Each week Josef Schachter gives 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 30 energy, energy service and pipeline & infrastructure companies with regular updates. We also hold quarterly webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more. 

EIA Weekly Oil Data: The EIA data of Wednesday December 15th was initially seen as positive for crude prices. US Commercial Crude Stocks fell 4.6Mb (forecast a decline of 2.1Mb). A key component was a rise in Exports of 1.375Mb/d or 9.63Mb on the week. If not for this large export increase there would have been a build of over 5Mb. As a result of these events crude has now fallen below US$70/b. Refinery Utilization was unchanged at 89.8% from the prior week. Total Motor Gasoline Inventories fell 0.7Mb while Distillate volumes fell 2.9Mb. US Crude Production was unchanged at 11.7Mb/d. Total Demand rose by 3.35Mb/d as Distillate heating oil demand rose by 1.32Mb/d due to the cold weather. Gasoline consumption rose by 509Kb/d to 9.47Mb/d which is just above the 9.41Mb/d consumed in 2019 at this time. Jet Fuel Consumption rose 387Kb/d to 1.61Mb/d versus 2.06Mb/d consumed in 2019. Cushing Inventories rose 1.3Mb to 32.2Mb/d.

OPEC December Monthly: On December 13th OPEC released their December Monthly Forecast Report (November data). As we have seen in the past few months they have not added the 400Kb/d in their stated monthly production increase. In October, they only added 213Kb/d and in November only 285Kb/d. Some countries like Angola continue to have underinvested in their industry and saw declines of 38Kb/d in November.

The biggest increase came from Saudi Arabia at 101Kb/d, followed by Iraq at 91Kb/d and then by Nigeria at 85Kb/d. Surprisingly Kuwait only added 29Kb/d, even though they could have easily added 156Kb/d more, just to get back to 2019 pre-pandemic levels. Sanctioned Iran saw production fall by 9Kb/d to 2.47Mb/d and Venezuela saw a modest rise of 15Kb/d to 625Kb/d (down from 796Kb/d in 2019).  OPEC sees 2021 consumption at 96.6Mb/d (Q4/21 at 99.5Mb/d). For 2022 they see world demand at 100.8Mb/d up 4.15Mb/d with Q4/22 at 102.63Mb/d. If there is no recession in the US and/or China they might be right but we see slowing economies in both areas. Our 2022 world demand forecast is for 97-98Mb/d or 3-4Mb/d less than OPEC’s positive economic view. The health of world economic activity is the key divergence between energy bull and near term bears like us.

EIA Weekly Natural Gas Data: Weekly withdrawals started three weeks ago as winter demand picked up. Last week, there was a withdrawal of 59 Bcf, lowering storage to 3.505Tcf. The five year average for last week was a withdrawal of 87 Bcf. Storage on a five-year basis was 3.595Tcf so storage is only 2.5% below the five-year average. NYMEX today is US$3.88/mcf down from the high in early October of US$6.47/mcf. AECO spot is at $3.48/mcf, down $3/mcf from 2021 highs. As to be expected, natural gas stocks have retreated from their 2021 highs. With the two key months for natural gas demand ahead of us (January and February) we should still expect large price moves to the upside on very cold days. Spikes over $6/mcf should be seen on both sides of the border when weekly withdrawals over 200 Bcf on a cold week occur. After winter is over natural gas prices will retreat and if the general stock market decline unfolds as we expect, then a great buying window could develop at much lower levels for natural gas stocks in Q2/22.

Baker Hughes Rig Data: The data for the week ending December 10th showed the US rig count rose seven rigs (unchanged the prior week) to 576 rigs last week. Of the total working last week, 471 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 73% from 323 rigs working a year ago. The US oil rig count is up 83% from 258 rigs last year at this time. The natural gas rig count is up a more modest 33% from last year’s 79 rigs, now at 105 rigs. The Permian saw an increase of three rigs last week (five rigs in the prior week) to 286 rigs and was up 70% from 168 rigs last year.The Permian is the hottest basin followed by the Haynesville with 46 rigs working.

Canada had a decline of three rigs (after a rise of nine rigs in the prior week) to 177 rigs. Canadian activity is now up 59% from 111 rigs last year. There were three less oil rigs working last week and the count is now 110 oil rigs working, up from 52 last year. There are 67 rigs working on natural gas projects now, up from 59 last year.

The material increase in rig activity over a year ago in both the US and Canada should continue to translate into rising liquids over the coming months, especially with the DUC count (drilled but uncompleted well count) at very low levels. The data from many companies on their plans for 2022 support this rising production profile expectation. We expect to see US crude oil production reaching 12.0Mb/d during winter 2021-2022. Companies are taking advantage of attractive drilling and completion costs and want to lock up experienced rigs and crews as staffing issues are getting tougher for the sector.

Conclusion:

Bearish pressure on crude prices:

1. The US is slowing its bond purchases which will remove 6%+ of monetary stimulus from the economy when completed in March 2022. The FOMC meeting (which ends today) is expected to announce a speed up of the tapering of bond purchases. They may also show their intent to increase interest rates starting in 2022. Some forecasters expect three increases in rates in 2022 and three in 2023, so that the terminal rate rises to 2.3% from 0.25% currently. Note, a 1% rise in interest rates adds US$300B of interest costs and with deficits continuing for many years into the future, this will add to deficits and depress the US economy. Recent economic data in the US is slowing. Retail Sales out Wednesday showed a rise of 0.3% down from 1.8% in the previous month against an expected rise of 0.8%. The PPI rose to a 40 year record high of 9.6% on Tuesday. The PPI for finished goods rose to an all time high of 13.6% exceeding the previous high of 12.9% seen in October 1980, just before the Fed Chairman of that time Paul Volcker jacked up interest rates quickly to stem the rampant inflation and caused a severe recession. The current Fed Chairman is boxed in and may be forced to reverse his accommodating stance. How he shifts and how fast he shifts will determine the vigor of the US economy in 2022.
2. China is seeing slower growth as well due to a prolonged property slump and sluggish consumer spending. Retail Sales only rose 3.9% in November (year over year) down from 4.9% (year over year) in October and below the annual inflation rate.
3. Covid caseloads are growing around the world with Omicron now exceeding Delta in many countries. This new variant is impacting both the vaccinated and unvaccinated with the unvaxxed filling the ICU wards. Concern is rising that in the next one to two months hospitals will need to triage again. In the US, the death rate is over 800K deaths. Worldwide, the death count is now 5.31M. Single case records are rising in Europe particularly in Denmark, Norway and Switzerland.
4. Energy demand is under pressure as high prices for most food, rent, taxes, child care, health expenses, auto costs and other daily necessities make spending decisions tougher for consumers. This gouge in prices will surely impact consumers’ buying behavior in the coming months. The spending pie of consumers is shrinking and some spending habits of the past will have to be dropped. Demand destruction is on the way.
5. The International Energy Agency (IEA) in a report released this week sees a surge in Covid-19 cases denting global demand for oil at the same time as they see supply exceeding demand by 1.7Mb/d starting in Q1/22. This view is in stark contrast to OPEC’s and consistent with ours.

Bullish pressure on crude prices:

1. While approving an increase of 400,000 b/d of new production for January 2022, OPEC has not achieved their target once again as seen from the December Monthly Report released earlier this week.
2. The Iran deal is not seeing progress as the Iranians continue to want removal of sanctions to sell oil but do not want to slow down their nuclear weapons program or allow intrusive UN inspections. The bulls are rejoicing that the 1-2Mb/d of new Iranian oil that could come on is now more unlikely.
3. If Russia invades Ukraine, sanctions will be added to pressure Russia to desist. Russia may face OECD blockages of sales of crude oil. This would be positive for China but would hurt Europe which would need to find other more expensive suppliers.
4. JP Morgan and other US investment banks see world demand exceeding pre-pandemic levels in Q2/22. Their fearless forecasts see US$80/b in early 2022 and US$100/b in 2H/22.

CONCLUSION: 

WTI fell today to an intra-day low (so far) of US$69.39/b and is now hovering just below US$70/b. From the late October high of US$85.41/b WTI crude has fallen 18%. Today’s Federal Reserve conference call will be critical to the go forward health of the US economy and for crude prices. Tightening of the economy is the antithesis for energy bulls. With our concern about the strength of the US and China economies (the largest two in the world) we still see prices having US$15-20/b of speculative value which should disappear as demand weakens once winter is over. Leveraged speculative longs in crude oil futures are vulnerable to nasty margin calls and this should add momentum to the recent downside pressure. In the next few weeks the price of crude should retreat to US$62-65/b and then bounce around for a while. Our target for WTI in Q2/22 once winter demand is over is US$48-54/b. This should set up an important low before our key signals should turn bullish again. 

Energy Stock Market: The S&P/TSX Energy Index currently trades at 152, down 12 points or over 7% from last week. From the start of the crude price decline, the Index has fallen from 172 or down by 12%. As crude prices retreat in the coming weeks we see downside for this Index to the 95-105 level during Q2/22, implying severe downside. Oil stocks are the most vulnerable as are any companies in the sector with over-leveraged balance sheets.

Our December Joint Monthly Report comes out tomorrow Thursday December 16th. We go over the history of bear markets and why we see us just entering another one. The magnitude of the declines are discussed in comparison to other overvalued markets since 1900 and we project potential downside targets for the overall stock markets and the energy sector during this market decline/plunge. A key section is our 2022 Fearless Forecasts.

Once this bear phase exhausts itself, a lengthy and powerful new Bull Market will arise and energy will be a prime beneficiary. We intend to send out multiple Action Alert BUY ideas once the next low risk entry point arrives.

Our next quarterly webinar will be held on Thursday February 24th at 7PM MT.

If you would like to access this upcoming 2022 Forecast Report and all previous reports and the webinar archives, go to https://bit.ly/34iKcRt to subscribe. 

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