Each week Josef Schachter gives you his insights into global events, price forecasts and the fundamentals of the energy sector. Josef offers a twice monthly Black Gold (SER) newsletter covering the general energy market and 30 energy, energy service and pipeline & infrastructure companies with regular updates. We also hold quarterly webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more. 

EIA Weekly Data: The EIA data on Thursday October 14th surprised energy bulls once again with a huge increase in Commercial Crude Oil Stocks of 6.1Mb (forecast was for a rise of 0.7Mb), and an increase in US crude production of 100Kb/d as US production recovered to 11.4Mb/d. This is just short of the 11.5Mb/d before the hurricanes started. We have been highlighting these negative issues for crude oil over the last number of issues and they are clearly occurring. This will eventually put a cold shower on the crude bulls and drive WTI prices down below US$70/b in the near future.

In detail:

• Commercial Crude Oil Stocks rose by 6.1Mb on the week to 427.0Mb. Energy bulls point to this being 62.1Mb below last year’s pandemic level, but it is close to the 434.9Mb seen at this time in 2019 when demand was higher. So we don’t see crude inventories as low for this time of year. Gasoline inventories fell by 2.0Mb to 223.1Mb and are close to the 226.2Mb in storage at this time in 2019. This crude oil inventory number would have been 10.0Mb higher or up a total of 16.1Mb if not for net imports declining by 1.441Mb/d or by 10.0Mb on the week.
• Refinery Activity fell 2.9 points to 86.7% from 89.6% last week. This level  is now above the pre-pandemic levels of 83.1% at this time in 2019. The lower refinery activity was the reason for the lower gasoline inventories.
• Demand for all products fell materially last week. Total Product Demand fell 1.651Mb/d to 19.875Mb/d (20.905Mb/d consumed in 2019 at this time). Gasoline consumption fell 241Kb/d to 9.186Mb/d (9.354Mb/d consumed in 2019 at this time) while Jet Fuel Consumption fell 360Kb/d to 1.334Mb/d (1.613Mb/d consumed in 2019 at this time). Cushing Inventories fell by 175Mb/d to 33.6Mb compared to 59.4Mb last year and 43.0Mb two years ago before the pandemic.

This was a very bearish weekly EIA report and as we see more seasonal inventory builds in the coming weeks, crude oil should fall US$10-15/b during Q4/21. Energy bulls are following momentum and are ignoring the industry data. 

OPEC October Monthly Oil Market Report: On October 13th OPEC released their October Monthly forecast report. The key highlights were a large increase in September production and a lowering of their demand forecasts for the end of 2021 and the beginning of 2022. The increase in September production was 486,000 b/d (above their agreed to increase of 400,000 b/d). The biggest increase was from Nigeria which raised production by 156,000 b/d to 1.451Mb/d last month versus having production difficulties in August when production fell by 114,000 b/d to 1.271Mb/d. Saudi Arabia increased production by 139,000 b/d to 9.678Mb/d and Iraq raised production by 84,000 b/d to 4.139Mb/d.

Russia also increased production last month by around 100,000 b/d. So there does not appear to be a real shortage of crude, just a shortage of crude in high demand areas due to supply chain issues.

OPEC lowered Q3/21 demand forecast by 130Kb/d to 98.467Mb/d but raised Q4/21 demand by 120Kb/d to 99.7Mb/d. For 2022, they raised overall demand growth to 4.15Mb/d or to 100.76Mb/d versus 96.6Mb/d in 2021. This moving of the demand goal line into the future has been a regular occurrence this year. We see their current forecast as too optimistic due to  the data on demand coming out of the US and China, the two largest energy consuming nations.

OPEC is forgetting history. Every time they have allowed a price spike to occur and did not keep prices from impacting demand, prices fell greater than 50% (just check 2008, 2014, 2018 and 2020). Demand is sluggish in the US due to weak consumer spending and is falling in China as they work to clear up the air quality ahead of the 2022 February winter Olympics, starting in less than four months.

Baker Hughes Rig Data: The data for the week ending October 8th showed the US rig count rose by five rigs (rose seven rigs in the prior week). Of the total of 533 rigs working last week, 433 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 98% from 269 rigs working a year ago. The US oil rig count is up 124% from 193 rigs last year at this time. The natural gas rig count is up a more modest 36% from last year’s 73 rigs, now at 99 rigs. The Permian saw an increase of three rigs (up by three rigs last week) to 266 rigs and is up 105% from 130 rigs last year at this time.

Canada had a rise of two rigs (up three rigs in the prior week) to 167 rigs. Canadian activity is now up 109% from 80 rigs last year. There were 95 oil rigs working last week, up from 39 last year. There are 72 rigs working on natural gas projects now, up from 41 last year.

The material increase in rig activity over a year ago in both the US and Canada should continue to translate into rising liquids and gas production over the coming months. The data from many companies on their plans for Q4/21 and forecasts for 2022 support this rising production profile expectation.

Conclusion:

We should see more weekly builds in Commercial Crude Stocks around the world as inventories rebuild to meet the winter 2021-2022 needs. Normal fall season builds are 2-3Mb per week. If we see any increases over 5Mb in any week (like the 6.1Mb/16.1Mb increase this week), that would put meaningful downward pressure on crude prices. The current spike in crude oil and natural gas prices is speculative in nature and is not sustainable. 

Bearish pressure on crude prices:

1. Covid caseloads are growing around the world. Formal vaccine documents are to be the norm in Canada going forward. In the US the death rate is >2,000/day and over 716K deaths have been reported. Worldwide the death count is now 4.87M. This pandemic has taken more lives in the US than the 1918-1919 Spanish Flu (675,000 estimated).
2. Demand is under pressure as high prices for most food, rent, taxes, child care, health expenses, auto costs and other daily necessities make spending decisions tougher for consumers. So this gouge in prices will surely impact consumers’ buying behaviour in the coming months. The spending pie of consumers is shrinking and some spending habits of the past will have to be dropped. Demand destruction is on the way. This week’s EIA report confirms this.
3. Global ports remain clogged with containers and delivery problems and could last into 2023 according to the CEO of Dubai’s DP World, the largest operators of ports. Some key US ports are going to 24 hours per day work schedules to clear the container blockage. However industry experts say this will not help in the short run.

Bullish pressure on crude prices:

1. Speculative long investors (hedge and commodity funds) and a short squeeze on bearish positions in the futures and options markets on crude and natural gas have spiked up prices. It could go higher but as these positions are reversed, the parabolic price spike could reverse sharply on any negative news.
2. Spot prices in short supply areas like Europe have lifted natural gas prices to over US$32/mcf in Europe and over US$36/mcf in parts of Asia (NYMEX today US$5.87/mcf – AECO C$4.81/mcf) as wind power is not fulfilling its need.
3. Russia has increased supplies of natural gas to Europe by 15% from a year ago and will be able to meet all winter needs (recent Putin statement) once they get permission to fully open the new NordStream 2 pipeline. The Russians are starting to fill the pipeline with gas as it tests for structural integrity and plans for shipping gas for the upcoming winter, shortly after approvals are received. The German regulator still needs two months to complete certification. They should hurry in case the weather gets colder faster than expected. The Danish Energy Agency has accepted that the line can be put into operation.

CONCLUSION: 

WTI has risen to US$80.62/b despite the rise in Commercial Crude Oil Stocks. We see prices as having US$15/b of speculative value which should disappear as Commercial Crude Stocks continue their seasonal build. The question for us is what is happening to world wide demand as the two largest economies in the world slow down? 

Many industrial plants in China have been closed due to the high cost of fuel and the Government’s plan to lower emissions in the Beijing area for the upcoming winter Olympics from February 4th to the 20th. Clean air is needed for the event and China wants to show it is making progress on its climate initiatives. This will dampen China’s consumption of fossil fuels over the next four to six months. 

Energy Stock Market: The S&P/TSX Energy Index currently trades at 157 as natural gas stocks rose sharply over the last week following the whirlwind gaping natural gas prices in the international spot market. The S&P Energy Bullish Percent Index has reached 100% again. This is a clear SELL signal. Energy stocks could fall 30-40% in the coming months.

Our October SER Monthly Report comes out next Thursday October 21st with details on the weakening general stock market and its expected impact on the energy sector.

Market pressures from many directions are a drag that are likely to change the current effervescent mood of investors. Some of these are:

• The debt ceiling battle – phase two deadline in early December,
• Rising bond yields,
• The problem of Congress’s approval of the two stimulus bills and the US$3.5T price tag,
• The planned new or increased taxes,
• Rising inflation (5.4% for US CPI in September and a whopping 10.7% surge in China’s PPI in September) are now drags on the general stock market.
• The most concerning domino which started the overall market decline appears to be the overleveraged and retrenching real estate sector in China.

We cover this in detail in our Schachter Energy Report. Over the next few months any of these events could lead to a domino effect of debt laden companies getting into trouble and financial markets declining materially. The Dow Jones Industrials Index is now  at 34,880 (market peak for Dow Jones Industrials Index at 35,631 in mid-August 2021) and could fall to below 30,000 in Q4/21 and to <25,000 in Q1/22. We have already seen three down days of more than 500 points for the Dow Jones Industrials Index and expect many more in the coming months as the bullish enthusiasm swings to fear and liquidation.

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