Schachter’s Eye on Energy – July 29th

Posted by Josef Schachter

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This week Josef comments on how US product consumption rose last week with the help of decent summer weather.

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 29th EIA weekly data was positive as summer energy demand rose and net imports fell sharply. The headline number for commercial crude stocks showed a decline of 10.6Mb versus the forecast of a decline of 0.4Mb. Net imports fell by 1.01Mb/d or by 7.1Mb in the week, which if it had been flat on the week, would have meant a build of only 3.5Mb. Motor Gasoline inventories rose by 0.7Mb as refinery utilization rose 1.6% to 79.5% from 77.9%. Overall stocks fell by 6.5Mb. Cushing saw its fourth weekly increase with a rise of 1.3Mb to 51.4Mb. US production of crude held steady at 11.1Mb/d.

Product supplied/consumed rose 8% to 19.1Mb/d or by 1.44Mb but is still down 2.2Mb/d or 10% from last year’s level of 21.3Mb/d. Finished motor gasoline demand rose 3% on the week to 8.81Mb/d or up by 259Kb/d on the week but is still down 8% from 9.56Mb/d last year. Jet fuel usage fell 55Kb/d last week to 1.02Mb/d and is still down 870Kb/d or 46% less than last year’s 1.89Mb/d.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 2 rigs (prior week down 5 rigs) to 251 rigs and down 73% from 946 rigs working a year ago. The US oil rig count rose by 1 to 181 rigs (down 1 rig last week) and down 77% from 776 rigs working last year. The Permian started to show a recovery with two rigs being added and now have 126 rigs working. This is still down 72% from a year ago when 443 rigs were working. Three more rigs for US natural gas were taken out last week and this rig count is down 60% from last year’s level of 169 rigs to 68 rigs.

A more optimistic scene is the recovering Canadian sector. Canada’s rig count rose by 10  (up by 6 rigs last week) to 42 rigs working but is still down by 77% from 127 rigs working at this time last year.

US companies have announced that they will restart production given the current US$40/b prices and this week’s data hsa yet to show this return of production. 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.

For Canada, the Petroleum Service Association of Canada (PSAC) lowered its forecast for drilling in Canada this year from 3,100 (April forecast) to 2,800 now. Provincially they see 1,360 wells in Alberta (prior 2,155 or down 37%), Saskatchewan 1,055 wells (prior 1,795 or down 41%), BC 285 wells (prior 345 or down 17%) and Manitoba 80 wells (down from 190 wells or down 58%).

Conclusion: As we write this, WTI is at US$41.29/b for August, down just a dime from last week when we wrote this. The energy market is getting comfort from other commodity boards (precious metals and lumber) and the hope that a coronavirus vaccine will be ready by year end (as more pharmaceutical companies announce progress) and that a new US stimulus package of US$2-3T is approved by Congress by Friday of this week. We are skeptical a fiscal deal can come together before the heated election campaign season gets fully underway. If no funding for the unemployed gets passed this week and no forbearance for renters who face eviction for non-payment of rent, then we face a deteriorating economic condition in the US with rapidly rising unemployment, business closures and rising tensions in the streets as the election cycle unfolds.

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. 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 have started to come out this week and so far have been disappointing with negative comparison and rising debt levels. The bulk of the energy and energy service companies reports 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/TSX Energy Index is at 76.64 down nearly 4 points or 4% from last week’s level of over 80. This Index is down 20% from the early June high of 96.07 when we turned bearish again. 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 to breakdown is 24,800 (now 26,446) with much lower levels  in Q3/Q4, 2020.

Our August Interim Update comes out next Thursday August 7th and we go over five companies on our Coverage List that will be reporting by our cut-off date of July 31st. We update our bearish views on the general stock market. The underpinnings of the recent market strength are the handful of tech-heavy NASDAQ “at home” beneficiaries and these are now showing signs of weakness.The rest of the market has been showing internal deterioration for some time. We expect a near term market breakdown.

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

I will be on with Michael Campbell on MoneyTalks radio on August 8th on the Corus network. Please listen in for our discussion about the energy and energy service industry with Michael at 10:00AM MT. With some energy and energy companies reporting disappointing Q2/20 financial results we will talk about them and my optimistic view for 2021.

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.

Our August 13th SER webinar will be of interest to those wanting to get an understanding of recent quarterly results in the sector and our outlook for the energy industry through the end of 2020 and into 2021. We expect a key energy and energy stock BUY signal to come out during Q4/20 and we will discuss our favourite energy and energy service ideas for investors to do their homework on so that they are ready to BUY when the next low risk BUY signal is activated. 

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