Schachter’s Eye on Energy – June 24th

Posted by Josef Schachter

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This week Josef talks about how the sharp rise in Covid-19 cases in the US has pummeled the stock markets. And this sharp decline has hit oil prices hard and the associated energy stocks. There is significant downside ahead but great buying opportunity, similar to the one we experienced this past mid-March, should occur in the second half of the 2nd quarter.

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 and subscribe

EIA Weekly Data: Wednesday June 24th’s EIA data was mostly bearish. The headline number of commercial crude stocks showed a rise of 1.4Mb versus the estimated 300K build. The Strategic Petroleum Reserve added 2.0Mb and now stands at 654.4Mb or nearly 36 days of current demand. The rise in commercial crude stocks would have been higher except net crude imports fell 797Kb/d or 5.6Mb on the week. Of this, exports fell by 695Kb/d or by 4.9Mb on the week. Motor gasoline stocks fell 1.7Mb while Distillates rose by 200Kb. Overall stocks rose this week by 5.9Mb (compared to a rise of 8.8Mb last week). Total stocks are now up 159.6Mb over last year. Refinery runs rose 0.8% to 74.6% from 73.8% in the prior week. Cushing saw a decline of 1.0Mb to 45.8Mb as refinery run activity consumed more crude. US production of crude recovered from last week’s large 600Kb/d decline to 10.5Mb/d, rising by 500Kb/d to 11.0Mb/d. Was last week an accounting error or is this the restart of shut-in production? We surmise it is the former.

The most positive part of the report was that product supplied, rose as more parts of the US reopened. Total product usage rose by 1.06Mb/d to 18.35Mb/d but is still down 12% from 20.88Mb/d consumed last year at this time. Finished motor gasoline demand rose by 738Kb/d to 8.61Mb/d, but is  down 9% from 9.47Mb/d last year. Jet fuel demand continues to rise modestly as more flights start up and consumption rose last week by 17Kb/d to 805Kb/d.  However, it is still 1.11Mb/d lower or 58% 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 13 rigs (prior week down 5 rigs) to 266 rigs and down 72% from 967 rigs working a year ago. The Permian had a rig loss of 5 rigs (last week down 4 rigs) or down by 70% from a year earlier level of 439 rigs. The US oil rig count fell by 10 to 189 rigs (down 7 rigs last week) and down 76% from 789 rigs working last year. Canada’s rig count fell 4 rigs (flat last week) to 17 rigs working and is down 86% from 119 rigs working at this time last year.

Conclusion: As we write this, WTI is at US$38.10/b for the July contract (down almost 6% on the day or by US$2.27/b on the day) due to the overall inventory build and the US stock market getting pummeled. The Dow Jones Industrials are down 784 points to 25,372. 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. Layoffs should pick up and we expect to see more bankruptcies. In addition this is also the window for the second 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 crude barrels. Hold cash and remain patient for the next low risk BUY window as we saw in mid-March. If over-invested hopefully you took appropriate defensive action from our previous warnings.  

The short covering rally of the last few weeks took the S&P Energy Bullish Percent Index from 0% on March 9th to 100% in early June. It has fallen to 69.2% as a result of the recent energy stock correction. Last week this index was at 84.6% so it has had a decent decline over the week following the declining stock prices. The Energy Bullish Percent Index is likely in this situation to fall to below 10%, providing the next low risk BUY signal. Today the S&P/TSX Energy Index is down 3.37 to 75.67 (down 4.3% on the day) and is down over 21% from the early June high of 96.07. The support level we noted last week of 76.54 was breached today. The next target for this index is the 50 level. For the S&P/TSX we see a decline to the 32-36, or a two for one sale over the coming months. Downside for the Dow Jones Industrials in the near term is 22,800 with much lower levels in July/August. We expect the market may see lower lows below the mid-March lows before this market carnage ends.

Our July Interim Report will come out on July 9th. We go over the why and how deep this stock market plunge is likely to go and what to look for at the potential end of this stock market rout. As we get closer to the bottom we will profile our best pick energy and energy service BUY  ideas for subscribers to consider. So far the key black swan event is the pick up in Covid-19 cases in the US (Florida, Texas and Arizona facing the largest increases) with 121,000 fatalities so far. Is this the start of the second wave or an extension of the first wave due to lack of using masks and safe distancing? The lack of White House Covid Task Force Briefings is adding to the nervousness. Is ignoring the issue by President Trump going to make the pandemic go away?

Second quarter 2020 financial reports start coming out in July and we expect most results will be worse than expected with guidance mostly depressing. We will update our Insider Trading Report in this issue.

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