This week Josef examines why WTI Crude prices fell nearly 10% over the last week was because of commercial inventories rising and OPEC overproducing. The S&P/TSX Energy Index fell 9% over the last week and is down 25% since the June high when he recommended taking profits from the great run from the mid-March BUY signal. Josef expects a new BUY signal during Q4/20.

Each week Josef Schachter will give you his insights into global events, price forecasts and the fundamentals of the energy sector. Josef offers a twice monthly Black Gold newsletter covering the general energy market and 27 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:. The EIA data on Thursday September 10th showed a production recovery from the impact of Hurricane Laura on Gulf coast production. Lower 48 production rose by 300Kb/d to 10.0Mb/d but is still down 2.4Mb from 12.4Mb/d at this time last year. More of the curtailed production should return in the coming weeks. Commercial crude stocks rose 2.0Mb to 500.4Mb as net imports rose by 581Kb/d or by 4.1Mb last week. The expectation had been for  a decline of 1.34Mb on the week. Overall stocks are 84.4Mb above last year or up by 20.3%. This build and current high stock level is putting pressure on WTI crude prices. Total product demand recovered after the Hurricane to 18.7Mb/d up 1.7Mb/d (last week was down by 2.64Mb/d to 16.98Mb/d as the hurricane hit land). Inventories of gasoline fell by 3.0Mb/d as refinery runs fell 4.9 points to 71.8% from 76.7% the prior week. We are now heading into the refinery maintenance period as they get ready to switch over to produce winter grade products.

Overall product inventories remain high at 1.94Bb or 136.0Mb (7.0%) above the previous year level. Total product demand is at 18.7Mb/d down 2.75Mb/d from a year ago or by 12.8%. Gasoline demand fell 396Kb/d to 8.39Mb/d as the summer driving season level subsides. Overall gasoline demand has declined by 14.4% from a year ago. Jet fuel consumption fell by 76Kb/d to 864Kb/d and is down 651Kb/d or 43.0% from a year ago. With coronavirus cases picking up again as schools and more businesses reopen, the US case load has risen to 6.4M cases with a new high of 192K fatalities. The next few weeks will be critical for the forecasts as the colder weather and normal seasonal flu season starts. If we see a Wave Two situation as is being seen in France, South Korea and some places in China, then greater lockdowns will hit energy demand even further and depress crude prices further.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed no change in the US land rig count. The US rig count is now at 256 rigs working, but remains down 71% from 898 rigs working a year ago. The Permian basin was flat last week at 125 rigs and is down now by 71% from a year earlier level of 427 rigs. The US oil rig count rose by one rig to 181 rigs but is down 76% from 738 rigs working last year.

Canada saw a decline of two rigs to 52 rigs working (down also two rigs last week). This level is down 65% from 147 rigs working at this time last year.

Conclusion: As we write this, WTI for October is at US$37.53/b down $0.52 on the day and down sharply from US$41.65/b last Wednesday. This decline of over US$4/b or down by nearly 10% in just one week is due to OPEC excess production and the rise in storage worldwide. The US build data today is the clear evidence of this. Crude prices should continue to decline in September as US consumption normally declines by 1.0-1.5Mb/d as the summer driving season ends. Further pressure is likely to come from OPEC as they raised production by 2.0Mb/d in August. They meet virtually next week, September 17th, and if they don’t reverse their increase in August (or cut it somewhat) then prices are likely to erode further. The psychological level of US$40/b was breached last week and the support at US$38.72/b has also now occurred confirming a top for crude. The next key level for WTI is US$34.36/b. If this is breached then the  sector will face increased pressure. We see most energy 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 and likely Q4/20 for most energy and energy service companies should be short of the prior year’s level which when reported will add to the downside pressure. 

Hold cash and remain patient for the next low risk BUY window expected during Q4/20. 

The S&P/TSX Energy Index fell nearly 9% to the 72 level today versus 79 last week. From the June high at 96 when we recommended profit taking the index is down by 25%. We see much more downside over the coming months. The support at 74.67 has been breached and the next downside target for the index is the 50 level. Further lows are likely in Q4/20 as tax loss selling could be very nasty this year.

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