Schachter’s Eye on Energy – July 22nd

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Josef talks about how US consumption last week fell materially as more cities went into lockdown. As well as how US production rose by 100Kb/d to 11.1Mb/d. He expects crude will decline in the coming weeks and that energy stocks will feel significant downside pressure.

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 28 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 and subscribe

EIA Weekly Data: Wednesday July 22nd’s EIA weekly data was bearish across the board. The headline number for commercial crude stocks showed a rise of 4.9Mb versus the forecast of a decline of 2.1Mb. Net imports fell by 77Kb/d or by 539Kb in the week, which if it had been flat on the week, would have meant a build of 5.4Mb. Motor Gasoline inventories fell by 1.8Mb even though demand weakened, as refinery utilization fell 0.2% from 78.1% to 77.9%. Overall stocks rose by 8.8Mb. Cushing saw its third weekly increase with a rise of 1.4Mb to 50.1Mb. US production of crude rose for the first time in many weeks with US domestic production rising  100Kb/d to 11.1Mb/d, as producers returned low cost shut-in production. This had been telegraphed by recent energy company announcements.

Product supplied/consumed fell by 826Kb/d to 17.65Mb/d and is down 3.9Mb/d or 18% from last year’s level of 21.5Mb/d. Finished motor gasoline demand fell by 98Kb/d to 8.55Mb/d, and is down 12% from 9.67Mb/d last year. Jet fuel usage fell 191Kb/d to 1.08Mb/d and is down 759Kb/d or 41% less than last year’s 1.84Mb/d. The increase in covid-cases and ICU beds being filled up in many cities in the US south are restarting lockdowns and renewing requirements for face masks and social distancing.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 5 rigs (prior week down 5 rigs) to 253 rigs and down 73% from 954 rigs working a year ago. The US oil rig count fell by 1 to 180 rigs (down 4 rigs last week) and down 77% from 779 rigs working last year. Canada’s rig count rose by 6 rigs (up by 8 rigs last week) to 32 rigs working but is still down by 77% from 118 rigs working at this time last year. US companies have announced that they will restart production given current US$40/b prices and this week’s data now shows this return of production. With current demand weakening as reversals of economic reopening are occurring, any significant oil production growth at this time would be very detrimental to the current level of crude prices. We are in the bottoming process for the service industry but we may not see decent demand growth until winter 2020-2021 when a vaccine for the coronavirus is available.

Conclusion: As we write this, WTI is at US$41.39/b for the August contract up 50 cents on the  week in the hopes that a coronavirus vaccine is ready by year end (as more pharmaceutical companies announce progress) and that a new US stimulus package of US$2T is approved by Congress in the next week. We are skeptical a deal can come together before the heated election campaign season gets fully underway. For WTI crude we see a decline starting shortly (US$38.54/b next breakdown level). Longer term we see a breach of US$30/b triggering aggressive selling of energy and energy service stocks. Demand for energy should weaken as layoffs should pick up in August as the current wage support plan ends July 25th and is unlikely to be renewed. We also expect to see more corporate bankruptcies as Q3 unfolds.

The energy and energy service companies with the most downside are those with high debt loads, high operating costs, declining production, have current balance sheet debt maturities of some materiality over the next 12 months and those that produce heavier crude barrels. Results for Q2 start to come out tomorrow for the large cap energy companies (Cenovus, Suncor and Precision Drilling). The bulk of the company reports should come out in August.

Hold cash and remain patient for the next low risk BUY window. If over-invested hopefully you have already taken appropriate defensive action.  

The S&P Energy Bullish Percent Index peaked at 100% in early June. This is the only such reading ever. It had fallen to 23.1% last week but bounced to 34.6% yesterday. The Energy Bullish Percent Index is likely to fall to below 10%, providing the next low risk BUY signal. The S&P/TSX Energy Index is at 80 today up two points on the week. The Index is down 17% so far from the early June high of 96.07. The next downside short term support is 71.76 and then we see downside to the 50 level. For the S&P/TSX Energy Index we see a bottom at the 32-36 level as the next major bottom low. Downside for the Dow Jones Industrials breakdown is 24,800 (now 26,910) with much lower levels  in Q3/Q4, 2020.

Our July SER Monthly Interim Update comes out tomorrow, July 23rd. We go over our reasons for being bearish on the general stock market. The underpinnings of the current market strength are the handful of tech-heavy NASDAQ “at home” beneficiaries. The rest of the market is showing internal deterioration. We expect a market breakdown over the next month or so.

Once the general market plunges and we get closer to the climactic bottom we will profile our Table Pounding best energy and energy service BUY ideas to consider owning by subscribers and add new ideas to our Action Alert BUY List.

We introduce coverage this week of a new international investment idea with the launch of coverage of an exciting small cap natural gas growth story in our July SER Monthly.

I will be on with Michael Campbell on MoneyTalks radio on August 1st on the Corus network. Please listen in for our discussion about the energy and energy service industry with Michael at 10:00AM MT.

Subscribe to the Schachter Energy Report and receive access to our previous Webinars (next webinar Thursday August 13th), our Action Alerts, our TOP PICK recommendations when the next BUY signal occurs as well as our Quality Scoring System review of the 28 companies that we cover.

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