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: Overall, the EIA data of Wednesday February 16th was moderately bearish for energy prices as US Commercial Crude Stocks rose 1.1 Mb versus the forecast of a decline of 900Kb. The main reason for this difference is that Net Imports rose 230Kb or by 1.6Mb on the week. Motor Gasoline Inventories fell 1.3Mb while Distillate Fuel Oil Inventories fell 1.6Mb. Refinery Utilization fell 2.9 points to 85.3% from 88.2% a week ago and this slower refinery activity lowered inventories of products. US Crude Production remained steady at 11.6Mb.
Total Demand rose 860Kb/d to 22.74Mb/d as Other Oils demand rose by 1.019Mb to 5.80Mb. Motor Gasoline demand fell 556Kb/d to 8.57Mb/d. Jet Fuel Consumption rose 102 Kb/d to 1.51Mb/d. Cushing Crude Inventories fell 1.9Mb to 25.8Mb.
EIA Weekly Natural Gas Data: Weekly withdrawals are rising as the cold weeks of winter are here. Last week’s data showed a withdrawal of 222 Bcf, lowering storage to 2.101 Tcf. The biggest US draws were in the South Central (74 Bcf), the Midwest (64 Bcf) and the East (56 Bcf). While a large draw again, it is by no means one for the record books. The largest US draw occurred in early January 2018 at 359 Bcf and the largest draw last year occurred in mid-February with a draw of 338 Bcf. We have now had four weeks of winter draws over 200 Bcf.
The five-year average for last week was a withdrawal of 177 Bcf and in 2021 was 171 Bcf due to mild weather. Storage is now 9.3% below the five-year average of 2.316 Tcf. Today NYMEX is US$4.52/mcf due to an expected colder spell in the coming days. AECO is trading at $3.59/mcf due to the milder weather in western Canada. February (being the key winter month for natural gas demand), is still likely to see price moves to the upside on very cold days. After winter is over natural gas prices typically retreat and if the general stock market decline unfolds as we expect, a great buying window should develop at much lower levels for natural gas stocks in Q3/22.
OPEC January Monthly: On February 10th OPEC released their February 2022 Monthly Forecast Report (January data). As repeated in the past few months they have not added the 400Kb/d, their stated monthly production increase. In January only 64Kb/d was added. Production rose to 27.981Mb/d but remains below the 29.368Mb/d produced in December 2019 before the pandemic hit. So they still have nearly 1.4Mb/d to bring on just to get back to pre-pandemic levels. Moral suasion by the US, China and India does not seem to be influencing OPEC’s production decisions. OPEC may be watching events in Europe and may be standing by to add more production if energy export sanctions are implemented against Russia upon any invasion of Ukraine. Saudi Arabia and the UAE alone could add 2.5Mb/d if they wanted to.
The biggest increase came from Nigeria at 81Kb/d, followed by Saudi Arabia at 54Kb/d and then by UAE at 44Kb/d. Surprisingly Kuwait only added 27Kb/d to 2.58Mb/d, even though they could have added 130Kb/d more just to get back to 2019 pre-pandemic levels of 2.71Mb/d. Sanctioned Iran saw production rise by 21Kb/d to 2.503Mb/d. Venezuela saw a decline of 51K b/d as they could not get sufficient diluent this month from Iran, China or Russia. OPEC sees 2022 consumption at 100.8Mb/d, up 4.15Mb/d from the 96.63Mb/d consumed in 2021.
Baker Hughes Rig Data: The data for the week ending February 11th showed the US rig count rose by a significant 22 rigs (up three rigs the prior week) to 635 rigs last week. Of the total rigs working last week, 516 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 60% from 397 rigs working a year ago. The US oil rig count is up 69% from 306 rigs last year at this time. The natural gas rig count is up a more modest 31% from last year’s 90 rigs, now at 118 rigs. Texas had the largest increase in rigs with 13 added last week and the total rising to 300 rigs. The Permian (Texas and New Mexico) added seven rigs taking the total rigs working in this lucrative basin to 301 rigs.
Canada had an increase of one rig (up one rig last week as well) to 219 rigs. Canadian activity is up 24% from 176 rigs last year. There was one more oil rig working last week and the count is now 137 oil rigs working, up from 101 last year. There are 82 rigs working on natural gas projects now, up from 75 rigs working last year. Staffing of rigs in Canada is becoming a problematic issue and adding significant more rigs in the near term is unlikely. While day rates are rising, so are costs and margin improvements so far are not what one should expect as the industry activity picks up.
The overall increase in rig activity from a year ago in both the US and Canada should translate into rising liquids and natural gas volumes over the coming months. The data from many companies’ plans for 2022 support this rising production profile expectation. We expect to see US crude oil production reaching 12.0Mb/d in the coming months. Companies are taking advantage of attractive drilling and completion costs and want to lock up experienced rigs, frack units and their crews as staffing issues are difficult for the sector. We expect US production to reach 12.5Mb/d before the end of this year.
Conclusion:
Bearish pressure on crude prices:
1. The Omicron pandemic is far from over but is losing its impact on individuals’ reticence to move about. Usage of energy as mandates are loosened and vaccination rates have risen is increasing especially for Jet Fuel. Covid-19 deaths are rising for the unvaccinated. Deaths in the US have reached 922K (up 16K over the last week) and worldwide has reached 5.83M.
2. The window for Russia to invade Ukraine is closing. If they want to move in they need to do so in the next two-three weeks or they will miss the window. Heading into mid-March the ground of attack will have thawed out and an invasion becomes unlikely. The window for exercises ends on February 20th so around this date is the window for any military action. Some NATO sources now see Russia having 180K troops in position to invade and that Kiev could be a key target.
A few days ago Russia acknowledged that it was willing to go the diplomatic route. Was this part of the poker game or a sign of good faith? They say that they have removed some troops from the front lines, however NATO does not see sufficient evidence of this but rather sees more troops being added across the invasion routes. Is this a removal of troops needing maintenance on their equipment and maybe some R&R, before being brought back to the front lines? Russia has staging areas deeper in Russia and Belarus as well as forward bases close to Ukraine’s border. In the meantime Russian hackers have increased their cyberwarfare attacks in Ukraine. Ukraine’s military (command and control) services and two large banks were targeted in recent days.
3. The Iran nuclear negotiations are working towards sealing a deal and having sanctions removed so that they can sell their oil around the world. Negotiations appear to be making a breakthrough with a timeline of the end of February. President Biden may be giving away more to Iran in order to have sanctioned Iranian oil available if Russia invades Ukraine. If Iran receives sanction relief it could increase production by over 1.5Mb/d almost immediately. Iran also has over 200Mb in storage around the world near its buyers, so those volumes could be added to supplies quite quickly.
Bullish pressure on crude prices:
1. Russia provides over 26% of western Europe’s crude oil needs and around 41% of its natural gas needs. Any sanctions on these sales would not be easily met by other producers. This effectively is a two-edged sword. The US is sending over more cargoes of LNG and has asked Qatar to do the same. While the Nord Stream 1 pipeline is operational with gas flowing into Germany, the second pipeline is part of the potential sanction regime by President Biden. Germany may accede to this but has not done so publicly as they desperately need the natural gas. Current levels of imports into EU countries may stay at current levels but increases (especially of Nord Stream 2) will not be permitted.
2. Russia has threatened increased cyber attacks against Ukraine and NATO countries (including the US) if President Biden escalates pressure on Russia upon any invasion activity. Cyberwarfare against Ukraine’s infrastructure and military control systems has already started. The US and many other countries have ordered their citizens to leave the country and have closed their embassies in the capital Kiev moving some personnel to Lviv in western Ukraine near the Polish border.
CONCLUSION:
The concern about an imminent invasion of all of Ukraine continues to spike crude oil prices higher. WTI rose to over US$96/b this week. WTI today is at US$94.82/b. If Russia just moves on eastern Ukraine then crude could spike to nearly US$120/b. If Russia plans on taking over all of Ukraine and places its military on the borders of Poland, the Baltic countries and Romania, facing off against NATO forces, then crude oil prices could spike even higher. We do not see Russia planning to go that far. It may want to gather the Russian speaking people in eastern Ukraine into its orbit and have a land corridor to Crimea, but anything more would invite insurgency warfare in western Ukraine.
If there is no invasion in the next short while and no sanctions against Russian energy exports occur, then the price of WTI crude should retreat quickly towards US$62-65/b as the war premium is removed and weak economic data around the world hint at recession this year. If sanctions against Iran oil sales are removed by an agreement during March, then crude oil prices would head down quite fast.
Energy Stock Market: The S&P/TSX Energy Index currently trades at 204 (up eight points over the last week) as the war event window closes in.
Our February SER Monthly Report comes out next Friday and covers the latest signs of internal deterioration in the general stock market and increased weakness in key world economies. Significant stock market downside is ahead and investors should be defensively prepared. The MEME stocks have been massacred and a few of the FAANG and related stocks have been severely eroded in value (Meta-FB, Netflix, Roblox, Shopify, Viacom and Zoom are just some of the recent sharp decliners) Remember how you felt in the later stages of bear markets as were seen in 1987, 2000, 2008, and 2020? Prepare yourselves for this impairment risk to your assets. Last week alone we had two down days over 500 points in the Dow Jones Industrials. Much greater daily declines are likely in the weeks ahead.
Our February SER report covers this painful market situation. The Q4/21 and year end results for 2021 are starting to be released for the 30 companies that we cover. In next week’s issue we cover those companies that have reported by the close on Friday February 18th. In the March issues we will cover the rest of the regular reporting run.
Our Q1/22 quarterly SER webinar will be held on Thursday February 24th at 7PM MT. If you want to join/register for this event or access our Interim Report or the upcoming SER Monthly become a subscriber. Go to https://bit.ly/34iKcRt to subscribe.
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