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 March 17th was bearish for prices as both crude inventories rose and Gasoline demand waned. Commercial Crude inventories rose by 2.4Mb compared to a forecast of 2.1Mb and would have been higher by 1.5Mb if not for net crude imports falling by 219Kb/d. US production was flat at 10.9Mb/d,and is 2.2Mb/d below last year’s 13.1Mb/d of production. In the coming weeks this could recover another 1.1Mb/d to reach 12.0Mb/d as rig activity remains strong and some of the weather related production shut-ins come back on line. Private operators are driving the growth in production at the current time as large public companies are under pressure to pay down debt and provide shareholder returns.
Refinery Utilization recovered 7.1 points to 76.1% from 69.0% but remains below last year’s 86.4%. Overall Commercial Crude inventories are 47.1Mb above last year or up by 10.4% to 500.8Mb. This is the build problem we have been warning about. Inventories should continue to build until we start the summer driving season. This could add 40-60Mb of additional stocks in storage. Total Product consumed rose a modest 261Kb/d to 18.93Mb/d. Gasoline demand fell 264Kb/d to 8.44Mb/d. Gasoline inventories rose as a result of the greater refinery activity, by 0.5Mb. Jet Fuel consumption rose by 161Kb/d to 1.01Mb/d as the spring break travel season started. A post-pandemic high of 1.34M people travelled by air last Friday according to the US Transportation Security Administration (TSA). Overall US consumption of all products is 12% below a year ago, Gasoline demand is down by 13% and Jet Fuel demand down by 42%. Inventories at Cushing fell 600Kb to 48.2Mb and are up from 38.4Mb a year ago.
Baker Hughes Rig Data: The data for the week ended March 12th showed the US rig count off by one rig (one rig up in the prior week). Canada had a decline of 25 rigs (22 rigs lower last week) as we have ended the winter drilling season and breakup season has started. Canadian activity is 34% below last year when 175 rigs were working. In the US there were 402 rigs active, but that is down 49% from 792 rigs working a year ago. The US oil rig count fell by one rig. The Permian saw an increase of one rig to 212 rigs working and activity is 49% below last year’s level of 418 rigs working. The rig count for oil in Canada fell by 22 rigs to 58 rigs working and is down 50% from 115 rigs working last year. The natural gas rig count fell by three rigs to 58 rigs active and is down from 60 rigs working at this time last year.
Conclusion:
Crude oil prices have fallen nearly US$4/b from the high two weeks ago of US$67.98/b after the Saudi announcement of extending their official 1.0Mb/d production cut through April. This positive lift to crude has now been reversed as it appears that there has been significant OPEC cheating (Iran, Iraq, Libya, Nigeria and Venezuela) at the same time as the US brought back on 1.2Mb/d (from 9.7Mb/d to 10.9Mb/d). In the coming weeks we expect to see further US production additions and if there is OPEC cheating, as remains likely, world inventories will grow in Q2/21 and prices will have reason to retreat meaningfully. Today WTI is down due to the inventory build, concern about one of the vaccines’ efficacy in Europe, Germany’s exponential growth in infections from the more problematic mutations, and a bearish forecast by the IEA. WTI is now trading at US$63.93/b, down $0.87/b on the day.
Iran in the meantime is selling more oil into China and has plans to increase sales to India in the coming months as they see the Biden administration wanting a nuclear deal and willing to ignore Iran’s cheating on sanctions. The buyers love the lower prices ($3-5/b below Brent) that Iran is offering and as well payment terms are very generous with refiners not paying for the crude until after it is processed. Iran had been shipping indirectly to China on average 306Kb/d in 2020 but this rose to 600Kb/d in January 2021, to 850Kb/d in February and to 856Kb/d in March, according to Reuters and Chinese customs data. OPEC’s next meeting is on April 1st to discuss production levels for May.
Technically the support levels for WTI crude are now US$63.13/b (not much below where we are now) and then US$58.60/b. Energy and energy service stocks are overbought and have been chased by hot momentum money and quarterly window dressing as we near the end of Q1/21. We remain in the bear camp now. 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 many companies for Q4/20 have been released and were not strong enough to justify current lofty stock price levels. If crude prices retreat these stocks could get battered. Commercial hedgers have added to their short crude positions and now are short 1.72BB, and net short 644Mb. They clearly expect to be able to buy back their short positions at much lower price levels. Speculative holders are long 586Mb, up 30Mb over the last week.
We got a 100% SELL signal since January 14, 2021. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of 14 stocks and the prices at which we think should be harvested. We sent out a second SELL Alert on February 5th and added four additional ideas for harvesting. The next few months could see significant downside for the energy sector. The topping process for the general stock market is ongoing and some event will prick this bubble. Rising interest rates appear to be the most likely reason as the US 10-Year Treasury yield has increased to a new 2021 high of 1.69% (up 5 BP today) more than triple the 0.52% of last August.
Last week we got a second 100% Bullishness signal which is the first time in our career that we have seen back to back clear SELL signals in any one year. The danger is clear.
Energy Stock Market: The S&P/TSX Energy Index now trades at 121 and is part of a lengthy, extended, and broadening topping process from the peak at 128. The S&P/TSX Energy Index is likely to fall substantially in the coming months. A breach of 117.81 should initiate the sharp decline. A more important support level to plunge through is 107.66.
I will be on MoneyTalks radio on the Corus (Global) network with Michael Campbell this Saturday March 20th at 10AM MT. If interested in our discussion on the risks in the general stock market and the energy market specifically, please listen in. We are planning to add coverage of pipeline and infrastructure stocks as well as some special situations that will benefit from a strong economy in Western Canada once this current corrective phase is over.
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