Schachter’s Eye on Energy – March 31st

Posted by Josef Schachter

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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 31 was mixed. US lower 48 production rose by 200Kb/d to 10.7Mb/d and Total Domestic Production rose by 100Kb/d to 11.1Mb/d.  Commercial Crude inventories fell by 0.9Mb, just above the consensus and was due to exports rising 693Kb/d or by 4.9Mb last week. Net Imports fell 170Kb/d or 1.2Mb on the week so we would have had a build this week if not for this stock movement. Motor Gasoline inventories fell by 1.7Mb due to stronger demand while Distillate volumes rose by 2.5Mb on the week as the weather improved. In the coming weeks US production should continue to rise as drilling activity is robust and could recover another 0.9Mb/d to reach 12.0Mb/d before the end  of the summer. Private operators are driving the growth in production as large public companies are under pressure to pay down debt and provide shareholder returns. Refinery Utilization recovered 2.3 points to 83.9% from 81.6% and is now above last year’s 82.3%. It appears the Texas Polar Vortex weather event is now behind us. Overall Commercial Crude inventories are 32.6Mb above last year or up by 7.0% to 501.8Mb.

As we are now one year into the pandemic and its initial impact, we are seeing recovery in the consumption levels of the various products, compared to the full Covid-19 shut down level of last year. Spring break holidaying is helping the numbers. Total Product consumed rose 1.61Mb/d to 20.3Mb/d but remains 4.9% below a year ago on a four week basis. Gasoline demand rose 275Kb/d to 8.89Mb/d. Jet Fuel consumption rose 324Kb/d to 1.36Mb/d and is now slightly above the decimated level of 1.34Mb/d of a year ago. Inventories at Cushing rose 0.8M to 47.1Mb and are up from 42.8Mb a year ago.

Baker Hughes Rig Data: The data for the week ended March 26th showed the US rig count rise of six rigs (nine rig decline in the prior week). Canada had a decline of 11 rigs (24 rigs lower last week) as we are in the spring break-up season. Canadian activity is now above the lows of when the pandemic fear was at its highest. There are 81 rigs working in Canada now compared to 54 rigs working at this time last year. In the US there were 417 rigs active, but that is down 43% from 728 rigs working a year ago. The US oil rig count rose by six rigs. The Permian saw an increase of five rigs to 221 rigs working and activity is 42% below last year’s level of 382 rigs working. The rig count for oil in Canada fell by 10 rigs to 31 rigs working but is up from the pandemic fear level of 18 rigs. The natural gas rig count fell by one rig to 50 rigs active but is up 39% from last year’s level of 36 rigs working at this time last year.


Crude oil prices have fallen US$8/b in less than four weeks from US$67.98/b after the Saudi announcement of extending their official 1.0Mb/d production cut. Today’s low so far is US$59.96/b. The price now is US$60.78/b.

Bearish pressure on crude prices:

  1. The Suez canal has re-opened and the transit risk has now fallen off.
  2. Europe is seeing a third wave of Covid mutations and has gone into longer lockdowns. Germany, the engine of Europe, is extending its lockdown until April 18th and may extend it further if case-loads and deaths don’t decline. Cases doubled in Germany over the last month. Nearly a third of France just entered a month-long lockdown and they may face a full national lockdown shortly.
  3. The CDC Director made an emotional plea Monday for continued masking and social distancing even though vaccination rates are now at 3M people per day. Her concern relates to the higher and faster spread of the mutations and an increase in 31 US States of hospitalizations and use of ICU beds. The death rate has risen to  550K in the US and 2.8M worldwide.
  4. Canada is worrying about a third wave looming over the country as there has been a lack of active testing, and active variant cases are up 50% since early March in British Columbia, Alberta, Saskatchewan, Ontario and Quebec. Vaccination rates are much slower than the US due to slow receipt of product. The new case-load increase is occurring in people in their 40’s and 50’s.
  5. Energy demand is showing signs of softening in various countries in Asia as tourism remains lackluster.
  6. Significant OPEC cheating is occuring (Iran, Iraq, Libya, Nigeria and Venezuela)
  7. US production has recovered by 1.4Mb/d so far. The IEA in their recent monthly report noted “global oil inventories and supply remain plentiful”. The Federal Reserve of Dallas sees the break-even price for crude in the State at US$50/b, providing lots of incentive to add barrels now.
  8. A stronger US dollar has a negative impact on commodity prices. The US dollar has risen recently to 93.32.

Bullish support for crude prices:

  1. OPEC is planning a meeting tomorrow (April 1st) to discuss production levels for May and it appears that the Saudi line is to continue current levels into the end of June with only moderate increases for Russia and Kazakhstan. They will put pressure on the many cheaters.
  2. Seaborne crude may take longer to reach consuming nations that have low inventories. Most large consuming nations have strategic reserves so overall not a big impact.
  3. Speculative hedge funds have lowered their long positions by 73Mb to a net short level of 824Mb.
  4. Refineries will be building inventories to produce products for the summer driving season.
  5. Vaccination rates are rising around the world providing a desire to get back to normal this summer. All who want vaccines in the US should have them by the July 4th holiday.

With the big decline in the last few weeks, we see the technical support levels for WTI crude now at US$57.75 on a close (not much below where we are now). Energy and energy service stocks were overbought and had 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 most companies for Q4/20 have been released and many were not strong enough to justify current lofty stock price levels. If crude prices retreat below US$50/b these stocks will get battered.

CONCLUSION:. The next two 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 1.76% more than triple the 0.52% of last August. 

Three weeks ago we got a second 100% Bullishness signal from the S&P Energy Bullish Percent Index which is the first time in my career that we have seen back to back clear SELL signals in any one year. The danger is clear and the downside is significant. We are now at 65.2% bullishness so there is quite a distance downward before the next BUY signal could occur and we will notify subscribers immediately.

Energy Stock Market: The S&P/TSX Energy Index now trades at 117 and is part of a lengthy, extended, and broadening topping process from the peak at 128 three weeks ago. The S&P/TSX Energy Index is likely to fall substantially in the coming months. A breach of 111.59 (the low close last week) should initiate the next sharp decline. Our target, once 100 is busted, is down to the 60-70 area with WTI trading in the US$42-48/b area. In this range we will be looking for a bottom and the next low risk BUY signal.

We are setting up models on five pipeline and infrastructure stocks and will launch coverage of these new ideas in our April SER Monthly to be distributed on Thursday April 22nd. Our research presentation is moving for all of our covered companies falling under three designations: Conservative, Growth and Entrepreneurial. Investors interested in this new coverage should become subscribers to get access to our expanded research coverage.

Our April Interim Report will be out next week Thursday April 8th and will include updates on 13 of our Coverage List companies. This should make for interesting reading for subscribers so they can focus on favourite ideas to BUY when we get the next low risk BUY signal (potentially late April or during May).

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