Euphoria over the Pfizer announcement of a vaccine cure rallied crude over $US5/b in recent days. With the vaccine unlikely to be readily available until late Q2/21 and corona case loads rising sharply, this crude rally is overdone. Josef sees WTI having over US$10/b of downside over the next few months.
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EIA Weekly Data:. The EIA data on Thursday November 12th (delayed one day due to Veterans Day) showed commercial stocks rising by 4.3Mb versus a forecast of a decline of 0.9Mb. Gasoline inventories fell by 2.3Mb while distillates fell by 5.4Mb as cold weather hit parts of the US. US crude production held steady at 10.5Mb. The surprises were in consumption which rose significantly. Total demand rose by 1.8Mb/d to 20.2Mb/d, Gasoline demand rose 426Kb/d to 8.78Mb/d and Jet Fuel saw consumption grow by 420Kb/d to 1.33Mb/d (the best level since the pandemic hit).
Refinery Runs fell 0.8 points to 74.5% from 75.3% in the prior week. Commercial stocks remain high at 39.7Mb or 8.8% above last year’s level of 449.0Mb. Total stocks (excluding the SPR) remain high at 96.2Mb above last year or 7.6% above the 1.269Bb in storage at this time last year. Cushing oil inventories fell 500Kb to 60.4Mb compared to 46.5Mb last year at this time.
OPEC Monthly Report: The OPEC report for October was released yesterday. They have lowered their forecast for demand as the recent rise in coronavirus cases in Europe and North America derail their prior view of demand. In Q4/20 they had a world demand forecast of 94.86Mb/d and have lowered this now to 93.67Mb/d. They have also lowered forecasts for three of the quarters in 2021. Q1/21 was lowered to 94.96Mb/d from 95.43Mb/d. All of 2021 was lowered to 96.26Mb/d from 96.84Mb/d. European demand seems to be down by nearly 1.2Mb/d from last year, Japan by 340Kb/d, and the US by 1.3Mb/d. Only China is showing growth, with consumption up 220Kb/d to 13.19Mb/d in September.
Baker Hughes Rig Data: Last week Friday the Baker Hughes Rig Survey showed an increase in the US land rig count. The US rig count rose by four rigs (up nine rigs in the prior week) to 300 rigs working, but remains down 63% from 817 rigs working a year ago. The Permian saw the largest increase at five rigs (nine in the prior week) to 147 rigs. The Permian rig count remains 64% below a year ago’s level of 412 rigs. The US oil rig count rose by five rigs (up 10 rigs last week) to 226 rigs, but is down 67% from 684 rigs working last year.
Canada saw no change in rigs this week (three the prior week) to 86 rigs working. The rig increase now has activity down only 39% from a year ago when 140 rigs were working. In the breakdown the most encouraging data point was rigs working for natural gas which was at 49 rigs up from 43 rigs working last year. This is the first positive year over year comparison in any of the Baker Hughes data. Natural gas stocks in Canada have performed better than oily names during the last few months.
Natural gas prices are very profitable for producers now with AECO at $2.83/mcf, with NYMEX at US$3.03/mcf. We expect much higher prices once the depths of winter arrive next month. US Gulf Coast LNG exports have recovered and booked cargoes should be at record shipment levels before year end. This bodes well for winter 2020-2021 and thereafter. Natural gas is our commodity of choice at this time.
Conclusion: As we write this, WTI for December is at $41.68/b up from $US$38.51/b last week as the market liked today’s EIA report which showed a significant rise in demand and the past few days’ response to the Pfizer vaccine announcement on Monday.
Positives for crude prices:
- The announcement on Monday of a vaccine with 95% effectiveness by Pfizer lifted spirits as there now is a road in 2021 back to normalcy and an expectation that energy demand will recover in 2H/21. Cruising stocks, airlines and economic sensitive stocks rose sharply while the stay at home stocks saw profit taking. Crude prices rose over US$4 earlier this week on the vaccine news.
- OPEC is talking about not bringing back on 2Mb/d of shut-in production in January as they are wary of weakening crude oil demand while economies face rising Covid-19 caseloads and increasing lockdowns.
- Winter is coming and demand usually rises worldwide by 1.5-2.0Mb/d.
Negatives for crude prices:
- Germany, UK, France, Italy, Russia and Austria are reporting record increases in Covid case loads. The Czech Republic has the worst outbreak in Europe and is in lockdown once again. Ireland has initiated a six week lockdown across the country to halt the disease. Red Zones are occuring all across Canada and total lockdowns are likely in some of these extremely stressed areas. Hospitals and ICU beds are full in many of these areas forcing a more intense approach to getting the virus contained. Tracing is becoming tougher to do in many countries. The more lockdowns occur the lower consumption of crude oil and its products.
- In most US states the number of new cases has increased to a record high of 144K per day and now over 10.4M total cases. Many states have hospitals that are maxed out on their ICU beds. Patients are being taken to other in-state hospitals or to hospitals in nearby states. Almost 242K deaths have occured in the US out of 1.29M around the world. If people don’t take adequate protection during the upcoming Thanksgiving holiday season the US case-load and death rate may explode in the coming months.
- Libya is getting its production up sharply now that the civil war is over. In September OPEC had them producing 454K/d and they are now at over 1.0Mb/d. By year end they expect to be producing around 1.3Mb/d. This will mean over a 1.0Mb/d increase in production in just three months as they produced only 104Kb/d in August.
OPEC has its next meeting scheduled for December 1st. We expect them to delay the next planned increase in production for one to two quarters which should help to lower the excess stock levels. We expect crude prices to retreat below US$40/b as it becomes clear that the vaccine will not be readily available by Pfizer (or other vaccine candidates once approved by the FDA) until Q2/21 at the earliest for all who want to take it. Near term we see the crude price ranging between US$36-44/b. However if lockdowns pick up in the US and Canada and Europe extends theirs in high case load areas, we see crude falling further. Our downside forecast for WTI crude oil remains for it to fall into the US$28-32/b range over the next few months. We remind readers that WTI fell to a low at the end of October of US$33.64/b.
Most energy and energy service stocks have significant downside risk. 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 Q3/20 have started and will continue through the end of November. So far the results have been weak, especially for the oily names and service stocks. The one positive is that some companies have announced financing support from BDC and EDC and that the paperwork is being completed. This will remove the stigma of survival concern for the entities able to complete the deals with these entities and their bank syndicates.
Hold cash and remain patient for the next low risk BUY window expected during tax loss selling season during Q4/20.
Energy Stock Market: The S&P/TSX Energy Index has fallen from the June high at 96.07 to the current level today of 77.41 (last week it was at 67.51). It reached 80.54 on Tuesday of this week as the euphoria of a vaccine lifted the sector. However the index is still down by 14% in four months when we recommended profit taking. We expect energy and energy service stocks to roll over shortly and recommence their descent.
The S&P/TSX Energy Index should fall below the low at 60.38 (the low in early October) in the coming weeks as tax loss selling commences. We expect to see a very attractive BUY signal generated during early to mid-December tax loss season and expect to recommend new ideas as well as highlight our favourite Table Pounding BUYS, which should trade at much lower levels than currently. Our initial downside target is for the S&P/TSX Energy Index to fall below 50 in the coming weeks.
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