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 9th was moderately bearish for energy prices as US Commercial Crude Stocks fell 4.8Mb (the forecast was for a build of 0.4Mb). The main reason for this difference is that Net Imports fell 1.42Mb/d or 9.94MB on the week. One large component of this difference was that Exports rose 724Kb/d or 5.1Mb on the week lowering US Commercial inventories. Motor Gasoline Inventories fell 1.6Mb while Distillate Fuel Oil Inventories fell 0.9Mb. Refinery Utilization was at 88.2%, up 1.5% from the prior week’s 86.7%. US Crude Production rose 100Kb/d to 11.6Mb as production recovered from last week’s weather disruptions.
Total Demand rose 470Kb/d to 21.88Mb/d as Motor Gasoline demand rose 900Kb/d to 9.13Mb/d. Distillate Fuel demand fell 373Kb/d to 4.30Mb/d. Jet Fuel Consumption fell by 62 Kb/d to 1.41Mb/d. Cushing Crude Inventories fell 2.8Mb to 27.7Mb.
Overall we would rate this week’s data as modestly negative for energy prices. The main focus of the markets remains potential supply disruptions in Europe if Russia invades Ukraine after the Beijing Winter Olympics end on February 20th. Russia does not want to disturb the growing political and economic alliance with China. The invasion, if it does occur, is likely to commence when the ground is still firm enough for tanks and other heavy weapons to maneuver but after the Olympics are over.
EIA Weekly Natural Gas Data: Weekly withdrawals are rising as the on and off cold weeks of winter are here. Last week’s data showed a large withdrawal of 268 Bcf (the largest so far this winter), lowering storage to 2.323 Tcf. The biggest US draws were in the South Central (101 Bcf), the Midwest (85 Bcf) and the East (68 Bcf). By contrast, 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 three weeks of winter draws over 200 Bcf.
The five-year average for last week was a withdrawal of 187 Bcf and in 2021 was 192 Bcf due to mild weather. Storage is now 5.8% below the five-year average of 2.466 Tcf. Today NYMEX is US$3.99/mcf due to the recent milder weather that may last for a week or so. AECO spot today is trading at $4.15/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. Spikes over $6/mcf could occur in the remaining weeks of this month.
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 4th showed the US rig count rose by three rigs (up six rigs the prior week) to 613 rigs last week. Of the total working last week, 497 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 56% from 392 rigs working a year ago. The US oil rig count is up 66% from 299 rigs last year at this time. The natural gas rig count is up a more modest 26% from last year’s 92 rigs, now at 116 rigs.
Canada had an increase of one rig (up five rigs last week) to 218 rigs. Canadian activity is up 27% from 171 rigs last year. There was one more oil rig working last week and the count is now 136 oil rigs working, up from 95 last year. There are 82 rigs working on natural gas projects now, 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.
Bearish pressure on crude prices:
- Omicron Covid-19 caseloads have not gone away and deaths are rising for the unvaccinated. Deaths in the US have reached 906K (up 19K over the last week) and worldwide has reached 5.75M. It seems we are getting used to Covid and are now seeing many areas of the world reopening once hospital bed usage declines. Political pressure by anti-vaxxers and other protestors are calling for countries to reopen. Those that do not are facing trucker blockades as we see in Canada. The Ambassador Bridge at Windsor crossing to Detroit is blocked and is an economic problem for Canada as 25% of our trade with the US crosses this bridge. The longer the blockade lasts the more disruptive this will be to the key Provinces of Ontario and Quebec.
- Some European countries like Germany and France are not inclined to follow the US’s lead to aggressively sanction Russia if it invades eastern Ukraine. They have strong reciprocal economic interests with Russia. 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. The US has sent troops to neighboring Poland and Romania in case the Russian invasion spreads further than just Ukraine and also to aid in the resettlement of large numbers of refugees from Ukraine. The US fears that there may be up to 5M refugees looking for new homes in western Europe if Russia grabs all of Ukraine. We see this as a low probability event.
- The Iran nuclear negotiations are working towards getting sanctions removed so that they can sell their oil around the world. Negotiations appear to be making a breakthrough with a target timeline of the end of February now that President Biden has agreed to full economic sanctions being removed if a deal is reached. If so Iran could increase production by over 1.5Mb/d almost immediately. In addition, Iran has over 200Mb in storage around the world near its buyers, so those volumes could also alleviate the current tight market. The US seems to be moving forward with this even though Iran is close to having a nuclear weapon. They are going this way as they see no way to stop a nuclear Iran. Having Iran abide by UN inspections appears to be acceptable to the US. The US sees this as Iran alleviating the tight oil market with the world gaining significant new oil supplies.
Bullish pressure on crude prices:
- 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. The Nord Stream 1 pipeline is operational and with gas flowing into Germany. The second pipeline is part of the potential sanction regime by President Biden who will not let this line open if there is an invasion. Germany may accede to this but has not done so publicly as they desperately need the natural gas.
- OPEC increased production in December by only 166 Kb/d and not the authorized 400Kb/d. OPEC+ held their February meeting and agreed to an increase of 400Kb/d in their official target for March 2022. Once again we see this as an unlikely target to reach as they have failed to reach this target in prior months. Many of the members have not spent to keep fields maintained and some have significant infrastructure problems.
- Russia has threatened increased cyber attacks against the US if President Biden escalates pressure on Russia. Cyberwarfare against Ukraine’s infrastructure and military control systems may be the prelude to the invasion. Such action has already started.
- Ukraine’s President Zelensky on February 2nd said “this is not going to be a war between Ukraine and Russia. This is going to be a European war, a fully fledged war.” Prior to this he has downplayed the situation. This is getting closer to a precipice. After the Olympics are over the countdown begins.
The growing concern about an invasion/annexation of eastern Ukraine continues to spike crude oil prices higher. WTI rose to over US$93/b last week. WTI today is at US$89.88/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 quickly towards US$62-65/b, especially if Iran sanctions to sell oil are removed in March. 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 up to US$120/b. How long it stays up is unknown but the repercussions would likely increase the potential for a severe world-wide recession. A recession would knock off demand for energy around much of the world and crude oil prices would collapse as they did in 2008-2009 and 2020.
Energy Stock Market: The S&P/TSX Energy Index currently trades at 196 (down three points over the last week) as the war event window closes in.
I presented my annual keynote energy presentation at the two day World Outlook Financial Conference (WOFC) on February 4 & 5. Post conference access passes are now available. Please go to their website to get your tickets to this excellent and informative event. It was another great success and there were quite a few very interesting sessions that are worth listening to especially if you have a very diversified portfolio.
Our February Interim Report comes out tomorrow afternoon and covers the latest signs of internal deterioration in the general stock market and increased weakness in key world economies. Energy usually lags big market moves with the general market breaking down first. We go over this in detail in our report. Big overall stock market downside is ahead and investors should be prepared. The MEME stocks have been massacred and a few of the FAANG and related have been severely eroded in value (Meta-FB and Netflix are just two examples) 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. Our report covers this potential painful market situation.
Our next 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 to come out tomorrow you will need to become a subscriber to our full product. Go to https://bit.ly/34iKcRt to subscribe.
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