with not so good reports (nine companies). We will have two Q&A sessions to go over our presentation materials and subscriber questions. 

If you want access to all our SER reports or want to join our webinar 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 November 6, 2021

Stocks soar to New All-Time Highs

The worries that caused the major stock indices to slump ~6% in September have been forgotten – bullish sentiment has returned BIG TIME, and the indices have surged to All-Time Highs with the DJIA and the S+P rising for the past five consecutive weeks. Since early October, the DJIA is up ~8%, the S+P ~10%, the Russell ~12% and the Naz100 ~14%.

Global Central Banks (Ex. European) starting to tighten

Short-term interest rates are firming, but bond yields are falling – which results in real (after inflation) long rates becoming more deeply negative while the yield curve flattens.

The US Dollar Index touches a 14-month high

Inter-day price action on the USDX has been choppy the past three weeks (up one day, down the next), but it rallied to a 14-month high Friday following the stronger-than-expected US employment report – but couldn’t sustain the gains. The USDX has rallied ~6% after touching a 3-year low in January.

This year, the Yen has been the weakest primary currency against the USD, down ~10% since early January.

The Euro has fallen ~5.5% against the Swiss Franc over the past eight months and is near a 6-year low. Weakness in the Euro/Swiss spread is often a sign of bearish Eurozone political sentiment.

Thanks to a vibrant commodity (especially crude oil) market, the Canadian Dollar is one of the few actively traded world currencies that has risen Vs. the USD this year. The CAD popped higher last week when the BoC was a little more-hawkish-than-expected but drifted lower recently as commodities have weakened and the USD has been strong.

Gold bounced $60 from mid-week lows to a 2-month high

Gold has been out of favour (relative to stocks and crypto) since it had that spectacular $800 rally to new All-Time Highs from 2018 to July 2020.

I’ve frequently discussed how gold ETF capital flows are an excellent barometer of gold market sentiment. In 2019 and 2020, the global gold ETF market “took” ~1,100 tonnes of gold, but the market turned sellers late in 2020, and so far this year, the ETF market has “sold” ~280 tonnes.

A breakout above $1840 could bring new attention to the gold market – especially if some currently popular markets fall out of favour.

I’ve traded gold for nearly 50 years and highly recommend the Gold Monitor, written by my good friend Dr. Martin Murenbeeld, as an excellent source of fundamental analysis. I’ve read his letter every week for thirty years.

I’d also recommend Crescat Capital for readers interested in gold – they have some nifty charts in their slide presentation decks.

WTI crude oil touched a 7-year high last week – but fell 8% to this week’s lows

WTI crude oil surged >35% from mid-August to October on perceptions of short-term (and longer-term) supply/demand deficits. (The spike in European NatGas to All-Time Highs may have been the “poster-child” for such concerns.)

My short term trading

In keeping with the “on my radar” section of last week’s Notes, I started this week flat but looking for opportunities to sell “irrational exuberance” in stocks and commodities.

The S+P closed last week at ATH and gapped higher in the Sunday (October 31) overnight session. Those overnight levels didn’t hold when the Monday “floor session” started, so I shorted the S+P with a tight stop. The trade held up throughout the Monday day and overnight sessions, but I was stopped for a tiny loss as the Tuesday “floor” session began.

Our new 2-month old puppy arrived Tuesday night and single-handedly sidelined me for the next couple of days (no sleep!)

I missed getting short crude oil (blame the puppy), but the wild price swings would probably have stopped me out with a loss (thank God for the puppy!)

I re-shorted the S+P on Friday about a dozen ticks below ATH after it lurched higher following the employment report but then rolled over and dropped through the “floor session” opening range. I remain short, with a stop just below ATH.

I bought the Yen on Friday in anticipation of it breaking out of the sideways range it has been in for the past three weeks. As noted above, the Yen has been weak against the USD all year, and as a result, speculators in the currency futures market have built a massive net short position in the Yen – they might turn buyers if the Yen was to rally. (If “something” happened and market psychology was to turn risk-off, the Yen would probably catch a “haven” bid.)

My realized P+L was down tiny for the week. My unrealized P+L is up 0.25%.

On my radar

I’ve lived through many wild market swings since I began trading fifty years ago. I remember being a speaker at a significant financial conference in Toronto when the Dow Jones tumbled ~25% on October 19, 1987. There were ~1,000 financial professionals at that conference, and everybody was in shock. I cancelled a trip to Chicago and flew straight home, worried that the world as I knew it would never be the same again.

These days, that crash in 1987 barely registers as a blip on the long-term chart.

I mostly write about my short-term trading (I think of it as my “day job“), but I also pay attention to long-term trends. (See the Quotes From The Notebook section below.) from that perspective, I’m worried about the bizarre valuations we see in many markets, particularly equities.

I know ultra-low interest rates “justify” high equity prices. I know Central Banks have flooded the world with liquidity, and share prices must rise as the purchasing power of currencies is degraded. I know “There Is No Alternative.”

I know my Old School metrics are useless for understanding today’s “valuations” and “rate of change.” Please forgive me, I’m not trying to lecture anybody, but I’m saying that we’ve seen this movie before. I remember people buying penny mining stocks on the Vancouver stock exchange fifty years ago because somebody told them that XYZ was going up. The companies had no tangible assets and were flying on a wing and a prayer, but, as my long-time friend Bob Hoye loves to say, “People will believe the most preposterous stories – as long as the price keeps going up.”

I’m not saying that the stock market will crash tomorrow – I honestly would not be surprised to see it go higher – but I think it has been going up because people believe (and have been told) that it will keep going up. Those people are putting money into the stock market like never before.

The major indices fell ~6% in September – the most prominent “tumble” we’ve seen since September 2020 – and then came roaring back the last five weeks to make new All-Time Highs. The Buy-The-Dip crowd is in an “I-Told-You-So” frame of mind – and who can blame them – you only need to look at the “seasonal trends” chart to see the roadmap to higher prices.

If markets reverse the trend of the last five weeks and take out the September lows (I know that seems impossible – but it was only five weeks ago), that would be the first time we’ve seen an interim low broken since the Covid Crash in March 2020. I think such a break would rattle the market and, perhaps, trigger some severe selling.

Thoughts on Trading – Why I read so much research, listen to podcasts, watch videos

In the gold section above, I mentioned that I’ve read Martin Murenbeeld’s weekly Gold Monitor for 30 years. Martin doesn’t offer a “buy this, sell that” service, and that’s not what I’m looking for when I read his letter. (I think letters that offer “buy this, sell that” advice are often “marketing” letters, not research letters.)

When I read a research piece, I want to be open to new ways of “seeing” things – especially if the ideas in the piece challenge some of the ideas I currently believe to be true. For instance, I got the idea that the gold ETF market was probably an excellent psychological barometer of the overall gold market while reading Martin’s letters. The next step was – if that’s the case, where’s the trade?

Another example: I recently watched a video prepared by Goehring and Rozencwajg (The Most Important 2000 Years Of Energy History) that challenged “conventional wisdom” concerning the importance of solar and wind-generated power as the world tries to transition away from fossil fuels. As I read their research, I was thinking, “If their ideas are correct, then a TON of capital is mal-invested in the energy markets – where’s the trade?”

Quotes from the Notebook

What were you thinking? Scott McNealy, founder and CEO of Sun Microsystems, from an address to an investor gathering in 2002. In 2000 shares of Sun Microsystems had been trading at $64 – which was ten times the firm’s annual revenue. Sun Microsystems was one of the HOT stocks during the dot-com boom.

At ten times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for ten straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero costs of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realise how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?

My comment: Scott McNealy’s speech has become famous within the value investing community. What, indeed, were people thinking when they paid $64 a share (10X Sun’s annual revenue per share?) The value investing community would argue that people “weren’t thinking” when they did that – they were buying something because they believed (or had been told) that the share price was going to keep going higher.

Tesla may be the modern-day version of Sun Microsystems. If we assume annual revenues are ~$40 per share, then, with the stock trading at ~$1,200 per share, the market is pricing Tesla at ~30X revenue. Can you imagine Elon Musk, two years from now, asking, “What were you thinking?

People will believe the most preposterous stories – so long as the price keeps going up. Bob Hoye many years ago

My comment: Nobody ever said it better. Thank you, Bob

This is Barney. He’s a 2-month old Golden Retriever / Border Collie.

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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.

Schachter’s Eye on Energy – November 3rd

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 (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 of Wednesday November 3 was decidedly bearish. Commercial Crude Stocks rose 3.3MB (forecast was for a rise of 1.75Mb). If not for Net Imports falling 221Kb/d or by 1.5Mb on the week, overall storage would have risen by 4.8Mb on the week. Total Motor Gasoline inventories fell 1.5Mb on the week as US Refinery Runs rose 1.2% to 86.3% and from 85.1% in the prior week. This compares to the 86.0% pre-pandemic level of 2019. Distillate Fuel Inventories rose by 2.2Mb on the week. Crude Production recovered to a post-pandemic high of 11.5Mb/d or up by 200Kb/d.

In detail:

  • Commercial Crude Oil Stocks rose by 3.3Mb to 434.1Mb. Energy bulls point to this being 50.3Mb below last year’s pandemic level, but it is close to the 438.9Mb seen at this time in 2019 and the 426.0Mb at the same time in 2018. So we do not concur that there is a shortage of oil in the US, the largest energy consuming nation.
  • Demand for all products rose modestly last week. Total Product Demand rose 166Kb/d to 19.997Mb/d (demand was 21,597Mb/d at the same time in 2019). Other Oils demand fell by 538Kb/d to 3.389Mb/d. Gasoline consumption rose 181Kb/d to 9.504Mb/d (but is below the 9.784Mb/d consumed in 2019 at this time) while Jet Fuel Consumption rose 231Kb/d to 1.682Mb/d (1.833Mb/d consumed in 2019 at this time). Cushing Inventories fell by 0.9Mb/d to 26.4 Mb/d compared to 47.7Mb two years ago, before the pandemic. While Cushing is seeing lower storage, the Gulf Coast saw an increase of 1.9Mb to 249.3Mb and is 21.7Mb above its level of 227.6Mb in 2019 pre-pandemic. So storage at Cushing should not be worried about.

Baker Hughes Rig Data: The data for the week ending October 29th showed the US rig count rose by two rigs (fell one rig in the prior week). Of the total of 544 rigs working last week, 444 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 84% from 287 rigs working a year ago. The US oil rig count is up 101% from 221 rigs last year at this time. The natural gas rig count is up a more modest 39% from last year’s 72 rigs, now at 100 rigs.

Canada had a rise of two rigs (a decline of four rigs in the prior week) to 166 rigs. Canadian activity is now up 93% from 86 rigs last year. There were five more oil rigs working last week and the count is now 98 oil rigs working, up from 40 last year. There are 68 rigs working on natural gas projects now, up from 46 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, especially with the DUC count (drilled but uncompleted well count) falling sharply. The data from many companies on their plans for Q4/21 and forecasts for 2022 support this rising production profile expectation. We expect to see US crude oil production reach 12.0Mb/d this quarter.  Companies are taking advantage of attractive costs and want to lock up experienced rigs and crews as staffing issues are getting tougher for the sector.

Conclusion:

We expect to see additional weekly builds in Commercial Crude Stocks over the next few weeks before winter fuel dem

and picks up.

Bearish pressure on crude prices:

1. Covid caseloads are growing around the world. In the US the death rate is over 747K deaths (up 10,000 during the last week). Worldwide the death count is now 5.0M. Deaths are rising in Eastern Europe particularly in Bulgaria, Slovenia, Romania, Russia and Ukraine.

2. Many US corporate and government employees are not planning on getting vaccinated and are now being put on unpaid leave and may soon lose their jobs. Millions more will have a shotgun decision in early December when the cut-off kicks in. NO JAB, NO JOB is the vaccination mantra. The US military is being significantly affected as many personnel are not planning on getting the vaccine in the required timeline and are planning court battles. The new “super-strain” Delta variant, known as AY.4V, is worrisome as it may have faster transmissivity. The normal winter flu season may soon impact Covid caseloads.

3. 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 behaviour 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. Consumer Confidence is weakening and is nearing levels that have forewarned of recessions. Real US GDP grew 6.7% in Q2/21 and was seen at less than 2% in Q3/21. Recent economic releases indicate that we may already be in the early stages of a recession.

4. China has seen a rising wave of new infections in 19 of its 31 provinces (11 were hit as of last week). 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 2022 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 over the next four to six months. Thermal coal prices have fallen over 50% in the last few weeks. Chinese PMI has fallen below 50 for the second month in a row.

Bullish pressure on crude prices:

  1. Speculative long investors (options traders, hedge and commodity funds) and a short squeeze on bearish positions in the futures and options markets on crude and natural gas have spiked up prices. Recently speculative buyers of nearby US$100/b options have increased them from under 20,000 contracts to >141,000 contracts for December 2021. In addition, large numbers of  US$200 priced options for December 2022 are being bought. This excessive bullish view is very persistent and is a contrarian signal historically.
  2. Spot natural gas prices in Europe have backed off after President Putin confirmed that Russia would meet all European winter needs once they open the Nord Stream 2 Pipeline, which is now being filled and undergoing pressure tests before certification. Russian pressure seems to have worked on getting Europe to move quickly to certify the new line. This new pipeline doubles Russia’s annual export capacity to Europe. In the US, NYMEX today is US$5.63/mcf – and in Canada AECO is C$5.66/mcf as snow covers much of Alberta. All have backed off from recent highs as weekly US storage injections are now above the five year average and over 2020 .

CONCLUSION: 

WTI backed off nearly 4% or US$3.25/b today to US$80.80/b (for the December contract and below US$80/b for the January 2022 contract) as the Commercial Crude Oil Stocks build number was higher than consensus. We see prices as having US$20-25/b of speculative value which should disappear as Commercial Crude Stocks continue their seasonal build. The question for us is what is happening to world wide demand as the two largest economies in the world slow down? We may be moving from stagflation to recession in 2022 in many countries. If the data comes out supporting recession conditions, the price slide could be quick and painful for leveraged speculative longs in crude oil futures and options. 

Energy Stock Market: The S&P/TSX Energy Index currently trades at 162. The S&P Energy Bullish Percent Index backed off from the 100% level to 80.95% now. Energy stocks could fall 30-40% in the coming months with leveraged entities the hardest hit.

Our November Interim Update comes out tomorrow Thursday November 4th with details on the  general stock market and its expected impact on the energy sector as well as reviews and updates on five early Q3/21 reporting companies. Our November SER Monthly will be out on Thursday November 25th and will cover the bulk of the 30 companies that we cover.

We will be holding our 90 minute Q4/21 quarterly Black Gold Webinar on Wednesday November 10th at 7PM MT. We will discuss in detail our view on the general stock market, the energy market and our bearishness on both areas for the near term. We will also go over those companies that have reported their Q3/21 results by the time of our cutoff for the webinar. We will have two Q&A sessions to go over our presentation materials and subscriber questions. 

Over the next few months any number of events could lead to a domino effect of debt-laden companies getting into trouble and financial markets declining materially. The Dow Jones Industrials Index is now at 35,980 and could fall to below 30,000 during Q4/21 and to <25,000 during Q2/22. If you want to receive ongoing coverage of these negative market impacts, 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 or want to join our webinar 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.