This week Josef discusses how crude inventories rose to an increase in net imports and a decline in exports as well as how energy stocks continue to weaken and are down 5% on the week as concern rises about pipeline construction.
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EIA Weekly Data: Wednesday July 8th’s EIA data was overall bearish. The headline number of commercial crude stocks showed a rise of 5.7Mb versus the forecast of a 3.1Mb decline. This miss was due to net imports rising by 2.13Mb/d or by 14.9Mb on the week. If not for imports rising (1.43Mb/d) and exports falling (705Kb/d) there would have been a significant decline during the week in crude storage. Motor Gasoline inventories fell by 4.8Mb on the week. Overall stocks rose this week by 10.5Mb (compared to a rise of 2.8Mb last week). Total stocks are now up 173.9Mb or 8.9% over last year. Refinery runs rose 2 points to 77.5% from 75.5% in the prior week. Cushing saw its first increase in quite a while with a rise of 2.2Mb to 47.8Mb (forecast 263K decline). US production of crude was flat last week at 11.0Mb/d and is down 1.3Mb/d from last year.
The most bullish part of the report was that total product supplied rose by 766Kb/d to 18.12Mb/d but is still down 3.14Mb/d or 15% from last year’s level of 21.3Mb/d. Finished motor gasoline demand rose by 205Kb/d to 8.77Mb/d, but is still down 10% from 9.75Mb/d last year. Jet fuel rose 336Kb/d to 924Kb/d as more planes were flying but is still down 880Kb/d lower or 49% less than last year’s 1.8Mb/d. Airline capacity is now at 40% of July 2019’s level and up from 30% in June as more airlines add flights as passengers slowly return. United Airlines today said they would furlough 36,000 staff after the US government funding support requirement to the end of September, ends on October 1st.
The rise in Covid-19 cases to record levels worldwide and to 60,000 new cases per day (a high of 40,000 cases reached just two weeks ago) in the US has necessitated reversals in opening phases. There are now nearly 132,000 fatalities in the US from this pandemic. With the US having 4% of the world’s population and 25% of the fatalities this is a deplorable outcome. President Trump is now pushing for schools to reopen fully in the fall but states are reluctant to do it on a full time basis. Partial in school and partial at home with lower attendance levels in classes may provide distancing needed to keep a large increase in the case load among young people. This will now be a political football.
Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 2 rigs (prior week down 1 rigs) to 263 rigs and down 73% from 963 rigs working a year ago. The Permian had a rig loss of 5 rigs (last week down 1 rig) or down by 72% from a year earlier level of 443 rigs. The US oil rig count fell by 3 to 185 rigs (down 1 rig last week) and down 77% from 788 rigs working last year. Canada’s rig count rose by 5 rigs (down by 4 rigs last week) to 18 rigs working but is still down by 85% from 120 rigs working at this time last year. Many US companies have announced that they will restart production this month given current economic prices. With a current world-wide crude glut, any significant oil production returns at this time would be very detrimental to the current level of crude prices.
OPEC Issues: Saudi Arabia’s Energy Minister has threatened OPEC cheaters with another price war if they do not comply with their mandated quotas. His targets on his July 1st rant were Nigeria and Angola. These countries sell their light crude oil mainly to China and the Saudi threat is to discount their similar crudes and take their Chinese customers away. These countries and others like Iran and Iraq need all the revenues they can get to provide basic necessities for their large populations. Angola sold 1.28Mb/d in May and has 33M people which compares to Saudi Arabia with 35M people and ARAMCO sold 8.5Mb/d in May. Nigeria has 206M people and sold 1.6Mb/d in May. Asking countries with large populations to cut back versus the Saudi’s cutting back more is a non-starter for these poor and desperate countries.
Conclusion: As we write this, WTI is at US$40.61/b for the August contract unchanged on the day. The Dow Jones Industrials which was initially up over 200 points is now up a modest 20 points to 25,909 after the United Airlines announcement. A decline below 24,800 will start the next serious plunge in the stock markets. We expect to see lower lows (below March) before this rout is over. For crude 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 at the end of this month. Layoffs should pick up in August and we expect to see more corporate bankruptcies (Brooks Brothers and David’s Tea today). In addition, this fall will likely be the window for the second Covid-19 wave.
The energy and energy service companies with the most downside are those with high debt loads, high operating costs, declining production, have current balance sheet debt maturities of some materiality over the next 12 months and those that produce heavier crude barrels. Results for Q2 start to come out at the end of July.
Hold cash and remain patient for the next low risk BUY window. If over-invested hopefully you have already taken appropriate defensive action.
The S&P Energy Bullish Percent Index peaked at 100% in early June. This is the only such reading ever. It has fallen over the last four weeks to 30.8% today as energy and energy service stocks fell. The Energy Bullish Percent Index is likely in this situation to fall to below 10%, providing the next low risk BUY signal. The S&P/TSX Energy Index was at 78 a week ago and is now at 74 or down 5% over the last week. The Index is now down 23% from the early June high of 96.07. The next downside target for this index is the 50 level. For the S&P/TSX we see a decline to the 32-36 level at the next important low, or a two for one sale over the coming months. Downside for the Dow Jones Industrials in the near term is 22,800 with much lower levels thereafter in Q3/Q4, 2020.
Our July Interim Update will come out tomorrow. We go over why and how deep this stock market plunge is likely to go and what to look for at the potential end of this stock market rout. As we get closer to the bottom we will profile our Table Pounding best energy and energy service BUY ideas to consider owning by subscribers. The next worry for the stock market will be Q2/20 financial results which will start shortly.
We update our Insider Trading Report in this issue (last run in April). There are some notable and significant insider buying that we highlight. We are working on a new international investment idea and expect to launch coverage of this exciting small cap growth story in our July 23rd SER Monthly.
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