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 Data: The EIA data of Wednesday November 10th was mostly bearish. Commercial Crude Stocks rose by 1.0MB while Refinery Utilization Rose by 1.4 points to 80.1% from 78.5% in the prior week. Last week Total Motor Gasoline inventories fell 1.6Mb while Distillate volumes fell 2.6Mb. US Crude Production was maintained at the pandemic high of 11.5Mb/d. Total Demand fell by 708Kb/d to 19.29Mb/d. With Commercial Crude Stocks now at 435.1Mb in inventory, coverage is  22.6 days of Total demand, down from 24.2 days last year but up from 20.9 days in 2019 and 19.7 days of coverage in 2018. So there is no shortage of crude in the US market. 

In detail:

• Demand for all products fell modestly last week. Total Product Demand fell 708Kb/d to  19.290Mb/d (demand was 20.18Mb/d at the same time in 2020, 21.5Mb/d in 2019 and 22.39Mb/d in 2018). Other Oils demand fell by 679Kb/d to 2.71Mb/d. Gasoline consumption fell 245Kb/d to 9.26Mb/d (and is below the 9.32Mb/d consumed in 2019 at this time). Jet Fuel Consumption fell 91Kb/d to 1.59Mb/d (versus 1.75Mb/d consumed in 2019 at this time). Cushing Inventories were flat versus the prior week at 26.4 Mb/d. Gulf Coast volumes are at 247.3Mb and are up 17.1Mb from 230.2Mb in pre-pandemic 2019 . In discussions with infrastructure companies, crude storage is being focused on the Gulf Coast so as to move the light oil volumes offshore (biggest market Asia) from the nearby prolific Permian and Eagle Ford basins. Over time Cushing should see growing storage as Canadian heavy crudes are moved down to this storage hub.

Baker Hughes Rig Data: The data for the week ending November 5th showed the US rig count rose by six rigs (up by two rigs in the prior week). Of the total of 550 rigs working last week, 450 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 83% from 300 rigs working a year ago. The US oil rig count is up 99% from 226 rigs last year at this time. The natural gas rig count is up a more modest 41% from last year’s 71 rigs, now at 100 rigs.

Canada had a decline of six rigs (a rise of two rigs in the prior week) to 160 rigs. Canadian activity is now up 86% from 86 rigs last year. There were three less oil rigs working last week and the count is now 95 oil rigs working, up from 37 last year. There are 65 rigs working on natural gas projects now, up from 49 last year.

The material increase in rig activity over a year ago in both the US and Canada should continue to translate into rising liquids and gas production over the coming months, especially with the DUC count (drilled but uncompleted well count) at very low levels. The data from many companies on their plans for Q4/21 and forecasts for 2022 support this rising production profile expectation. We expect to see US crude oil production reach 12.0Mb/d before the end of 2021.  Companies are taking advantage of attractive drilling and completion costs and want to lock up experienced rigs and crews as staffing issues are getting tougher for the sector.

Conclusion:

We expect to see additional weekly builds in Commercial Crude Stocks over the next few weeks before winter fuel demand in December picks up. 

Bearish pressure on crude prices:

1. Covid caseloads are growing around the world. In the US, the death rate is over 756K deaths (up 9,000 during the last week). Worldwide, the death count is now 5.06M. Deaths are rising in Europe particularly in Austria (may impose lockdowns on the unvaccinated), Bulgaria, Croatia, Germany, Romania, Russia, Slovakia, Slovenia, and Ukraine.
2. Many US corporate and government employees are not planning on getting vaccinated and are now being put on unpaid leave and may soon lose their jobs. Eighty million individuals have a shotgun decision by January 4th (delayed by one month to cover off Christmas deliveries) when the cut-off kicks in. NO JAB, NO JOB is the vaccination mantra. The US military, police and firefighters are being significantly affected as many personnel are not planning on getting the vaccine in the required timeline and are planning court battles.
3. Energy demand is under pressure as high prices for most food, rent, taxes, child care, health expenses, auto costs and other daily necessities make spending decisions tougher for consumers. This gouge in prices will surely impact consumers’ buying behaviour in the coming months. The spending pie of consumers is shrinking and some spending habits of the past will have to be dropped. Demand destruction is on the way. Consumer Confidence is weakening and is nearing levels that have forewarned of recessions. Consumer spending rose at a low annual rate of 1.6% down from 12% in Q2/21. Real US GDP grew 6.7% in Q2/21 and was seen at only 2% in Q3/21. Recent economic releases indicate that we may already be in the early stages of a recession. Today the US CPI came out at the highest level in 30 years at up 6.2%. Wholesale prices (PPI) rose even faster and are up 8.6% from October of last year. The US$1.2T infrastructure bill when signed into law by President Biden will only add to US inflationary pressures.
4. China has seen a rising wave of new infections in 19 of its 31 provinces. Many industrial plants in China have been closed due to the high cost of fuel and the Government’s plan to lower emissions in the Beijing area for the upcoming 2022 winter Olympics from February 4th to the 20th. Clean air is needed for the event and China wants to show it is making progress on its climate initiatives. This will dampen China’s consumption of fossil fuels over the next four to six months. Thermal coal prices have fallen 55% in the last few weeks. Chinese PMI has fallen below 50 for the second month in a row. China’s General Administration of Customs reported yesterday that imports of crude oil in October were down by 1.5Mb/d from 10.5Mb/d to 9.0Mb/d as the smog issue was being focused on.
5. Iran is returning to the negotiating table on November 29th and if progress is made, then at some point in the future they may get sanction relief and be able to add 1-2Mb/d fairly quickly.
6. Iraq wants to boost its productive capacity materially and is working on deals with Saudi Arabia worth tens of billions of dollars to increase oil production, natural gas fields for electricity, and build water desalination and solar energy stations in the country. If concluded this could be a big game changer for the country which is trying to get out of Iran’s orbit and move back to their traditional allies.

Bullish pressure on crude prices:

1. Speculative long investors (options traders, hedge and commodity funds) and a short squeeze on bearish positions in the futures and options markets on crude have spiked up prices. Energy bulls like Bank of America see US$120/b by June 2022.
2. President Biden’s moral suasion move to get OPEC+ to add more oil (ask of 600-800Kb/d monthly increases) fell on deaf ears. They plan to keep to their 400Kb/d monthly increase instead.
3. Spot natural gas prices in Europe have backed off after President Putin confirmed that Russia would meet all European winter needs once they open the Nord Stream 2 Pipeline, which is now being filled and undergoing pressure tests before certification. Russian pressure seems to have worked on getting Europe to move quickly to certify the new line. This new pipeline doubles Russia’s annual export capacity to Europe. In the US, NYMEX today is now at US$4.86/mcf – and in Canada AECO is C$4.78/mcf as weather is mild and storage levels have been building. US storage injections for the last five weeks have been above the five year average and over 2020 injection levels.

CONCLUSION: 

WTI is down US$2.51/b today to US$81.64/b as the Commercial Crude Oil Stocks built and demand data was weaker than expected. We see prices as having US$20-25/b of speculative value which should disappear as Commercial Crude Stocks continue their seasonal build and demand weakens as the US and China head into recessions. We seem to be moving from stagflation to recession in 2022 around the world. If the data comes out supporting recession conditions, the oil price slide could be quick and painful. Leveraged speculative longs in crude oil futures are vulnerable to nasty margin calls in the future. 

Energy Stock Market: The S&P/TSX Energy Index currently trades at 165. The S&P Energy Bullish Percent Index backed off from the 100% SELL level to 85.7% now. Energy stocks could fall 30-40% in the coming months with leveraged entities the hardest hit.

Our November Schachter Energy Report Monthly comes out tomorrow Thursday November 25th with details on the  general stock market and its expected impact on the energy sector as well as reviews and updates on over 20 companies that have released their Q3/21 report since our Interim Report.

We are holding our 90 minute Q4/21 quarterly Black Gold Webinar tonight Wednesday November 10th at 7PM MT. We will discuss in detail our view on the general stock market, the energy market and our bearishness on both areas for the near term. We will also go over those companies that have reported their Q3/21 results so far. They are broken up into presentations on those that reported good results (11 companies) and those with not so good reports (nine companies). We will have two Q&A sessions to go over our presentation materials and subscriber questions. 

If you want access to all our SER reports or want to join our webinar then you will need to become a subscriber. Go to https://bit.ly/34iKcRt to subscribe. 

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