Energy & Commodities
This week Josef explains how the EIA had a third increase in total stocks which is creating a storage problem. As well as how the OPEC’s report out Wednesday the 17th showed significant non compliance and it is very likely crude will fall sharply in the near term.
Each week Josef Schachter will give you his insights into global events, price forecasts and the fundamentals of the energy sector. Josef offers a twice monthly Black Gold newsletter covering the general energy market and 28 energy and energy service companies with regular updates. He holds quarterly subscriber webinars and provides Action BUY and SELL Alerts for paid subscribers. Learn more and subscribe.
EIA Weekly Data: Wednesday June 17th’s EIA data was mostly bearish. The headline number of commercial crude stocks showed a rise of 1.27Mb versus the estimated 130K build. The Strategic Petroleum Reserve added 1.7Mb and now stands at 651.7Mb or nearly 38 days of current demand. The rise in commercial crude stocks would have been higher except net imports fell 245Kb/d or 1.72Mb on the week. Motor gasoline stocks fell 1.7Mb and Distillates fell by 1.4Mb. Overall stocks rose this week by 8.8Mb (compared to a rise of 11.9Mb last week). Total stocks are now up 141.8Mb over last year. Commercial crude oil stocks are now up 11.8% from 56.9Mb last year. Refinery runs rose 0.7% to 73.8% from 73.1% in the prior week. Cushing saw a decline of 2.6Mb to 46.8Mb as refinery activity consumed more crude.
US production of crude fell by a whopping 600Kb/d to 10.5Mb/d (all in the lower 48) and is now down 2.6Mb/d from the peak in mid-March at 13.1Mb/d. We are surprised by the large size of the shut-in. It is possible we are looking at data that removes production from bankrupt entities. There were a number of new filings last week for Chapter 11 insolvency.
Product supplied backed off from the strong consumption during the Memorial holiday weekend. Total product usage fell by 283Kb/d to 17.29Mb/d and is down 3.53Mb/d or 17% from 20.8Mb/d consumed last year at this time. Finished motor gasoline demand fell by 31K to 7.87Mb/d, but is down 21% from 9.93Mb/d last year. Jet fuel demand continues to rise modestly as more flights start up and consumption rose last week by 76Kb/d to 788Kb/d. However, it is still 885Kb/d lower or 53% less than last year’s 1.67b/d.
Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 5 rigs (prior week down 17 rigs) to 279 rigs and down 71% from 969 rigs working a year ago. The Permian had a rig loss of 4 rigs (last week down 7 rigs) or down by 69% from a year earlier level of 441 rigs. The US oil rig count fell by 7 to 199 rigs (down 16 rigs last week) and down 75% from 788 rigs working last year. Canada’s rig count was flat at 21 rigs working but is down 80% from 107 rigs working at this time last year. The rate of weekly rig releases has clearly decelerated and we are close to the bottom for this key energy service sector activity indicator. Last week we saw the first green shoot with the Haynesville showing a rig count increase of two rigs to 33 rigs.
OPEC Monthly Data: OPEC today released their June 2020 monthly issue. They see demand at 81.3M/d in Q2/20 rising nearly 11Mb/d to 92.3Mb/d in Q3/20. Their big assumption is that China demand rises to 12.55Mb/d in Q2/20 from 10.27Mb/d in Q1/20 and OECD demand rebounds meaningfully. We suspect this may be high due to weak consumer demand in the OECD and the recent lock-down in Beijing due to the recent Covid-19 breakout. The report shows non-OPEC production falling 4.1Mb/d from 66.5Mb/d in Q1/20 to 61.4Mb/d in Q2/20. This fits with what we are seeing from the weekly EIA data and the reports from Canada. OPEC cut overall production in May 2020 by 6.3Mb/d to 24.2Mb/d with the Saudi’s taking the largest cutback at 3.16Mb/d. UAE helped with a 1.36Mb/d cut as did Kuwait with a 921Kb/d cut. As we suspected, other OPEC countries did not partially or fully meet their quota. Angola cut only by 33Kb/d to 1.28Mb/d, Iran raised production by 5Kb/d to 1.978Mb/d, Iraq cut only 340Kb/d versus the over 1.0Mb/d cut allocated and Nigeria cut by only 185Kb/d to 1.59Mb/d. Overall compliance appears to be 2-3Mb/d less than needed. OPEC in the report shows that the call on OPEC in Q2/20 is 14.6Mb/d and with production of 24.2Mb/d there is still an inventory build of 9.6Mb/d. So the deal last week to extend the cuts to the end of July does nothing to balance supply and demand. In the OPEC report they show Q2/20 demand at 81.3Mb/d, non-OPEC production at 61.4Mb/d, OPEC NGL’s at 5.3Mb/d leaving a call on OPEC of only 14.6Mb/d. They spin their positive story showing demand rising 11.0Mb/d to 92.3Mb/d in Q3/20 with non-OPEC production falling by 2.1Mb/d in Q3/20 to 59.3Mb/d. Under this view they show demand for OPEC crude rising to 27.8Mb/d and inventories worldwide starting to shrink. Our biggest disagreement is that we don’t buy their large increase in world demand for Q3/20 that they forecast.
Conclusion: As we write this, WTI is at US$37.43/b for the July contract (down US$0.95/b on the day) due to the overall inventory build. After a robust short covering rally of nearly 90% from the April low to US$40.44/b on Monday, crude prices have now rolled over and are down over 7%. We see a decline below US$30/b as the line in the sand for crude oil bulls (US$34.36/b next breakdown level). The breach of US$30/b should start the next phase of worry for energy bulls and restart aggressive selling of energy and energy service stocks. Much lower levels are expected once we get into the fall and the wage support programs by the governments end, and layoffs pick up and we see more bankruptcies. In addition this is also the window for the next expected Covid-19 wave. The energy and energy service companies with the most downside are those with high debt loads, high operating costs, have current balance sheet debt maturities of some materiality over the next 12 months and those that produce heavier barrels. Hold cash and remain patient for the next low risk BUY window as we saw in mid-March. If over-invested take appropriate defensive action.
The short covering rally of the last few weeks took the S&P Energy Bullish Percent Index from 0% on March 9th to 100% two weeks ago (84.6% now after stock market decline of the last two weeks). As the general stock market has declined, we expect to see the energy sector fall heavily as well. The Energy Bullish Percent Index is likely in this situation to fall to below 10%, providing the next low risk BUY signal. For the S&P/TSX this means a decline to below 40 for the Index, or nearly a two for one sale – OUCH! In a few days we see the next general market plunge starting. Downside for the Dow Jones Industrials in the near term 22,800 with much lower levels in July/August.
The S&P Energy Index today is at 78.82 (down 11% from last week’s level of 88.60) and down from the recent bear market rally high of 96.07 (Index down 18% from this recent high of two weeks ago). Be prepared for significantly lower energy and energy service stock prices in the coming weeks. Next downside breach is 76.50 (one bad market day away).
High risk tolerant speculative ownership of crude oil futures continues to rise crude. Last week speculators owned a net long position of 572Mb up modestly from 570Mb the week before. Commercials are adding more aggressively to positions and are now short 617Mb up from 605Mb the week before. Speculators are usually wrong and we expect them to get smacked hard once the current stock market decline has massive intermarket margin calls. At the next bottom in crude prices It is possible that commercials will move to net long position..
Our June SER Monthly Report will come out tomorrow. We go over the current market conditions and our key reason why we see an imminent breakdown in the overall stock markets that will drag energy stocks down as well. In our corporate update section we cover one of our favourite international ideas which just successfully completed its debt refinancing with a two year extension and covenant relief.
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Most European brick-and-mortar clothing stores have been open for three or four weeks, yet sales continue to languish. In April, when all but the essential brick-and-mortar stores were shut, sales of clothing and accessories slumped by 50% in the UK and 67.4% in France, the home of fashion. In Spain, revenues in the sector plunged by 80.5%, according to data published by the trade association Acotex.
But even in May, when stores in most Spanish cities reopened, revenues in the sector fell 72% year over year and are down 45% year to date. Those figures include booming online sales.
“The textile and accessories trade is in a very delicate spot, requiring urgent and specific measures for the sector,” warned Acotex. In other words, government help and money. Otherwise, the trade association said, there will soon be a wave of bankruptcies and closings…CLICK for complete article
Beating the market is not just about having a good strategy. It is even more important to have the emotional control and discipline to execute that strategy, consistently and with focus. Making money in the market is simple, but it is far from easy.
In my 30 years of trading, I have made countless mistakes repeatedly. Those mistakes almost always come down to not being a master over my emotions and biases that cause me to make bad trading decisions.
I have also taught others how to trade my strategies for over 20 years and have watched almost every student make those same mistakes. When you know what they are, they become obvious. However, the solutions are not always easy to find or execute. The reason is simple; it is hard to overcome being a normal human with a normal emotional attachment to money.
My experiences from the past 30 years of trading make me something of an expert on making mistakes. I believe that those who can overcome themselves will excel in trading the stock market. Those who cannot find their success rises and falls with the trends of the market.
To be a successful investor, you must overcome your emotions. Here are two ways to do that:
Do Not Chase Greed
In the short-term time horizon for the stock market, the fundamentals do not matter. Stocks can go up quickly because there are emotional buyers chasing after a fast moving upward trend. However, when the emotion wears off, these same stocks can come crashing down to earth quickly. If you are part of the crowd and coming into a strong stock late, you may be setting yourself up for failure.
There is a simple rule that will help you avoid chasing after greed.
Buy when the stock is breaking from low volatility, not after it has already been going up for a while.
Here is a chart that demonstrates this idea:
Throughout the recent stock market crash and recovery, I have been focused on buying stocks that had sold off sharply and then broke their downward trend line after building a rising bottom. Ideally, this comes with a break from low price volatility.
Low price volatility simply means that the stock is not moving up or down a lot in price. In the chart above, that occurred at point 1. You can see that the height of the candles on the chart are short indicating that the stock did not have a lot of price volatility.
Point 1 was also the rising bottom and at Point 2, there was the break from low price volatility. This was the signal that the stock was starting an upward trend and the ideal place to buy. Most investors would doubt this signal to buy because the recent market activity was a frightening sell off and most people will not buy in to fear because they feel it themselves.
People will start to feel the itch to buy at the Point 3s. When a stock goes from $30 to $45 in 4 days, people get excited. Their outlook is biased toward what has just happened and what has just happened is exciting!
However, Point 3 is a terrible place to buy because the stock has risen on emotion and is due for a pull back. Large computerized traders have a strategy that almost guarantees that a pull back will happen as they will be strong sellers on stocks that run up quickly like this (the strategy is called Mean Reversion).
How do you know when you are chasing after emotion? Notice the green line that I drew on the chart above. It is the upward trend line and I have drawn it across the bottoms on the chart. When the distance from the current price to the trend line becomes large, you are best to leave the stock alone and wait for a pull back before buying. This is another one of my trading strategies, something I call a Pullback Play.
Buy When Others are Panicking
Fear is so powerful that it actually changes how our brains function. When we feel fear, our brain seeks to protect us with the “fight or flight” response that triggers that little part of our brain called the Amygdala. That serves us well when we are being chased by a Cougar, but it hurts our ability to make smart trading decisions when we simply have a fear of losing money.
This fear response causes us to accept a price that is irrationally too low. The farther a stock falls, the closer it gets to the bottom and yet, our fear increases the farther a stock falls. So, our response to fear is more likely to cause us to sell the closer we get to the stock’s turning point from weakness. The Amygdala really hurts our ability to make money in the stock market.
Consider how you felt about your investments in March. My last article for MoneyTalks discussed the tremendous opportunity that the market crash brought, and I showcased a simple strategy for finding stocks to buy (this is the pattern that I show on the chart above). However, I am certain that many readers of that article, perhaps even the majority, thought I was crazy to suggest that it was a good time to be a buyer. The reason was simple; it seemed like the world was ending and taking the stock market down with it. Fear was high.
Since that article, the market is up sharply. The haters that left me disparaging comments on my YouTube channel have gone quiet. A lot of money has been made by those willing to buy in to fear when the market started to turn higher. Buying since March would seem brave, but really, it was just taking advantage of other people’s emotional decision making.
I want to be clear, however, that we should never buy simply because a stock has gone down in price. There must first be a sign that the stock is trying to make a bottom. There are some stocks that go down for very good reasons and deserve to be lower. If we look for stocks that have made emotional sell offs and then start to build rising bottoms on the chart, we are applying a strategy that takes advantage of emotion at a time when the trend is starting to turn. Wait for those signs before trying to catch a falling knife.
Fear and Greed create opportunity if you are on the other side of the emotion. Buy when others are fearful and sell when others are greedy.
Tyler Bollhorn, Stock Scores
A scientific study which found COVID-19 may have been a “cell-culture” uniquely adapted for transmission to humans (more so than any other animal – including bats), is gaining steam.
The paper, currently under peer review, comes from Flinders University Professor Nikolai Petrovsky, who has spent over two decades developing vaccines against influenza, Ebola, and animal Sars. He says his findings allow for the possibility that COVID-19 leaked from a laboratory, according to Sky News.
“The two possibilities which I think are both still open is that it was a chance transmission of a virus from an as yet unidentified animal to human. The other possibility is that it was an accidental release of the virus from a laboratory,” said Petrovsky, adding “Certainly we can’t exclude the possibility that this came from a laboratory experiment rather than from an animal. They are both open possibilities.” CLICK for complete article
A spokeswoman for Donald Trump confirmed on Tuesday morning that the US president is taking a malaria drug as a defense against Covid-19, despite his own administration’s warnings that the drug could have dangerous side-effects.
The confirmation came hours after the House speaker, Nancy Pelosi, expressed alarm that Trump was taking the drug since he is “morbidly obese”, in her words.
At the White House, the press secretary, Kayleigh McEnany, told CBS News Trump was taking hydroxychloroquine.
“I can absolutely confirm that,” she said…CLICK for complete article
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