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 February 3rd were very bearish. For now investors are focusing on the Saudi cut of 1.0Mb/d for February and March and the fearless forecasts of some prognosticators of rising energy demand in the coming months as vaccines are rolled out. This ignoring of the current falling demand data will catch up to the current bullish mania. The Gamestop market forces have succeeded in pushing up silver prices and some now see crude as the next commodity that the 7M retail Reddit horde can manipulate higher.
Commercial Inventories fell by 1.0Mb on the week right on the forecast. Motor Gasoline Inventories rose by 4.5Mb on the week as Refinery Utilization rose 0.6% to 82.3% from 81.7% in the prior week. While an increase it is below last year’s level of 87.4%. Crude Oil Stocks are now 40.7Mb or 9.3% above last year’s level of 435.0Mb. US Domestic Crude Production remained at 10.9Mb. Compared to last year this is down 2.0Mb/d from last year’s 12.9Mb/d.
The important part of the report this week was on the consumption side. Total Product Consumption fell 1.15Mb/d to 18.53Mb/d. Finished Motor Gasoline Consumption fell by 63Kb/d to 7.77Mb/d while Jet Fuel consumption fell by a whopping 490Kb/d to 750Kb/d. Overall Product demand is now down 11% from last year, Gasoline demand is down 13% and Jet Fuel by 55%. Cushing Oil Inventories fell by 1.5Mb. Inventories at Cushing are now at 48.7Mb down from 50.2Mb last week but are up from 36.7Mb a year ago.
Baker Hughes Rig Data: The data for the week ended January 29th showed increases in the US and Canadian rig counts. In the US rigs rose by six (up five rigs in the prior week) to 384 rigs working, but remains down 51% from 790 rigs working a year ago. The US oil rig count rose by six (up two rigs the prior week) to 295 rigs but is down 56% from 675 rigs working last year. The Permian saw an increase of four rigs to 192 rigs working and remains 53% below last year’s level of 406 rigs working. Over US$45/b for WTI seems to be a price point where producers see economic returns from drilling. Yet, so far this increase in drilling activity has not seen a corresponding increase in US domestic production.
Canada saw an increase of two rigs last week with 174 rigs working. However, it is 30% lower than the 247 rigs active last year. The rig count for oil has risen to 98 rigs (up two rigs last week) but is down 38% from 157 rigs working last year. The natural gas rig count held steady at 76 rigs active but is down from 90 rigs working at this time last year.
Conclusion: WTI today is at US$55.82/b, up on euphoria of the Saudi cut, very cold winter weather and the Reddit rumours. We believe that the top in crude prices for Q1/21 is being made now and that there is US$10-15/b of downside risk as markets begin to reflect current fundamentals and not the bullish chat room mania. The Reddit room gang see Commercials (refiners, petrochemical companies and energy companies etc.) short 588Mb at the end of last week and may want to squeeze them. In the next few weeks we expect to see WTI crude breaching US$50/b and moving into the mid-US$40’s as rational behavior returns.
WTI Crude Oil:
The reason for our downside crude oil price view is:
- Saudi Arabia and Russia are fighting for market share in the only growth market so far in 2021, that of China. The Saudi cut of 1.0Mb/d started on February 1st and lasts for only two months. Russia’s increase this month now puts them ahead of the Saudis in market share in China.
- Iran is increasing production and is moving crude oil and products via intermediaries as it sees the US and Iran moving towards a new nuclear accord deal that will remove or reduce sanctions. Iran may have as much as 2.0Mb/d of shut-in production that could be brought on quickly. In December 2020 they produced 2.0Mb/d so they could double production if a deal is concluded and sanctions are removed.
- Reuters yesterday commented that demand forecasts are again being lowered for 2021. The recent decrease was of an additional loss of 300,000 b/d due to the pandemic drag. Once winter is over world wide demand falls by 2.0-2.5Mb/d of which over 1.0Mb/d is from the US.
- Covid mutations from the UK and South Africa are worrying medical professionals as they are transmitted faster and may in the case of the South African version, not be handled effectively by current vaccines. Dr. Fauci is calling on vaccine producers to manufacture versions that are specifically tailored to the emerging variants. Some concerned epidemiologists fear that producing these new versions could take into the end of 2021. Today the press commented that Public Health England said the E484K mutation could be much more resistant to the current range of vaccines. These mutations are believed to bind easier to human cells and evade the antibodies. Other concerns are that the South Africa variant may be able to reinfect people who have contracted Covid-19 and recovered.
- Death rates in the US are picking up and now have exceeded 443K (425K last week) with the total caseload over 26.3M. Current government forecasts are for 600-660K deaths before herd immunity is achieved, possibly by September. January had the highest death rate yet at over 95,000 fatalities. If the new virus mutations take off, then this number could be exceeded in March or April.
Technically the near-term support level for WTI crude is US$50/b and then major support is at US46.15/b. Energy and energy service stocks are overbought and have rolled over. We are clearly bearish 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 Q4/20 should start being released shortly and they will for the most part not be good. Imperial OIl was the first to report and they took a severe impairment. Depending upon the pressure from the above issues we may see crude prices range bound in February and in March, crash through US$46/b if demand remains weak and the world wide crude inventory build commences once winter is over.
We now have a SELL signal in place. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of which stocks and at what prices we think ideas could be harvested. The next few months could see significant downside for the energy sector.
Energy Stock Market: The S&P/TSX Energy Index now trades at 96.55 down nearly 7% from the recent high. Our Q1/21 target of 100-105 was reached when the Index reached a high at 103.60. The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low of late October 2020) during March/April. A breach of 89.77 (the low of last week) should initiate the next sharp decline.
Our SER February Interim Report (out February 4th) focused on our SELL signal and the personal sell transactions that we did on January 22nd, after the five day notice period to subscribers and the removal of 14 ideas from our BUY List (going from 25 to 11 ideas) on January 14th. The major decline we have been forecasting is clearly underway and may last into late March or April. Downside from here remains substantial with the Index downside in the 30-50% range.
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