This week Josef discusses how the slow rollout of Covid vaccines is likely to shaft crude oil prices in the coming months and how the downside could be US$10/b.
Each week Josef Schachter will give 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 27 energy and energy service companies with regular updates. He holds quarterly subscriber webinars and provides Action BUY and SELL Alerts for paid subscribers. Learn more.
EIA Weekly Data: The EIA data on Wednesday January 13th was mixed. Commercial inventories fell 3.2Mb on the week versus the forecast of a 1.9Mb decline. The miss was due to refinery runs rising to 82.0% from 80.7% in the prior week, resulting in Distillate inventories rising by 4.8Mb and Gasoline Inventories by 4.4Mb. So the decline in crude inventories was more than offset by the increase in these product categories. Crude inventories are now 53.7Mb or 12.5% above last year’s level of 428.5Mb. US domestic crude production was unchanged at 11.0Mb/d, but is down 2.0Mb/d from last year’s 13.0Mb/d.
Consumption rose sharply last week. Total usage rose by 2.55M/d to 19.6Mb/d offsetting last week’s decline of 2.26Mb/d. Gasoline consumption rose by 91Kb/d to 7.53Mb/d while Jet Fuel consumption rose by 551Kb/d to 1.47Mb/d. Total product demand was up 560Kb/d from last year.
Cushing Oil Inventories fell by 2.0Mb as consumption rose. Inventories at Cushing are now at 57.2Mb down from 59.2Mb last week.
Baker Hughes Rig Data: The data for last week showed an increase in the US and Canadian rig counts. In the US rigs rose by nine (up three rigs in the prior week) to 360 rigs working, but remains down 54% from 781 rigs working a year ago. The US oil rig count rose by eight (up three rigs the prior week) to 275 rigs but is down 58% from 659 rigs working last year. The Permian saw an increase of four rigs to 179 rigs working but remains 55% below last year’s level of 397 rigs working. Over US$45/b for WTI seems to be a price point where producers see economic returns from drilling. Yet, so far there has been no corresponding increase in US domestic production now at 11.0Mb/d.
Canada saw a big increase in the rig count last week as activity normally picks up in the New Year. The rig count rose by 58 rigs to 117 rigs working. While a significant increase, it is 50% lower than the 118 rigs added in the first week of last year when 203 rigs were active. The current rig activity level is down 42% from a year ago. The rig count for oil has risen to 53 rigs (18 last week) but is down 56% from 120 rigs working last year. The natural gas rig count rose by 23 rigs to 64 rigs active but is still down from 83 rigs working at this time last year.
Conclusion: WTI today is at US$53.36/b (high today of US$53.93/b) and we see a significant Q1/21 topping range in the US$52-55/b area occurring shortly.
The reason for our bearishness is twofold.
One, is that some OPEC+ members continue to produce over their quotas (Russia, Kazakhstan and Iraq) and non-quota members (Iran, and Venezuela) are trying to sell at discounts whatever they can sell at discounts through intermediaries. Russia is leading the group increasing supplies to take advantage of the current robust prices while the Saudis want to cut back production so that a meaningful glut does not happen later this quarter. Cold weather is helping demand but winter ends in about two months and then the slower demand shoulder season occurs.
The second, is that the mutation variants of the coronavirus are causing increased lockdowns and curfews, especially in OECD countries. Ireland, the Czech Republic, Germany, Slovenia and the UK, are now on tighter restrictions. Death rates are rising. In Alberta we had the highest death rate yet yesterday. The US is now nearing 380,000 dead and forecasts for the end of January see this at over 450,000. The US daily death toll is now exceeding 4,000 individuals on many days with all age groups being affected. President-elect Biden wants to vaccinate 1.0M people per day in his first 100 days and getting sufficient vaccines out and people vaccinated at this rate is a challenge. Bloomberg reports that if the goal is 75% of Americans vaccinated to get to herd immunity, then 2.0M people need to be vaccinated daily to get to this herd level by August. This is a big challenge and one that is also extending the timeline of Q2/21 that had been promised by the current administration’s ‘Warp Speed’ program.
The World Health Organization (WHO) yesterday were quite pessimistic about when the world would have herd immunity with a forecast that it was more like in early 2022 than during 2021, especially due to the mutations that may not be controlled by currently available vaccines.
The near-term support level is US$46.15/b. Energy and energy service stocks are overbought and could stay so for a little while longer. We see significant downside risk. The most vulnerable companies are energy and energy service companies with high debt loads, high operating costs, declining production, current balance sheet debt maturities of some materiality within the next 12 months and those that produce heavier crude barrels. Results for Q4/20 should start being released in early February and they will for the most part not be good.
We are getting concerned about valuations and we may get a SELL signal at some point in the near term. Subscribers of our regular service will be notified when this occurs and what stocks and at what prices gains should be harvested.
Energy Stock Market: The S&P/TSX Energy Index now trades at 100.2 and is reaching our near term target of 105. The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low in late October 2020) during Q1/21. A breach of 87.55 should start this downward trend.
In our December SER we introduced a new feature, monthly articles from a guest contributor, Professional Engineer and oil industry veteran, Ron Barmby. He will provide articles on climate change and related policies that affect the energy sector. In our January SER Monthly edition (to be published on Thursday January 21) he will cover the Federal Clean Fuel Tax Issue.
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