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.

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