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 Wednesday October 6th surprised energy bulls once again with increases in Commercial Crude OIl Stocks of 2.3Mb (forecast was for a decline of 0.4Mb), and an increase in US crude production of 200Kb/d as US production recovered to 11.3Mb/d (just short of the 11.5Mb/d before the hurricanes started). We have been highlighting these potentials over the last number of issues and they are now occurring. This should put a cold shower on the crude bulls and drive prices down below US$70/b in the near future.

In detail:

• Commercial Crude Oil Stocks rose by 2.3Mb on the week to 420.9Mb. Energy bulls point to this being 72.0Mb below last year’s pandemic level, but it is close to the 422.6Mb seen at this time in 2019. So we don’t see crude inventories as too low. Gasoline inventories rose by 3.3Mb to 225.1Mb and are close to the 230.0Mb in storage at this time in 2019.
• Refinery Activity rose 1.5 points to 89.6% from 88.1% last week as Gulf Coast refineries increased activity. This is now above pre-pandemic levels of 85.7% at this time in 2019.
• In the coming months we expect to see US crude oil production rising and reaching 12.0Mb/d as the drilling pace picks up sharply and much of the remaining shut in offshore production returns. This week’s level of 11.3Mb/d (up 200Kb/d this week) supports this view.
• Demand for all products rose last week. Total Product Demand rose 1.135Mb/d to 21.526Mb/d as Distillate Demand rose 392Kb/d and Other Oils rose by 390Kb/d. Gasoline consumption picked up a modest 28Kb/d to 9.274Mb/d while Jet Fuel Consumption rose by a decent 267Kb/d to 1.694Mb/d (1.76Mb/d consumed in 2019 at this time). Cushing Inventories rose by 1.5Mb/d to 35.5Mb compared to 56.5Mb last year and 41.7Mb two years ago.

This was on an overall basis a bearish report and as we see more seasonal inventory builds in the coming weeks, crude oil should fall US$10-15/b during Q4/21.

OPEC October Supply Meeting: OPEC met on Monday October 4th and approved their originally planned 400,000 b/d increase in quotas. This was despite significant pressure for larger volume increases from the US, China and India, their biggest consumers. Crude oil bulls rejoiced and pushed WTI up to a new 2021 high of nearly US$79.50/b on Monday with the support of short covering and margin calls on bearish futures and options traders, who were required to reverse their positions or add to their margin capital. The basic problem with the 400,000 b/d monthly increase is that some of the members getting higher quotas do not have capacity to raise production. For example in August OPEC increased quotas by 400,000 b/d but only 151,000 b/d of new oil was brought on (the Saudis +69K b/d, UAE +55K b/d, Iraq +90K b/d and Angola +43K b/d). On the downside, producers such as Nigeria decreased production by 114K b/d and the Congo by 14K b/d. It is unlikely that the full 400Kb/d was brought on in September (data to be released Wednesday October 13th). If OPEC wanted to, just Iraq, Kuwait, Saudi Arabia and UAE could increase production almost immediately by 3-4Mb/d. This would lower crude prices and keep pump prices reasonable. If not, demand will fall even more sharply than is now likely. The current short-term OPEC greed pricing will surely fall to depressed prices again and hurt OPEC members severely. Don’t they remember 2009 and early 2020?

OPEC is forgetting history. Every time they have allowed a price spike to occur and did not keep prices from impacting demand, the price of crude after spiking, fell greater than 50% (just check 2008, 2014, 2018 and 2020). Demand is sluggish in the US 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 1st showed the US rig count rose by seven rigs (rose nine rigs in the prior week). Of the total of 528 rigs working last week, 428 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 98% from 266 rigs working a year ago. The US oil rig count is up 126% from 189 rigs last year at this time. The natural gas rig count is up a more modest 34% from last year’s 74 rigs, now at 99 rigs. The Permian saw an increase of three rigs (up one last week) to 263 rigs and is up 104% from 129 rigs last year at this time.

Canada had a rise of three rigs (up eight rigs in the prior week) to 165 rigs. Canadian activity is now up 120% from 75 rigs last year. There were 97 oil rigs working last week, up from 37 last year. There are 68 rigs working on natural gas projects now, up from 38 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 the 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 (as we saw this week). If we see any increases over 5Mb in any week, that would put meaningful downward pressure on crude prices. The current spike in prices was speculative in nature and is not sustainable.

Bearish pressure on crude prices:

1. Covid caseloads are growing around the world. Just note the challenges faced in Alberta. Formal vaccine documents are to be the norm in Canada going forward. In the US the death rate is >2,000/day and over 703K deaths have been reported. Worldwide the death count is now 4.81M. 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 and other daily necessities make spending decisions tougher for consumers. Yesterday, I filled our car, spending over C$71 to fill it – the first over $70 fill in years. Normally C$50 would have done it. So this gouge in prices will surely impact most consumers buying behaviour in the coming months.
3. Global ports remain clogged with containers and delivery problems could last into 2023 according to the CEO of Dubai’s DP World, the largest operators of ports.

Bullish pressure on crude prices:

1. A short squeeze on bearish positions in the futures and options markets on crude and natural gas has 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$5.84/mcf – AECO C$4.87/mcf).
3. Russia has held back supplies of natural gas to Europe as they pressure the EU and Germany to open the new NordStream 2 pipeline. The Greens and the Free Democrats, planning to join the new Government, are against the project. Opening the pipeline should end the shortage of natural gas on the continent. Once the political maneuvering is over this should start up. The Russians are starting to fill the pipeline with gas as it tests for structural integrity and plans for shipping more gas for the upcoming winter. The German regulator still needs three months to complete certification. The Danish Energy Agency has accepted that the line can be put into operation.

CONCLUSION: 

WTI has fallen to US$75.48/b (down US$1.48/b) due to the rise in Commercial Crude Stocks. We see prices as having over US$15/b of speculative value which should disappear as 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 149 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 Interim Report comes out tomorrow Thursday October 7th with details on the weakening general stock market and its expected impact on the energy sector.

Market pressures such as the debt ceiling battle in the US, rising bond yields, the problem of Congress’s approval of the two stimulus bills and the US$3.5T price tag, the planned 40 new or increased taxes, and rising inflation are now drags on the general stock market. The domino starting the overall market decline appears to be the overleveraged and retrenching real estate sector in China. Following on this problem is the very politically tough situation in the US as all Republicans are opposed to the Biden Human Infrastructure proposal and a few moderate Democrats are also opposed.  Liberals and progressives want a bigger package and moderates want to see it lowered in price and fully paid for with taxes. The next few weeks could see some of the Biden policy agenda face defeat which could rock the financial markets.

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 over leveraged companies getting into trouble and financial markets declining materially. The Dow Jones Industrials Index is now below 34,000 (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. As predicted, 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.

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