Josef is concerned about there being more downside ahead with a large increase in US crude inventories it pummeled the crude price 6% on Wednesday and WTI down nearly US$5/b over the last week.

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EIA Weekly Data:. The EIA data on Wednesday October 28th showed commercial stocks rising by a whopping 4.3Mb versus an estimate of a rise of 1.2Mb. There would have been an even larger inventory build (an additional 3Mb to 7.3Mb) if not for net exports rising by 424Kb/d, or by 3.0Mb on the week. US crude production recovered from Hurricane Delta as facilities were restarted in the Gulf. US oil production rose 1.2Mb/d to 11.1Mb/d as production recovered. However Hurricane Zeta (the 27th Atlantic Hurricane this year) will hit land shortly and already the industry has closed in 300Kb/d of offshore crude. Gasoline inventories fell by 0.9Mb/d as demand increased last week after a major decline the prior week due to the weather issues. Refinery runs rose 1.7 points to 74.6% from 72.9% in the prior week. US Production is now down 1.5Mb/d or 12% from 12.6Mb/d last year. Commercial stocks are up 12.2% above last year (53.60Mb) at 438.9Mb. Total stocks remain high at 120.7Mb above last year or 9.5% above the 1.27Bb in storage at this time last year. Cushing oil inventories fell by a modest 400Kb to 60.0Mb compared to 46.0Mb last year at this time. These data points highlight the downside risk to crude prices.

Total product demand rose last week by 1.52Mb to 19.6Mb as demand rose once the last Hurricane’s effects had passed and recovery began again. While a nice recovery, this level is still 2.0Mb or 9.3% below last year’s consumption level of 21.6Mb/d. Gasoline demand rose last week by 256Kb/d to 8.55b/d. However, it is down 1.24Mb/d or 12.7% from last year’s level of 9.78Mb/d of consumption. Jet fuel remains the weakest area. Consumption last week was 1.01Mb/d up a modest 39Kb/d on the week. It remains 816Kb/d or 45% below last year’s level of 1.83Mb/d.

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 six rigs (up 13 rigs in the prior week) to 287 rigs working, but remains down 65% from 830 rigs working a year ago. The Permian saw the largest increases at three rigs (no increase in the prior week) to 133 rigs. The Permian rig count remains 68% below a year ago’s level of 417 rigs. The US oil rig count rose by six rigs (up 12 rigs last week)  to 211 rigs, but is down 70% from 696 rigs working last year. If we are right about crude oil prices falling as demand wanes during a pick up in the pandemic, we may start to see a reversal of this positive trend and start to see a decline again in the US rig count.

Canada saw an increase of three rigs last week (none the prior week) to 83 rigs working. The rig increase now has activity down only 44% from a year ago when 147 rigs were working. In the breakdown the most encouraging data point was rigs working for natural gas which was at 41 rigs versus 45 rigs working last year. Natural gas stocks have held up better than oily names during the correction over the last few months as it is expected that we will see stronger AECO prices this winter as storage in Canada is below normal and drilling activity has not replaced demand. Most companies are likely to show declining production in Q3 versus the prior year and many could show declines from their Q2/20 volumes.

Natural gas prices are at very profitable prices now with AECO at $3.34/mcf while NYMEX is at US$3.03/mcf. We expect much higher prices once the depths of winter arrive next month.

Conclusion: As we write this, WTI for December is at US$37.18/b, down US$2.39/b on the day (and nearly US$6/b on the week) as the market did not like today’s EIA report. With such a large inventory build and the pandemic rising across Europe causing more lockdowns, the fear is that the case rise in the US may indicate that Wave Two is here with a vengeance and that caseloads, will rise rapidly, hospital beds will fill up to capacity and death rates may rise materially.

Positives for crude prices:

• US Gulf Coast production is being shut in again due to Hurricane Zeta (the eleventh Hurricane this year to hit Gulf Coast production. The Gulf produces 17% of US crude production and 5% of natural gas production.
• 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 as 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 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. Tracing is becoming tougher to do in those countries. Energy demand is falling across Europe.
• In 41 US states and Washington DC the number of new cases has increased. In some they are at record levels and some states have hospitals that are at max on their ICU beds.
• Libya is reopening its exports now that the civil war is over. Before the agreement they produced 156Kb/d in September. Last week’s production was at 500Kb/d as more ports  reopened. Additional fields should lift production to 800Kb/d in two weeks time and to over 1.0Mb/d in a month. This is much faster than markets had expected. Total production potential is 1.2Mb/d.

Downside pressure is expected in the coming weeks as the pandemic caseload rises lowering world energy demand and as production in Libya and then the US increases. A critical breach level is US$36.63/b and we see this occurring in the coming weeks. We have been range bound between US$41.90/b at the high end and US$36.63/b at the low end over the last few weeks. Once US offshore and Libyan production returns to 1.0Mb/d and if Wave Two caseloads and lockdowns get much worse, we should see the breach of the US$36.63/b level, We now see  revised downside for WTI crude oil to the US$28-32/b level.

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. Most results will not be investor friendly.

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 63.87 (last week it was at 65.85). Overall the index is now down by 34% in under four months. We see much more downside over the coming months as unfavourable Q3/20 results impact the stocks even more. We will be watching to see how companies discuss their debt loads and lender support. Companies with pessimistic views about their reserve base lending, cutbacks in lines of credit and potential additional impairment write-downs will face significant stock price pressure. The next support for the S&P/TSX Energy Index is at 60.38 (the low four weeks ago). Further lows are likely in Q4/20 as tax loss selling is likely to be very nasty this year. We see the likelihood that the final low for the index could be in the 32-36 area during tax loss selling season. We expect to see a very attractive BUY signal generated during Q4/20 and will recommend new ideas as well as highlight our favourite Table Pounding BUYS which should trade at much lower levels than now.

Please become subscribers before the November 26th webinar as we will be discussing the best ideas to invest in during the tax loss selling season. In addition during the 90 minute webinar we will discuss the third quarter results (those that did well and those that did not perform) of the 27 companies we cover. 

Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all archived Webinars, Action Alerts, TOP PICK recommendations when the next BUY signal occurs, as well as our Quality Scoring System review of the 27 companies that we cover. We go over the markets in much more detail and highlight individual companies in our reports. If you are interested in the energy industry this should be of interest to you.

Tomorrow we will release our October Monthly SER and we cover the general stock market’s erosion and downside risk. As well we review the only company that reported Q3/20 results before our research cut-off of Friday November 20th. The company was an energy service company that reported EBITDA ahead of our forecast and showed an improvement in their balance sheet during these tough times for the energy service sector.  

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