This week Josef explores why a large build in US Inventories was ignored by the stock market as it continues to focus on the economy reopening and why US total stocks grew by 17.0M while total demand fell by 628Kb/day to 16.0M.
Josef offers a twice monthly Black Gold newsletter covering the general energy market and 29 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: Thursday’s (May 28th) EIA data was delayed by one day due to the US Memorial Day holiday on Monday. The report was mostly bearish with total stocks up 17.0Mb on the week with the headline commercial crude stocks number a 7.9Mb rise (versus a 1.9Mb decline forecast). Gasoline stocks fell a modest 0.7Mb, however Distillate inventories rose by 5.5Mb. The rise in commercial stocks and rise in inventories of products was due to imports rising by over 2.0Mb/d or by 14.5Mb on the week, and due to refinery runs rising to 71.3% from 69.4% last week.
US production of crude fell by 100Kb/d to 11.4Mb/d and is now down 1.7Mb/d from the peak in mid-March at 13.1Mb/d. Production cutbacks keep on being announced by energy companies as storage fills up with the biggest declines in production in the Permian basin. This summer US production is likely to be under 11.0Mb/d as the high decline shale basins see rapid production declines (voluntary and involuntary). It is very likely the decline in crude oil production could reach down to 10.0Mb/d by late Fall if commodity prices fall in the next month or so. Cushing saw a decline of 3.4Mb to 53.5Mb as refinery activity consumed more crude.
The most bearish part of the report was that overall product consumed fell by 628Kb/d to 16.0Mb/d and is down 5.46Mb/d or 25% from 21.4Mb/d at this time last year as the Memorial weekend usually sees lots of travel. But not so this year due to the Covid-19 health crisis. Finished motor gasoline did rise by 463Kb/d from the prior week to 7.25Mb/d, but is still down 22% from 9.39Mb/d last year. Jet fuel demand rose by 226Kb/d from the prior week to 860Kb/d as some decided to fly to visit family and friends during the long weekend. However, it was 1.165Mb/d lower or 57% less than last year. Jet fuel demand may have the most difficulty in seeing a resurgence until a vaccine is available and people feel safe flying again.
Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 21 rigs (prior week down 35 rigs) to 318 rigs and down 67% from 983 rigs working a year ago. The Permian felt the largest basin loss with a rig loss of 13 rigs (last week down 23 rigs) or down by 64% from a year earlier level of 451 rigs. The US oil rig count fell by 21 rigs to 237 rigs and down 70% from 797 rigs last year. Canada had a decline of two rigs and the count now is at 21 rigs working and down 73% from 78 rigs working a year ago. On May 27th the Alberta Energy Minister said Alberta producers had already cut production by about a quarter or by 1Mb/d. If crude prices don’t recover in Q3/20 there may end up being a total of 1.2-1.6Mb/d shut in during that quarter. The EIA report of May 15th showed Canadian exports to the US of 2.946Mb/d down 20.1% from 3.688Mb/d sent down the prior year so as of that date the US was already taking 742Kb/d less from us.
Conclusion: WTI as we write this is at US$33.50/b for the July contract and is ignoring the rise in US inventories as market participants focus on the economies reopening and the multitude of drugs being talked about as possible coronavirus cures. We see a decline below US$30/b as the line in the sand for crude oil bulls. We do not see supply and demand balancing until July so there will be a storage problem for the market to face in the coming weeks. This week’s rise is being ignored. As we see more builds in the coming weeks we see this breach occurring and fear of a lack of storage returns. This breach should start the next phase of worry for energy bulls and restart heavy selling of energy stocks. We expect this to occur starting in early June.
The short covering rally of the last few weeks took the S&P Energy Bullish Percent Index from 0% on March 9th to 100% on May 4th. It is now at 80.8% a fairly lofty level. As the general stock market declines in the coming weeks, we expect to see the energy sector fall 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 the 32-36 level. The S&P Energy Index today is at 79.2 so there is lots of downside risk over the coming weeks and possibly months.
Speculative ownership of crude oil futures continues to rise chasing crude, with many buying later dated contracts after the May expiry problem. Speculators were taught a nasty roll over lesson on the nearby contact. Last week speculators owned a net long position of 547Mb up from 533Mb the week before. Commercials are now short 583Mb up from 552Mb the week before. We expect that a market decline with intermarket margin calls will knock the speculator’s position down to below 200Mb net long at the next bottom in crude prices. It is possible that commercials will move to net long positions in this event.
Our June SER Interim Report will come out next week Thursday and we plan to go over the remaining Q1/20 results for the companies we cover (13 companies will be reviewed in the report). We include our new SER Quality Scoring System for those that are: Successful, those that will Survive, and those that are Problematic (mainly debt levels and near term maturity problems). If you are interested in this report then please go to our website and to the subscriber page. Our final count shows three ‘A’s – Successful, thirteen ‘B’s – Survivors, and thirteen as ‘C’s – as Problematic. The deterioration of companies is due to the lower commodity prices, impairments taken, declining cash flows making debt coverage problematic and a batten down the hatches worry of another black swan event.
Subscribe to the Schachter Energy Report and receive access to our Webinar from Thursday May 28th, our Action Alerts, our TOP PICK recommendations when the next BUY signal occurs as well as our review of the 29 companies that we cover.
To get access to our research please go to http://bit.ly/2OvRCbP to subscribe.
