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.
We are in a dire moment in history. Russia has invaded Ukraine and the war premium for crude has risen sharply. WTI today rose over US$100/b. How high crude prices go in the near term depends upon the severity of sanctions that will be imposed in the coming days. The key is what will Germany accept as they are the largest importer of energy from Russia. If energy, metals and grain exports by Russia are impacted by sanctions then all three of these product groups will have further significant upside price moves. Crude in this situation could rise over US$120/b in the short term. If only sanctions on Putin and those close to him are implemented and Russia is removed from the SWIFT financial clearing system, then crude will not skyrocket much higher. Today’s sanctions relate to use of outside currencies to purchase Russian goods. Also exports like technology are now not allowed which should hurt the Russian economy. They did not remove them from the SWIFT financial system as Europe still needs to pay for imports from Russia. These increased sanctions will be challenging for Russia but not severe enough to change Putin’s naked aggression. The next two weeks are the window of uncertainty as we see what Russia’s plans for Ukraine and its neighbors are. While these sanctions are tough, China has agreed to support Russia through these more difficult economic times.
EIA Weekly Oil Data: The EIA data of Thursday February 24th was moderately bearish for energy prices but the price of WTI and Brent crude are reacting to the Russian invasion of Ukraine and the possibility of energy export sanctions against Russia. Russia provides Europe with 25% of its crude and products and over 40% of its natural gas needs.
US Commercial Crude Stocks rose 4.5Mb versus the forecast of a rise of only 0.4Mb. The main reason for this difference is that Net Imports rose 623Kb or by 4.3Mb on the week. Motor Gasoline Inventories fell 0.6Mb while Distillate Fuel Oil Inventories fell 0.6Mb. Refinery Utilization rose 2.1 points to 87.4% from 85.3% a week ago. US Crude Production remained steady at 11.6Mb.
Total Demand fell 1.26Mb/d to 21.5Mb/d as Other Oils demand fell by 874Kb/d to 4.93Mb. Motor Gasoline rose 87Kb/d to 8.66Mb/d. Jet Fuel Consumption fell 30Kb/d to 1.48Mb/d. Cushing Crude Inventories fell 2.0Mb to 23.8Mb.
EIA Weekly Natural Gas Data: Weekly withdrawals remain high as winter continues. Last week’s data showed a withdrawal of 129 Bcf, lowering storage to 1.782 Tcf. The biggest US draws were in the Midwest (46 Bcf) and the East (39 Bcf) and in South Central (34 Bcf).
The five-year average for last week was a withdrawal of 163 Bcf and in 2021 was a whopping 338 Bcf due to the severe weather that week. Storage is now 10.7% below the five-year average of 1.996 Tcf. Today NYMEX is US$4.70/mcf due to an expected colder spell in the coming days. AECO is trading at $4.46/mcf. 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.
Baker Hughes Rig Data: The data for the week ending February 18th showed the US rig count rose by 10 rigs (up 22 rigs in the prior week) to 645 rigs last week. Of the total rigs working last week, 520 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 71% from 305 rigs last year at this time. The natural gas rig count is up a more modest 36% from last year’s 91 rigs, now at 124 rigs. Texas had the largest increase in rigs with 8 added last week and the total rising to 308 rigs. The Permian (Texas and New Mexico) added five rigs taking the total rigs working in this lucrative basin to 306 rigs.
Canada had an increase of one rig (up one rig last week as well) to 220 rigs. Canadian activity is up 28% from 176 rigs last year. There was a two rigs decline for oil rigs and the count is now 135 oil rigs working up from 100 last year. There are 85 rigs working on natural gas projects now, up from 72 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 therefore margin improvements are not what one should expect as the industry activity picks up. The current view is that margins should rise after spring breakup.
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. The EIA forecasts US production reaching 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 as individuals have been vaccinated and reopenings occur with no mask requirements. Covid-19 deaths are rising for the unvaccinated. Deaths in the US have reached 936K (up 14K over the last week) and worldwide has reached 5.89M.
2. 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 next week. President Biden may be giving away more concessions to Iran in order to have sanctioned Iranian oil available if Russia is precluded from sales to Europe and the US. If a deal is concluded in the next week or so and Iran receives sanction relief, Iran could increase production by over 1.5Mb/d 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 has invaded Ukraine and this is likely going to continue for a few weeks to complete their objectives. The US sees Russia having 200K troops in their invasion force. Cyber and air attacks since the invasion launch on Wednesday February 23rd have been happening throughout the country. The land battle has started with the invasion forces landing at the Black Sea ports and land forces coming in from the east and the north.
Russia provides over 26% of western Europe’s crude oil and product needs and over 40% 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 and other producers to do the same. What new sanctions are agreed to with European countries will be key to how high crude prices go in the near term. If Russia is not allowed to export to Europe, then the shortage will be difficult to meet even with Iran being allowed to sell again to the world. Germany is the key to what occurs as they are the most reliant on Russia. WTI crude has lifted to over US$100/b today and may go up much more in the short term if Russia loses access to western markets. In the end though Russia will find a buyer for its energy volumes from China, so the issue will be logistics to make this happen.
The cost of this war is significant for Russia but the rise in prices of energy, metals and grains has been so large that this may be a financial boon for Russia. Crazy!
CONCLUSION:
The invasion of Ukraine has spiked up crude prices. WTI rose today to over US$100/b and has reversed to $92 with the sanction announcement. If financial access to the ‘SWIFT’ clearing system is added later then crude could spike upward again. If Russia is precluded from selling energy and other products to Europe then crude could spike to over US$120/b in the near term. So far this has not happened. Today’s sanctions will hurt but will not change Russia’s course of action.
In the end the higher energy prices will knock down demand and we are likely to see recessions around the world later this year. If this unfolds then demand could fall 3-5Mb/d and the price of crude will fall from its current war premium, elevated level.
Energy Stock Market: The stock markets around the world are getting hit hard as the concerns about the extent of the war and its implications spook markets. The Dow, the S&P, the Nasdaq, the TSX and other world exchanges (Germany has been hit by 5% earlier today) have broken support levels and look to have significant further downside. The bubble has burst already for the MEME and FAANG US stocks and now the overall market bubble has been pricked. Today even with all the bullish price action in crude the S&P/TSX Energy Index is down on the day and currently trades at 197 (down seven points from last week).
Our February SER Monthly Report comes out tomorrow and covers the latest signs of 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. Some of you may remember the market upheaval of other bear markets like in 1987, 2000, 2008, and 2020? We hope you have prepared yourselves for this impairment risk to your assets. We have had six significant down days for the Dow Jones Industrials this month and 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 four 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 tonight 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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