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 January 26th were moderately bearish for energy prices as US Commercial Crude Stocks rose 2.4Mb (a decline of 728Kb was expected). The most bearish metrics were that Motor Gasoline Inventories rose by 1.3Mb and Distillate Fuel Oil Inventories rose by 2.3Mb. Inventories would have risen even more if not for net imports falling 695Kb/d, or by 4.865Mb on the week. Refinery Utilization was at 87.7%, down 0.4% from the prior weeks 88.1%. Two years ago, just prior to the pandemic hitting, the rate was 87.2%. US Crude Production fell 100Kb/d to 11.6Mb last week which is down 200Kb/d from its 11.8Mb/d 2021 peak.

Total Demand rose 502Kb/d to 22.417Mb/d (above the level in 2020 pre–pandemic) as Motor Gasoline and Distillate demand rose. Motor Gasoline demand rose by 281Kb/d to 8.505Mb/d (in late-January 2020 demand was 8.793Mb/d). Distillate Fuel demand rose 198Kb/d to 4.754Mb/d (in late-January 2020 demand was only 3.901Mb/d). Jet Fuel Consumption fell 235 Kb/d to 1.278Mb/d compared to 1.670Mb/d in mid-January 2020. This weakness was due to staffing shortages, flight cancellations and some airport challenges with the introduction of 5G technology that cut back flights. Cushing Crude Inventories fell 1.8Mb to 31.7Mb.

Overall we would rate this week’s data as modestly negative for energy prices but it is being overshadowed and ignored by energy bulls who are focused on Russia readying to invade Ukraine. The invasion, if it does occur, is likely to commence after week two of February when the land is firm enough for tanks and after the winter Olympics have started in Beijing. President Putin is expected to attend the opening ceremonies and is a friend of President Xi Jiping.

The cyberwarfare side has already started against Ukraine but the land war is a few weeks away. If Russia invades then severe economic sanctions are being contemplated by the US and some European/NATO countries against imports of oil and gas from Russia. This would put Europe in a tough situation with no easy replacement sources right as winter gets to its coldest. This is a two- edged sword and Germany and France appear to reject following President Biden in implementing this due to their countries’ interdependence with Russia. Diplomatic efforts continue while military responses are being upped by both Russia and supporters of Ukraine.

EIA Weekly Natural Gas Data: Weekly withdrawals are rising as the coldest weeks of winter are now here. Last week data showed a large withdrawal of 206 Bcf (the largest so far this winter), lowering storage to 2.810 Tcf. The biggest US draws were in the South Central (69 Bcf), the Midwest (65 Bcf) and the East (61 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.

The five-year average for last week was a withdrawal of 153 Bcf and in 2021 was 187 Bcf. Storage is now 1.2% above the five-year average, so the US is not facing a natural gas shortage as is seen in Europe and Asia. NYMEX today is US$3.23/mcf due to the expected colder weather trend for the upcoming week. AECO spot today is trading at $3.86/mcf. With all of February (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 if multiple weekly withdrawals of over 200 Bcf are seen.

After winter is over natural gas prices should 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 Q2/22.

Baker Hughes Rig Data: The data for the week ending January 21st showed the US rig count rose by three more rigs (up 13 rigs the prior week) to 604 rigs last week. Of the total working last week, 491 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 59% from 378 rigs working a year ago. The US oil rig count is up 70% from 289 rigs last year at this time. The natural gas rig count is up a more modest 28% from last year’s 88 rigs, now at 113 rigs.

Canada had a sharp increase of 21 rigs (up 50 rigs last week) as activity continued to recover from the holiday season to 212 rigs. Canadian activity is up 24% from 172 rigs last year. There were 13 more oil rigs working last week and the count is now 134 oil rigs working, up from 96 last year. There are 78 rigs working on natural gas projects now, up two rigs from 76 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 getting tougher for the sector. We expect US production to reach 12.5Mb/d during 2H/22.

Conclusion:

Bearish pressure on crude prices:

1. The Federal Reserve holds its press conference today after its official meeting is over and the market will be listening to the stance the Fed takes to fight inflation. Forecasters now expect four or five rate increases starting in March, with the first increase likely of 50BP. The responses by Chairman Powell to questions will get a lot of attention to see how hawkish he and the Fed have become to fight the severe inflation.
2. Omicron Covid-19 caseloads have not gone away and deaths are rising for the unvaccinated. Deaths in the US have reached 868K (up 14K over the last week) and worldwide 5.60M. The US faced a record 2,100 deaths during one day last week. China has tightened travel restrictions again, just before the start of the winter Olympics next week in Beijing, they may last for at least six months and will slow their economy down. China has also requested citizens not travel during the normally active travel period of the Lunar New Year holiday season due to the pandemic. This will lower transportation fuel consumption significantly.
3. 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 so far.

Bullish pressure on crude prices:

1. Russia provides over 20% of western Europe’s crude oil needs and around 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 on LNG and has asked Qator to do the same. Over time OPEC could send more oil to Europe while Russia could sell its sanctioned oil to China. The Biden administration believes there will be an invasion of eastern Ukraine and the US, UK and Canada have started to remove the families of the embassy and consulates from the country. Citizens of those countries have also been encouraged to leave the area. The US has put 8,500 US troops on heightened alert in the US that can be moved to NATO countries expeditiously.
2. OPEC only increased production in December by 166 Kb/d and not the authorized 400Kb/d. OPEC+ holds their next meeting on February 2nd. Many OPEC members (led by Oman) want to see US$100/b for Brent in 2H/22 and have held off raising production. Others cannot as they face infrastructure problems (Libya and NIgeria) or have not spent funds to increase capacity as they had projected.
3. The Iran nuclear negotiations are working to get sanctions removed on Iran so that they can sell their oil around the world and not just to China that rejects the sanctions.
4. Russia has threatened cyber attacks against the US if President Biden escalates pressure on Russia to unacceptable limits. Threatening to sanction President Putin is a joke as he has no assets in the US and has no desire to get a VIP tour of Disneyland. President Biden’s miscues are getting nuttier. Russia has already warned that any increase in military personnel or offensive weaponry in former USSR countries that are now members of NATO would see Russia move ‘strategic nuclear’ weapons to Cuba, Nicaraugua and Venezuela. A nastier tit for tat. This could turn out worse than the 1962 Cuban missile crisis.
5. Speculators and hedge funds are betting on over US$100/b by the summer and over US$120/b by the end of the year. Futures buyers have added >5000 contracts or over 500Mb of long positions. In addition, options buyers have added increasing amounts of ‘out-of-the-money contracts. The highest price being bought is US$200 calls for December 2022 which we think is outrageously high.

CONCLUSION:

The growing concern about an invasion/annexation of eastern Ukraine continues to spike crude oil prices higher. WTI rose to US$87.89/b today, a new high for the year and a buck higher than last week as the war drums indicated that the invasion is imminent. The poker game is on and Putin does not appear to be bluffing. President Biden is coming off as the Neville Chamberlain of this confrontation.

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 190 (down four points from last week). The Index fell last week by 23 points to 173 before reversing on heightened invasion worries. Last week’s 11% decline was a reaction to the general stock market weakness as the MEME stocks and the FAANGs got hit. Overall the Dow Jones Industrials fell by 10% to a low of 33,200 (now 34,640) while the NASDAQ fell 19% from its high to 13,095 two days ago. It has rebounded to 13,836 today as the market awaits the Fed decision and press conference. This meeting will be critical for the markets go forward movement.

Our January SER Report will come out tomorrow Thursday January 27th and will include our concerns about the general market (MEME stocks have been massacred and the FAANGs are topping out). Many of the underpinnings of the general market are weakening and we have seen a bumpier ride in recent days. We also include a section on the Russian/Ukraine confrontation and why an invasion of eastern Ukraine could spark a bigger decline in the stock markets. In addition we will have an update of Insider Trading activity of the companies on our Coverage List.

We are planning to return to Mount Royal University (MRU) (after a two year pandemic halt) for our ‘Catch the Energy’ conference on October 22, 2022. We will be discussing the protocols on attendance, food service, masking and QR code verification with MRU in Q1/22. We look forward to adding more companies and focus the event on attendees having safe and maximum, face to face time with company management. More on this to come. Please save the date in your calendars.

I will be presenting my regular keynote annual energy macro presentation at 7:15PM PT next 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 webinar will be held on Thursday February 24th at 7PM MT.

If you would like to access our January SER Report or any of our previous reports or the webinar archives, go to https://bit.ly/34iKcRt to subscribe.

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