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 27th was at first glance quite bullish. Commercial Inventories fell by 9.9Mb on the week versus the forecast of a 0.4Mb rise. The variance was fully due to exports rising by 1.1Mb/d, or by 7.7Mb on the week and imports falling by 981Kb/d or by 6.9Mb on the week. Overall this implies a stock change of 14.6Mb versus the 9.9Mb decline in crude. Otherwise, we would have seen a 4.7Mb increase in inventories during the week. Refinery runs fell modestly from 82.5% to 81.7%. Motor Gasoline Inventories rose 2.5Mb while Distillate Fuel Inventories fell 0.8Mb. Crude Oil Stocks are now 45.0Mb or 10.4% above last year’s level of 431.7Mb. US Domestic Crude Production fell 100Kb/d to 10.9Mb after hovering at 11.0Mb/d for quite a few months. Compared to last year this is down 2.1Mb/d from last year’s 13.0Mb/d.
Consumption rose a bit last week. Total usage rose by 95Kb/d to 19.68Mb/d. Finished Motor Gasoline Consumption fell by 279Kb/d to 7.83Mb/d while Jet Fuel consumption rose by 152Kb/d to 1.24Mb/d. Cushing Oil Inventories fell by 2.3Mb. Inventories at Cushing are now at 50.2Mb down from 52.5Mb last week but are up from 35.6Mb a year ago.
Baker Hughes Rig Data: The data for the week ended January 22nd showed increases in the US and Canadian rig counts. In the US rigs rose by five (up 13 rigs in the prior week) to 378 rigs working, but remains down 52% from 794 rigs working a year ago. The US oil rig count rose by two (up 12 rigs the prior week) to 289 rigs but is down 57% from 673 rigs working last year. The Permian saw a decrease of one rig (up 10 rigs in the prior week) to 188 rigs working and remains 54% below last year’s level of 405 rigs working. Over US$45/b for WTI seems to be a price point where producers see economic returns from drilling. Yet, so far this increase in drilling activity has not seen a corresponding increase in US domestic production.
Canada saw a big increase in the rig count last week as activity continues to pick up in the New Year. The rig count rose by 11 rigs to 172 rigs working. However, it is 30% lower than the 244 rigs active last year. The rig count for oil has risen to 96 rigs (up 6 rigs last week) but is down 38% from 154 rigs working last year. The natural gas rig count rose by 5 rigs to 76 rigs active but is down from 90 rigs working at this time last year.
Conclusion: WTI today is at US$52.78/b up 17 cents on the headline decline in crude inventories. We believe that the top crude prices for Q1/21 may be in place. In the next few weeks we expect to see WTI crude breaching US$50/b and moving into the mid-US$40’s.
The reason for our downside crude oil price view is:
- Saudi Arabia and Russia are fighting for market share in the only growth market so far in 2021, that of China. With a new outbreak of the virus in China, travel restrictions and strict visa travel testing requirements are being implemented. The Chinese government is urging people to not travel during the upcoming Lunar New Year holiday (starting January 28th and lasting up to 40 days) which normally sees tens of millions of people typically head back to the villages where their extended family live. If China implements firm lockdown measures, energy demand will fall off materially. China is well stocked at this time so their imports going forward may slow down materially.
- Iran is increasing production and is moving crude oil and products via intermediaries as it sees the US and Iran moving towards a new nuclear accord deal that will remove or reduce sanctions. In the meantime buyers in China have been buying relabled ‘doped’ crude (crude that has chemicals added to make it like a non-sanctioned crude oil). Overall compliance by OPEC in January is being reported at only 85% so cheating by members has picked up. One of them, Kazakhstan, is ramping up production at their giant Tengiz field.
- Mutation variations from the UK and South Africa are worrying medical professionals as they are transmitted faster and may in the case of the African version not be handled effectively by current vaccines. Moderna said this week that a booster to their present vaccine could handle this African mutation. The Brazil mutation issues are still unknown. The UK strain is becoming more deadly in England and Wales. It has a faster transmissible rate causing a rise in cases. Fatalities rose 20% a week ago and now have breached 100,000 for the country.
- Death rates in the US are picking up and now exceed 425K (408K last week) with the total caseload over 25.3M. Current government forecasts are for 600-660K deaths before herd immunity is achieved, possibly by September. President Biden’s request for a new US$1.9T stimulus package to fund the increase in vaccinations is now before Congress and is facing filibuster intransigence by Republicans. Getting to 60 Senators in favour of moving the bill forward may be difficult and a smaller package may be likely. Biden’s 100 day, 100-150 million people being vaccinated may be a challenge if funds and vaccines are not available. The US vaccine rollout has been hindered by crashing websites to book appointments, long waits for shots, and low income areas are not getting the vaccines as quickly as wealthy areas. To date 44.4M doses have been distributed of which 23.5M have been administered. Merck has abandoned its development of two candidates as initial trials resulted in inadequate immune responses. Clearly a disappointment!
- Vaccine availability is now an issue as Pfizer is having production problems at their main European manufacturing facility. Shortages may last six to eight weeks. AztraZeneca is facing travails in Europe as Germany and other EU countries want the vaccines for themselves before exports are to be allowed.
Technically the near-term support level for WTI crude is US$46.15/b. Energy and energy service stocks are overbought and are now rolling over. We are bearish for the near term. 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. Depending upon the pressure from the above issues we may see crude prices range bound in February in the US$42-48/b area for WTI and in March crash through US$40/b if demand remains weak and world wide crude inventories build once winter is over.
We now have a SELL signal in place. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of which stocks and at what prices we think ideas could be harvested. The next few months could see significant downside for the energy sector.
Energy Stock Market: The S&P/TSX Energy Index now trades at 91.63 down nearly 12% from the recent high. Our Q1/21 target of 100-105 was reached last week when the Index reached a high at 103.60. The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low in late October 2020) during March/April. A breach of 87.55 should initiate the next sharp decline.
Our SER Interim Report focused on our SELL signal. Many of the 14 ideas we said to remove had reached our 2021 year-end targets, providing excellent returns. Others had more downside risk from current levels versus the remaining upside potential. When we get the next low risk BUY signal many of these stocks should be excellent investments for the upcoming energy BULL market. The major decline we have been forecasting is clearly underway and may last into late March or April. Downside from here remains substantial.
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