This week Josef comments on how US product demand fell 2.2Mb/d to 17.2Mb/d last week as reversal of re-openings occurred in high Covid-19 case States and how US exports of crude and product are waning (down 1.0Mb/d last week to 2.1Mb/d) as trade war issues with China and other weak economies slow imports from US.

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 19th’s EIA data was mostly bearish. The most bearish piece was that total product demand fell by 2.2Mb/d to 17.2Mb/d or down by 11% on the week as many States tightened up re-openings due to rising Covid-19 case loads, and a rising percent of tests being positive. Motor Gasoline demand fell 253Kb/d to 8.63Mb/d and Jet Fuel fell a modest 8Kb/d to 980Kb/d. However compared to last year overall product supplied is down 3.8Mb/d from 21.0Mb/d or down 18%, Motor Gasoline is down 997Kb/d from 9.6Mb/d or down over 10% and Jet Fuel demand is down 929Kb/d from 1.91Mb/d, or 49%. With the summer driving season over in just two weeks demand will decline further. Inventories fell 1.6Mb on the week but came in lower than the forecast of a decline of 2.7Mb/d. Exports fell sharply or by 1.0Mb/d from 3.1Mb/d to 2.1Mb/d as China did not buy much and other buyers were not active due to slowdowns in their economies due to new outbreaks of Covid-19 and its mutations. Motor Gasoline inventories fell by 3.3Mb on the week while distillates rose by 0.2Mb. Total stocks excluding the SPR fell 2.8Mb last week. Total stocks are now 139.0 Mb or 7.1% above last year. Refinery runs fell 0.1% to 80.9%. Cushing saw a decline of 0.6Mb to 52.7.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline of 3 rigs (last week down by 4 rigs) in the US rig count to 244 rigs working and down 74% from 935 rigs working a year ago. A bottoming process in activity in the US may be underway. The Permian basin had a rig loss of 5 rigs this week following a 2 rig loss last week. This basin activity is down by 73% from a year earlier level of 441 rigs. The US oil rig count fell by 4 more rigs to 172 rigs and is down 78% from 770 rigs working last year. Canada’s on the other hand saw a rig count increase of 7 rigs (last week 2 rigs were added) to 54 rigs working. It is still down 62% from 142 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. Tourmaline Oil, Canada’s largest natural gas producer alone is using 10 rigs.

Conclusion: As we write this, WTI is at US$42.55/b for the September contract down  US$0.38/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 fallen over the last week from 85 to 82 or down 3.5% on the week with the decline mainly in oily names. Natural gas stocks have held their own and some have risen as AECO prices have strengthened (AECO today $2.38/mcf) and NYMEX is US$2.41/mcf. The gain is due to the very hot weather and the increase in electricity usage for air-conditioning. We continue to prefer natural gas and natural gas with liquids investment ideas over heavier barrel oil companies. However, after the recent strong performance a correction phase should occur and give us another great buying opportunity during Q4/20.

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 held our quarterly webinar for subscribers on August 13th at 7PM MT for 100 minutes. Topics included:

• 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 held two Q&A sessions for webinar attendees to ask questions about the topics covered as well as issues of their interest.

Subscribe to the Schachter Energy Report and receive access to this Webinar, 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.

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