This week Josef explains how the EIA had a third increase in total stocks which is creating a storage problem. As well as how the OPEC’s report out Wednesday the 17th showed significant non compliance and it is very likely crude will fall sharply in the near term.
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EIA Weekly Data: Wednesday June 17th’s EIA data was mostly bearish. The headline number of commercial crude stocks showed a rise of 1.27Mb versus the estimated 130K build. The Strategic Petroleum Reserve added 1.7Mb and now stands at 651.7Mb or nearly 38 days of current demand. The rise in commercial crude stocks would have been higher except net imports fell 245Kb/d or 1.72Mb on the week. Motor gasoline stocks fell 1.7Mb and Distillates fell by 1.4Mb. Overall stocks rose this week by 8.8Mb (compared to a rise of 11.9Mb last week). Total stocks are now up 141.8Mb over last year. Commercial crude oil stocks are now up 11.8% from 56.9Mb last year. Refinery runs rose 0.7% to 73.8% from 73.1% in the prior week. Cushing saw a decline of 2.6Mb to 46.8Mb as refinery activity consumed more crude.
US production of crude fell by a whopping 600Kb/d to 10.5Mb/d (all in the lower 48) and is now down 2.6Mb/d from the peak in mid-March at 13.1Mb/d. We are surprised by the large size of the shut-in. It is possible we are looking at data that removes production from bankrupt entities. There were a number of new filings last week for Chapter 11 insolvency.
Product supplied backed off from the strong consumption during the Memorial holiday weekend. Total product usage fell by 283Kb/d to 17.29Mb/d and is down 3.53Mb/d or 17% from 20.8Mb/d consumed last year at this time. Finished motor gasoline demand fell by 31K to 7.87Mb/d, but is down 21% from 9.93Mb/d last year. Jet fuel demand continues to rise modestly as more flights start up and consumption rose last week by 76Kb/d to 788Kb/d. However, it is still 885Kb/d lower or 53% less than last year’s 1.67b/d.
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 17 rigs) to 279 rigs and down 71% from 969 rigs working a year ago. The Permian had a rig loss of 4 rigs (last week down 7 rigs) or down by 69% from a year earlier level of 441 rigs. The US oil rig count fell by 7 to 199 rigs (down 16 rigs last week) and down 75% from 788 rigs working last year. Canada’s rig count was flat at 21 rigs working but is down 80% from 107 rigs working at this time last year. The rate of weekly rig releases has clearly decelerated and we are close to the bottom for this key energy service sector activity indicator. Last week we saw the first green shoot with the Haynesville showing a rig count increase of two rigs to 33 rigs.
OPEC Monthly Data: OPEC today released their June 2020 monthly issue. They see demand at 81.3M/d in Q2/20 rising nearly 11Mb/d to 92.3Mb/d in Q3/20. Their big assumption is that China demand rises to 12.55Mb/d in Q2/20 from 10.27Mb/d in Q1/20 and OECD demand rebounds meaningfully. We suspect this may be high due to weak consumer demand in the OECD and the recent lock-down in Beijing due to the recent Covid-19 breakout. The report shows non-OPEC production falling 4.1Mb/d from 66.5Mb/d in Q1/20 to 61.4Mb/d in Q2/20. This fits with what we are seeing from the weekly EIA data and the reports from Canada. OPEC cut overall production in May 2020 by 6.3Mb/d to 24.2Mb/d with the Saudi’s taking the largest cutback at 3.16Mb/d. UAE helped with a 1.36Mb/d cut as did Kuwait with a 921Kb/d cut. As we suspected, other OPEC countries did not partially or fully meet their quota. Angola cut only by 33Kb/d to 1.28Mb/d, Iran raised production by 5Kb/d to 1.978Mb/d, Iraq cut only 340Kb/d versus the over 1.0Mb/d cut allocated and Nigeria cut by only 185Kb/d to 1.59Mb/d. Overall compliance appears to be 2-3Mb/d less than needed. OPEC in the report shows that the call on OPEC in Q2/20 is 14.6Mb/d and with production of 24.2Mb/d there is still an inventory build of 9.6Mb/d. So the deal last week to extend the cuts to the end of July does nothing to balance supply and demand. In the OPEC report they show Q2/20 demand at 81.3Mb/d, non-OPEC production at 61.4Mb/d, OPEC NGL’s at 5.3Mb/d leaving a call on OPEC of only 14.6Mb/d. They spin their positive story showing demand rising 11.0Mb/d to 92.3Mb/d in Q3/20 with non-OPEC production falling by 2.1Mb/d in Q3/20 to 59.3Mb/d. Under this view they show demand for OPEC crude rising to 27.8Mb/d and inventories worldwide starting to shrink. Our biggest disagreement is that we don’t buy their large increase in world demand for Q3/20 that they forecast.
Conclusion: As we write this, WTI is at US$37.43/b for the July contract (down US$0.95/b on the day) due to the overall inventory build. After a robust short covering rally of nearly 90% from the April low to US$40.44/b on Monday, crude prices have now rolled over and are down over 7%. We see a decline below US$30/b as the line in the sand for crude oil bulls (US$34.36/b next breakdown level). The breach of US$30/b should start the next phase of worry for energy bulls and restart aggressive selling of energy and energy service stocks. Much lower levels are expected once we get into the fall and the wage support programs by the governments end, and layoffs pick up and we see more bankruptcies. In addition this is also the window for the next expected Covid-19 wave. The energy and energy service companies with the most downside are those with high debt loads, high operating costs, have current balance sheet debt maturities of some materiality over the next 12 months and those that produce heavier barrels. Hold cash and remain patient for the next low risk BUY window as we saw in mid-March. If over-invested take appropriate defensive action.
The short covering rally of the last few weeks took the S&P Energy Bullish Percent Index from 0% on March 9th to 100% two weeks ago (84.6% now after stock market decline of the last two weeks). As the general stock market has declined, we expect to see the energy sector fall heavily as well. The Energy Bullish Percent Index is likely in this situation to fall to below 10%, providing the next low risk BUY signal. For the S&P/TSX this means a decline to below 40 for the Index, or nearly a two for one sale – OUCH! In a few days we see the next general market plunge starting. Downside for the Dow Jones Industrials in the near term 22,800 with much lower levels in July/August.
The S&P Energy Index today is at 78.82 (down 11% from last week’s level of 88.60) and down from the recent bear market rally high of 96.07 (Index down 18% from this recent high of two weeks ago). Be prepared for significantly lower energy and energy service stock prices in the coming weeks. Next downside breach is 76.50 (one bad market day away).
High risk tolerant speculative ownership of crude oil futures continues to rise crude. Last week speculators owned a net long position of 572Mb up modestly from 570Mb the week before. Commercials are adding more aggressively to positions and are now short 617Mb up from 605Mb the week before. Speculators are usually wrong and we expect them to get smacked hard once the current stock market decline has massive intermarket margin calls. At the next bottom in crude prices It is possible that commercials will move to net long position..
Our June SER Monthly Report will come out tomorrow. We go over the current market conditions and our key reason why we see an imminent breakdown in the overall stock markets that will drag energy stocks down as well. In our corporate update section we cover one of our favourite international ideas which just successfully completed its debt refinancing with a two year extension and covenant relief.
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