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 17th was mixed. US Commercial Crude Stocks fell 2.1Mb (forecast 135K decline) as Net Imports fell 490Kb/d, reducing inventories by 3.43Mb. If this had not occurred there would have been a 1.1Mb build. The key subcomponent Exports showed a rise of 573Kb/d which indicates exports rose by 4.0Mb last week, lowering US Commercial Crude levels. Refinery Utilization Rose by 1.2 points to 87.9% from 86.7% in the prior week. Total Motor Gasoline inventories fell 0.7Mb while Distillate volumes fell 0.8Mb. US Crude Production declined 100Kb/d to 11.4Mb/d. Total Demand rose by 2.34Mb/d to 21.63Mb/d as Other Oils demand rose by 2.20Mb/d. Gasoline consumption fell 18Kb/d to 9.24Mb/d which is just above the 9.19Mb/d consumed in 2019 at this time. Jet Fuel Consumption rose 206Kb/d to 1.38Mb/d versus 1.66Mb/d consumed in 2019 at this time. Cushing Inventories rose 200Kb to 26.6Mb/d.

Baker Hughes Rig Data: The data for the week ending November 12th showed the US rig count rose by six rigs up by six rigs in the prior week. Of the total of 556 rigs working last week, 454 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 78% from 312 rigs working a year ago. The US oil rig count is up 93% from 236 rigs last year at this time. The natural gas rig count is up a more modest 40% from last year’s 73 rigs, now at 102 rigs.

Canada had a rise of eight rigs (a decline of six rigs in the prior week) to 168 rigs. Canadian activity is now up 89% from 89 rigs last year. There were six more oil rigs working last week and the count is now 101 oil rigs working, up from 39 last year. There are 67 rigs working on natural gas projects now, up from 50 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 reaching 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:

Bearish pressure on crude prices:

1. Covid caseloads are growing around the world. In the US, the death rate is over 764K deaths (up 8,000 during the last week). Worldwide, the death count is now 5.11M. Deaths are rising in Europe particularly in Austria (imposing lockdowns on the unvaccinated with fines of $30K if they leave homes when not essential), Bulgaria, Croatia, Germany, Netherlands, 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.
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. 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. The US$1.2T infrastructure bill signed into law by President Biden will only add to US inflationary pressures.
4. The UAE and the IEA now see 2022 as having sufficient supplies and that inventories will start to build after winter 2021-2022 is over. We concur!
5. 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. 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. They are breaking US sanctions by buying 560Kb/d from Iran and 57Kb/d from Venezuela, leaving less oil to non-sanctioned OPEC members under the deal provisions. In Monday’s virtual meeting between President Xi and President Biden they discussed using their Strategic Petroleum Reserves (SPR’s) to lower prices in their domestic markets and send a warning signal to OPEC+ that current prices are unacceptable. If they cut back or ordered nothing from OPEC for some set period of time, OPEC would be in big trouble quickly.
6. 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.

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. 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. This new pipeline doubles Russia’s annual export capacity to Europe. The most recent problem/delay is that German regulators want Nord Stream to set up a German company with a headquarters and manpower before completing the regulatory requirements. This was supposed to be completed in January 2022 in time for the worst of winter natural gas needs but may now be delayed by four months. Natural gas prices in Europe have lifted again and this is supportive of crude prices.
3. In the US, NYMEX today is now at US$5.12/mcf – and in Canada AECO is C$4.37/mcf as storage levels have been built up sufficiently for a normal winter. US storage injections for the last six weeks have been above the five year average and over 2020 injection levels.

CONCLUSION: 

WTI is down nearly 2.5% or US$2.03/b today to US$78.73/b as the US and China bring pressure on OPEC+. We see prices as having US$20-25/b of speculative value which should disappear as demand weakens in the US and China as they both could be headed into recessions. 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, flat with last week. The S&P Energy Bullish Percent Index backed off from the 100% SELL level to 80.9% 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 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 25 companies that have released their Q3/21 report since our Interim Report.

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

Become a subscriber if you would like to access the archive of the webinar and all our previous SER reports. Go to https://bit.ly/34iKcRt to subscribe. 

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