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 27 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. 

EIA Weekly Data: The EIA data on Wednesday April 7th was mixed. On the positive side US production fell last week by 200Kb/d to 10.9Mb/d (volumes should recover in the next week or so and then grow from there to 12.0Mb/d this summer) and Commercial Crude inventories fell by 3.5Mb (forecast of a decline of 1.6Mb). Of this decline Exports rose 260Kb/d lowering US supplies by 1.8Mb. On the bearish side Motor Gasoline inventories rose by 4.0Mb while Distillate volumes rose by 1.5Mb on the week. Refinery Utilization recovered 0.1 points to 84.0% from 83.9% and is above last year’s 75.6%.

The most bearish part of the report was consumption last week. Total Product consumed fell 1.1Mb/d to 19.2Mb/d. Gasoline demand fell 109Kb/d to 8.8Mb/d. Jet Fuel usage fell 99Kb/d to 1.3Mb/d. This fall off in consumption is likely due to the Easter holiday season and the end of spring break. Inventories at Cushing fell 0.8M to 46.3Mb and are down from 49.2Mb a year ago.

Baker Hughes Rig Data: The data for the week ended April 1st showed the US rig count rising by 13 rigs (rise of six rigs in the prior week). Canada had a decline of 12 rigs (11 rigs lower last week) as we are in the spring break-up season. Canadian activity is now above the lows of when the pandemic fear was at its highest. There are 69 rigs working in Canada now compared to 41 rigs working at this time last year. In the US there were 430 rigs active, but that is down 35% from 664 rigs working a year ago. The US oil rig count rose by 13 rigs. The Permian saw an increase of three rigs to 224 rigs working and activity is 36% below last year’s level of 351 rigs working. The rig count for oil in Canada fell by seven rigs to 24 rigs working but is up from the pandemic fear level of 9 rigs last year. The natural gas rig count fell by five rigs to 45 rigs active but is up 41% from last year’s level of 32 rigs working at this time last year.

Conclusion:

Crude oil prices have fallen over US$9/b in the last month from US$67.98/b to US$58.79/b now. Pressure on OPEC from China, India and the US helped to get them to agree to add material volumes versus the expectation of keeping production flat. Over the next three months OPEC will increase production by 2.0Mb/d, more than is needed for world wide demand growth into late 2021 and will help to drive crude prices lower. We headlined last week that we expected an imminent breach of US$60/b and this has happened. Our next downside target is US$57.63/b. A close below that level could set up a quick decline to the US$48-52/b level.

Bearish pressure on crude prices:

1. OPEC (outside of the Saudis) will be adding 350Kb/d in May, 350Kb/d in June and 440Kb/d in July.
2. The  Saudis will separately ease its cuts by 250Kb/d in May, 350Kb/d in June and 400Kb/d in July.
3. Europe is seeing a severe third wave of Covid mutations and has gone into longer lockdowns. Germany, the engine of Europe, is extending its lockdown until April 18th and may extend it further if case-loads and deaths don’t decline. Cases doubled in Germany over the last month. Nearly a third of France just entered a month-long lockdown and they may face a full national lockdown shortly.
4. The US and Canada are being hit by higher and faster spread of the mutations. Alberta is going back to tougher restrictions due to the pick up in caseload and mutation spread.
5. Energy demand is showing signs of softening in various countries in Asia as tourism remains lackluster. The EIA has again lowered its demand forecast for 2021.
6. Significant OPEC cheating is occuring (Iran, Iraq, Libya, Nigeria and Venezuela). China plans to buy 1.0Mb/d from Iran this month (January 2021 they imported 600Kb/d) as they get a nearly 10% price discount and very generous payment terms. China is not concerned about the US sanctions regime.
7. US production has recovered by 1.2Mb/d so far. The Federal Reserve of Dallas sees the break-even price for crude in the Permian at US$50/b, providing lots of incentive to add barrels now. The rise in the US rig count supports the view that US production may be able to rise by another 1.0Mb/d this year.

With the big decline in the last few weeks, we see the technical support levels for WTI crude now at US$57.63/b on a close. Energy and energy service stocks are overbought and have been chased by hot momentum money adding to the inflation and economic recovery part of their portfolios.

We remain in the bear camp now. The most vulnerable companies are energy and energy service companies with high debt loads, high operating costs, declining production, current balance sheet debt maturities of some materiality within the next 12 months and those that produce heavier crude barrels. Results for most companies for Q4/20 have been released and many were not strong enough to justify current lofty stock price levels. If crude prices retreat below US$50/b these stocks will get battered.

CONCLUSION:. The next few months could see significant downside for the energy sector. The topping process for the general stock market is ongoing and some ‘Black Swan’ event will prick this bubble. Rising interest rates appear to be one of the most likely reasons as the US 10-Year Treasury yield has increased to a new 2021 high of 1.74% more than triple the 0.52% of last August. 

Energy Stock Market: The S&P/TSX Energy Index now trades at 118 and is part of a lengthy, extended, and broadening topping process from the peak at 128 three weeks ago. The S&P/TSX Energy Index is likely to fall substantially in the coming months. A breach of 111.59 should initiate the next sharp decline. Our target, once 100 is busted, is down to the 60-70 area with WTI trading in the US$42-48/b area. In this range we will be looking for a bottom and the next low risk BUY signal.

We are setting up models on five pipeline and infrastructure stocks and will launch coverage of these new ideas in our April SER Monthly to be distributed on Thursday April 22nd. Our research presentation for all of our covered companies is now falling under three designations: Conservative, Growth and Entrepreneurial. Investors interested in this new coverage should become subscribers to get access to our expanded research coverage.

Our April Interim Report will be out on Thursday April 8th and will include updates on 13 of our Coverage List companies. This should make for interesting reading for subscribers so they can focus on favourite ideas to BUY when we get the next low risk BUY signal.

Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all archived Webinars, Action Alerts, TOP PICK recommendations when the next BUY or SELL signal occurs, as well as our Quality Scoring System review of the 27 companies that we cover. Our coverage in the April SER Monthly will rise to 32 companies. We go over the markets in much more detail and highlight individual companies’ financial results in our reports. If you are interested in the energy industry this should be of interest to you.

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