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 2nd was moderately bullish for energy prices as US Commercial Crude Stocks fell 1.0Mb (the forecast was for a build of 1.5Mb). The most bearish metric was that Motor Gasoline Inventories rose 2.1Mb. Distillate Fuel Oil Inventories fell 2.4Mb as cold weather increased heating oil demand. Refinery Utilization was at 86.7%, down 1.0% from the prior weeks 87.7%. Two years ago, just prior to the pandemic hitting, the rate was 87.4%. US Crude Production fell 100Kb/d to 11.5Mb last week due to weather disruptions.
Total Demand fell 1.0Mb/d to 21.41Mb/d as Other Oil demand fell 669Kb/d. Motor Gasoline demand fell 278Kb/d to 8.23Mb/d. Distillate Fuel demand fell 85Kb/d to 4.67Mb/d. Jet Fuel Consumption rose by 188 Kb/d to 1.47Mb/d. Cushing Crude Inventories fell 1.2Mb to 30.5Mb.
Overall we would rate this week’s data as modestly positive for energy prices. The main focus of the markets remains, what will happen across Europe if Russia invades Ukraine. The invasion, if it does occur, is likely to commence in the next week or so when the ground is firm enough for tanks and other heavy weapons to maneuver.
EIA Weekly Natural Gas Data: Weekly withdrawals are rising as the cold weeks of winter are here. Last week’s data showed a large withdrawal of 219 Bcf (the largest so far this winter), lowering storage to 2.591 Tcf. The biggest US draws were in the South Central (81 Bcf), the Midwest (69 Bcf) and the East (60 Bcf). The largest US draw ever occurred in early January of 2018 at 359 Bcf and the largest draw in 2021 occurred in mid-February with a draw of 338 Bcf. We have now had two weeks of winter draws over 200 Bcf. The current freeze across the eastern part of the US should make for another big decline week coming up.
The five-year average for last week was a withdrawal of 178 Bcf and in 2021 was only 128 Bcf due to mild weather. Storage is now 1.0% below the five-year average of 2.616 Tcf. NYMEX today is US$5.38/mcf due to the colder weather. AECO spot today is trading at $4.85/mcf. February (being the key winter month for natural gas demand), we are likely to see large price moves to the upside on very cold days. Spikes over $6/mcf could occur.
After winter is over natural gas prices typically retreat and if the general stock market decline unfolds as we expect, a great buying window could develop at much lower levels for natural gas stocks in Q3/22.
Baker Hughes Rig Data: The data for the week ending January 28th showed the US rig count rose by six rigs (up three rigs the prior week) to 610 rigs last week. Of the total working last week, 495 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 59% from 384 rigs working a year ago. The US oil rig count is up 68% from 295 rigs last year at this time. The natural gas rig count is up a more modest 31% from last year’s 88 rigs, now at 115 rigs.
Canada had an increase of five rigs (up 21 rigs last week) as activity continued to recover from the holiday season to 217 rigs. Canadian activity is up 25% from 174 rigs last year. There was one more oil rig working last week and the count is now 135 oil rigs working, up from 98 last year. There are 82 rigs working on natural gas projects now, up four rigs from the prior week and up from 76 rigs working last year.
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 during 2H/22.
Conclusion:
Bearish pressure on crude prices:
1. Omicron Covid-19 caseloads have not gone away and deaths are rising for the unvaccinated. Deaths in the US have reached 887K (up a shocking 21K over the last week) and worldwide has reached 5.67M. The US faced a record 2,400 deaths during one day last week and may reach the horrendous level of over 1M dead this year.
2. Some European countries like Germany and France are not inclined to follow the US lead to aggressively sanction Russia if it invades eastern Ukraine. They have strong reciprocal economic interests with Russia. They may be willing to accede to Russia’s annexation of eastern Ukraine. An overall invasion to take over the whole country may be a different situation for them. Berlin has not sent any weapons to Ukraine compared to other countries. They have only sent medical support and helmets so far. If there is an invasion and Germany and France do not go along with President Biden’s move to sanction energy exports from Russia then crude prices will lose their war premium.
3. Russia is expanding its port at Vyborg (NW of St Petersburg and near Finland) with the help of global trading house Trafigura. This expansion of this little used facility could export 2Mb/d of crude oil in the future.
4. Saudi Arabia and Kuwait are planning to increase crude production from the neutral zone between the two countries. Production potential from the two fields (Khafji and Wafra fields) in the zone are estimated at 550Kb/d and currently produce around 300Kb/d. Saudi sources see potentially increasing supply from these fields by over 200Kb/d within months. Longer term upside is forecast at an increase of 300 Kb/d compared to current levels.
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.
2. OPEC increased production in December by only 166 Kb/d and not the authorized 400Kb/d. OPEC+ held their February meeting today and agreed to an increase of 400Kb/d in their official target for March 2022. They are unlikely to reach this level as they have in recent months failed to see this target increase met. Many of the members have not spent to keep fields maintained and some have significant infrastructure problems.
3. The Iran nuclear negotiations are working towards getting sanctions removed so that they can sell their oil around the world. Negotiations do not appear to be making progress, holding off a potential addition of over 1.5Mb/d if sanctions were removed. The timeline for negotiations to end is the end of this month.
4. Russia has threatened cyber attacks against the US if President Biden escalates pressure on Russia to unacceptable limits. Cyberwarfare against Ukraine’s infrastructure and military control systems may be the prelude to the invasion.
5. Ukraine’s President Zelensky on February 2nd said ‘this is not going to be a war of Ukraine and Russia. This is going to be a European war, a fully fledged war.’ Prior to this he has downplayed the situation. The US yesterday agreed to move 3K troops to Romania (a NATO country) to be ready for any future missions. This is getting closer to a precipice, with war more likely.
CONCLUSION:
The growing concern about an invasion/annexation of eastern Ukraine continues to spike crude oil prices higher. WTI rose to around US$90/b in recent days. WTI today is at US$87.60/b.
If there is no invasion or if a ‘minor incursion’ does not set up sanctions against Russian energy exports as the winter weather subsides, the price of WTI crude could retreat towards US$62-65/b fairly quickly. More downside is likely when the US and China economies stagnate and/or fall into recession. If the Russian invasion is for all of Ukraine (not very likely in our view), then the price of crude could spike up over US$100/b. How long it stays up is unknown but the repercussions would likely increase the potential for a severe world-wide recession. A severe recession would kill demand for energy and prices would collapse as they did in 2008-2009 and 2020.
Energy Stock Market: The S&P/TSX Energy Index currently trades at 199 (up 9 points over the last week as the war event window closes in).
I will be presenting my annual keynote energy presentation at 7:15PM PT Friday. The two day World Outlook Financial Conference (WOFC) is on February 4 & 5. Michael Campbell will be doing a Q & A with me on Friday evening as part of this virtual event. Access passes are still available. Please go to their website to get your tickets to this excellent and informative event.
Our next quarterly SER webinar will be held on Thursday February 24th at 7PM MT. If you want to join/register for this event you will need to become a subscriber to our full product before the event. Go to https://bit.ly/34iKcRt to subscribe.
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