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 December 9th was very negative. Commercial inventories rose (a record for 2020 of) 15.2Mb versus the assumption of a decline of 1.4Mb on the week.The reason was that US crude and product exports fell a dramatic 1.6Mb/d to 1.83Mb/d (last week exports were 3.46Mb/d). Overall this reflects 11.4Mb of the build. Is this a one time event or is there now such a glut of global oil that US exports are being hurt? Crude prices started this morning at US$46.24/b and have fallen over US$1/b so far today to US$45.21/b at the time of this report (low so far today US$44.95/b). Crude inventories are now 55.3Mb or 12.3% above last year’s level of 447.9Mb. Gasoline inventories rose by 4.2Mb while distillates rose by 5.2Mb, all very bearish for WTI prices. US domestic crude production was flat at 11.1Mb/d on the week but down 1.7Mb/d from 12.8M last year.

Consumption during the Thanksgiving period rose modestly last week. Total usage rose by 67Kb/d to 18.5Mb/d however gasoline consumption fell by 373Kb/d. The bright spot was Jet Fuel Consumption, which rose by 176Kb/d to 1.31Mb/d as more people flew to visit family and friends during the holiday period. Total Demand rose 167Kb/d above last year’s level of 18.4Mb/d.  Gasoline Demand is still down 14.4% from the 8.9Mb/d consumed last year and Jet Fuel remains 17% below demand of 1.58Mb/d last year.

Refinery Runs rose 1.7 points to 79.9% from 78.2% in the prior week but down from 90.6% last year. Total Stocks (excluding the SPR) rose by 19.9Mb and now are 98.2Mb above last year or 7.7% above the 1.28Bb in storage last year. Cushing Oil Inventories fell by 1.4Mb to 58.2Mb and are higher compared to 40.4Mb last year at this time.

Baker Hughes Rig Data: Last week Friday, the Baker Hughes Rig Survey showed an increase in the US rig count. The US rig count rose by three (up 10 rigs in the prior week) to 323 rigs working, but remains down 60% from 799 rigs working a year ago. The US oil rig count rose by five (up 10 rigs last week) to 246 rigs but is down 63% from 663 rigs working last year. The Permian saw an increase of three rigs to 164 rigs working but remains 59% below last year’s level of 400 rigs working. Over US$45/b for WTI seems to be a price point where producers see economic returns from drilling.

Canada saw no change in the rig count last week (up 1 in the prior week) to 102 rigs working. The rig increase now has activity down only 26% from a year ago when 138 rigs were working.. The rig count for oil is now at 40 rigs (up two on the week) and is down 59% from 87 rigs working last year. The natural gas rig count fell by two last week to 62 rigs working but remains up by 22% for the year versus the 51 rigs working last year.

Natural gas prices have drifted lower as warm weather has lowered consumption. AECO is now at $2.10/mcf down over 25% in recent weeks. NYMEX has also retreated and is now at US$2.49/mcf. We expect much higher prices once the depths of winter arrive later this month.

Conclusion: We are now back to crude price levels seen in March 2020 just before the pandemic caused lockdowns of worldwide economies. The positive view of vaccines coming shortly has ignited investor interest in the sector.

Positive issues for higher crude prices:

• The first vaccine deliveries have started in the UK and should start around the world later this month once approved by the drug authorities. Anyone who wants one in Canada or the US should have it by Q3/21. Today Canada was the third country to approve the Pfizer/BioNTech vaccine.
• While OPEC has lowered the near term demand forecast for crude oil they see demand rising in 2021 to 96.26Mb/d from 90.01Mb/d in 2020. The forecast for Q4/20 is for consumption of 93.67Mb/d and by Q4/21 is forecast at 97.09Mb/d.
• Asian demand remains the strongest in the world and is now above last year’s consumption levels.

Negatives issues for lower crude prices:

• OPEC’s agreement was a disaster as instead of delaying any production increases to Q3/21, they agreed to a production rise in January of 500Kb/d. They also plan to review production quotas monthly (next meeting January 4th) with plans to increase production by the same amount each month if appropriate. Of the January increase the Saudi’s took 125,000 b/d and the Russian 125,000 b/d, leaving a miniscule amount for the remaining members. Cheating is guaranteed to continue as many of the smaller OPEC players are desperate for funds to run their economies.
• Iraq has signed a multi-billion dollar deal with a Chinese oil company and will receive up front money in exchange for long term oil supplies. Chinese entities have done this regularly with struggling oil producers in Angola, Ecuador, Iran and Venezuela.
• Germany had record case loads this week and plans to put in more restrictions. The US coastal states are back as Covid hotspots. Canada is tightening up with Alberta imposing its tightest restrictions to date, starting on Sunday December 13th. There are now 15.3M cases (up from 13.8M cases last week) in the US with 288K deaths (272K last week). Worldwide the caseload is 68.3M and deaths near 1.56M. Christmas holiday gatherings will be limited in many places around the world due to the rise in caseloads. Without substantial and effective mitigation measures Dr. Fauci sees the middle of January ‘could get really bad and a really dark time for us’.
• Libya is getting its production up sharply now that their civil war is over. They are now producing 1.3Mb/d, an impressive feat, up from the October level of 454K/d and they expect to be producing 1.6Mb/d during early 2021. This will mean over a 1.4Mb/d increase in production in just four months as they produced only 155Kb/d in September.

OPEC has been unsuccessful in its meetings on November 30th and December 1st to get an extension of the production cut by up to six months. We had expected them to delay the planned 2.0Mb/d increase in production in January for two quarters, which they hoped would lower the excess stock levels. World-wide crude and product inventories are now 475Mb over the five year average. If they agree to add 500Kb/d in February then crude should breach US$40 and fall to the US$32-36/b area during Q1/21. The next downside near-term support level is US$42.57/b. One will need to keep an eye on crude and product inventory levels to determine how low crude oil prices could fall during the coming months.

Energy and energy service stocks and now very overbought with the S&P Energy Bullish Percent Index at 92%, an outright sell signal for traders. We see significant near-term downside risk. 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. A breach of US$40/b will hit these stocks hard.

Continue to hold cash and remain patient for the next low risk BUY window which may now occur during Q1/21. Traders may want to harvest some of the great gains since the BUY signal triggered in March. OPEC+ production is too high and is rising when it should have been held flat with no cheating.  

Energy Stock Market: The S&P/TSX Energy Index now trades at 93.59. The S&P/TSX Energy Index started the year at 146 so it is down 36% year-to-date and there should be some tax loss activity shortly. The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low in late October) during Q1/21. A breach of 85 should start this downward trend. In the meantime consolidation continues in the Canadian energy market with players having assets in the same core areas seeing positive reasons for merging. Today’s big merger is an all stock deal.

I will be on BNN’s Commodities show with Andrew Bell next week Wednesday December 16th at 9:00AM MT. The discussion of that day’s EIA report, the outlook for energy commodity prices and stocks are the topics likely to be discussed.

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