This week Josef discusses why US crude production is falling off at a sharper pace as the low 48 saw volumes decline by 300Kb/d to 10.7Mb/d last week. As well as why offsetting this OPEC raised production by 980Kb/d in July and plans to add 2.0Mb/d this month. As we enter into fall he feels we should start to see crude inventories start to rise again destabilizing crude prices.

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 August 12th’s EIA data was mixed. The most bullish piece for crude prices was the 300Kb/d decline in US domestic production from 11.0Mb/d to 10.7Mb/d. This level is 1.6Mb/d lower than last year’s 12.3Mb/d while the industry retrenches as low prices impede spending. The high profile commercial crude stocks number showed a decline of 4.5Mb (forecast of a decline of 2.9Mb) reflective of net imports which fell 713Kb/d or 5.0Mb on the week. Motor Gasoline inventories fell 0.7Mb while Distillates fuels fell by 2.3Mb on the week. Overall petroleum stocks fell on the week by 8.4Mb. Total stocks are now 148.2Mb or 7.6% above last year. Refinery runs rose 1.4% to 81.0% from 79.6% in the prior week as summer demand kept refineries busy. Cushing saw a rise of 1.3Mb to 53.3Mb compared to 44.8Mb at this time last year.

The summer driving week was quite strong as it rose 1.46Mb/d to 19.37Mb/d versus a decline of 1.18Mb/d in the prior week. However it is still down 12% from last year’s level of 22.06Mb/d. Finished Motor Gasoline demand saw a rise of 266Kb/d last week to 8.88Mb/d but is still down 11% from 9.93Mb/d last year. Jet Fuel demand fell 23Kb/d last week to 987Kb/d. It is down 1.05Mb/d or 51% from last year’s 2.02Mb/d, as the reticence to fly continues.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline of 4 rigs in the US rig count to 247 rigs working and down 74% from 934 rigs working a year ago. A bottoming process in activity is underway. The Permian basin had a rig loss of 2 rigs this week following a two rig loss last week. This basin activity is down by 73% from a year earlier level of 444 rigs. The US oil rig count fell by 4 to 176 rigs and is down 77% from 764 rigs working last year. Canada’s rig count rose by 2 rigs (last week 3 rigs were added) to 47 rigs working but is still down 66% from 140 rigs working at this time last year. Canada’s improvement is due to the pick up in the liquids rich Montney and Duvernay basin activity.

OPEC Monthly: OPEC released their August Monthly Oil Market Report today and they are optimistic that world consumption will rise from 81.8Mb/d in Q2/20 to 92.1Mb/d in Q3 and then to 95.8Mb/d in Q4/20. With US demand alone being 2.7Mb/d lower than last year we expect their forecast is optimistic. Now that there is a pick up in coronavirus cases around the world, crude demand should weaken. In addition, once we get past the September long weekend and into the fall seasonal slowdown, demand historically falls by 1.0 – 1.5Mb/d. In their report they noted that OPEC raised production by 980Kb/d to 23.17Mb/d in July. The biggest increases were from Saudi Arabia (866Kb/d to 8.41Mb/d), UAE (98Kb/d to 2.43Mb/d), Kuwait (73Kb/d to 2.16Mb/d) and Iraq (39Kb/d to 3.75Mb/d). The 2.0Mb/d addition by OPEC starting August 1st may prove detrimental to the industry and current crude prices. In their report they show the call on OPEC for 2020 at 23.4Mb/d so if their production rises to 25.2Mb/d this month then we may see inventories in storage start to rise again in September once these additional barrels hit the market. We expect this excess will dampen the current crude price level.

Conclusion: As we write this, WTI is at US$42.21/b for the September contract up US$0.60/b on the day. For crude we see a decline below US$38.72/b as confirming the top. Later when we see a breach of US$34.36/b the sector will fall under heavy pressure. Energy stocks are ahead of the fundamentals and have significant downside risk. The most vulnerable stocks 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. Raise and hold cash and remain patient for the next low risk BUY window. 

The S&P/TSX Energy Index has risen over the last week to the 85 level as crude oil and AECO prices have strengthened (AECO today $2.11/mcf), but is down over 11% from the early June high of 96 when we recommended taking profits in non-taxable accounts from the great upside move from mid-March. We signalled an Action Alert BUY on March 13th and the stocks since the recommendation have done superbly. We now see material downside risk over the coming months. A breach of 74.67 would set up the next downside target for this index at the 50 level. Further lows are likely in Q4/20 as tax loss selling could be very nasty this year.

We hold our quarterly webinar for subscribers tomorrow Thursday August 13th at 7PM MT for 90 minutes. Topics will include:

• Overview of the general stock market and why we remain cautious on crude prices in the near term.
• Results for Q2/20 from energy and energy service companies that have reported – some are decent and some have disappointed. We do not cover individual company information in the ‘Eye on Energy’ complimentary product so if you want this company analysis please become a subscriber.
• OPEC cutbacks – have they managed to balance world supply and demand?
• If Joe Biden wins the Presidency – what does that mean for the Energy sector in Canada and the US. Who wins and who loses?
• Which energy and energy services stocks have the most downside risk if crude prices retreat below US$30/b?
• We will have two Q&A sessions for webinar attendees to ask questions about the topics covered as well as issues of their interest.
• For subscribers please send in your last minute questions ASAP so we can prepare detailed responses.

Subscribe to the Schachter Energy Report and receive access to our Webinars, our Action Alerts, our TOP PICK recommendations when the next BUY signal occurs as well as our Quality Scoring System review of the 28 companies that we cover.

Next week our ‘Eye on Energy’ will be produced on Thursday August 20th due to holiday travel.

To get access to our research and to join tomorrow’s webinar please go to  http://bit.ly/2OvRCbP to subscribe.