Josef notes that US oil production fell 200Kb/d last week due to renewed hurricane activity and declining WTI crude prices. And predicts a decline below US$30/b for WTI is likely during Q4/20.
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EIA Weekly Data:. The EIA data on Wednesday September 23rd showed a production decline of 200Kb/d as Hurricane Sally hit Gulf coast production. Lower 48 production fell to 10.7Mb/d versus 10.9Mb/d in the prior week and down 1.8Mb/d from 12.5Mb/d last year. Commercial crude stocks fell 1.6Mb versus an expectation of a decline of 3.3Mb as net imports fell 267Kb/d or 1.9Mb on the week. Overall commercial crude stocks are 74.9Mb above last year or up by 17.8% as the glut continues. Total product demand recovered after the recent hurricanes to 18.4Mb/d, up 1.4Mb/d from the prior week. Inventories of gasoline fell by 4.0Mb/d as refinery runs fell 1.0 points to 74.8% from 75.8% in the prior week.
Overall product inventories remain high at 1.94Bb or 128.6Mb (6.6%) above the previous year level. Total product demand at 18.4Mb/d is down 2.76Mb/d from a year ago or by 13.0%. Gasoline demand rose a moderate 37Kb/d on the week to 8.5Mb/d but is down 831Kb/d or 8.8% from last year’s level of 9.35Mb/d. Jet fuel consumption fell by 12Kb/d to 935Kb/d and is down 565Kb/d or 37.7% from a year ago. With coronavirus cases picking up again in many US states the US coronavirus case load has risen to 6.9M cases with a new high of over 200K fatalities. The next few weeks will be critical as the colder weather and normal flu season starts. If we see a Wave Two situation as is being seen in France, Spain, the UK, South Korea and some places in China, then greater lockdowns will hit energy demand and depress crude prices further. Cushing inventories were unchanged on the week at 54.3Mb above last year’s level of 40.9Mb.
Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a two rig increase in the US land rig count. The US rig count is now at 255 rigs working, but remains 71% lower than the 868 rigs working a year ago. The Permian basin lost one rig last week to 123 rigs working and is down by 71% from a year earlier level of 417 rigs. The US oil rig count fell by one rig to 179 rigs and is down 75% from 719 rigs working last year.
Canada saw a significant rise of 12 rigs to 64 rigs working last week as higher natural gas prices lifted activity. While a nice improvement it is still down from 119 rigs working at this time last year.
Conclusion: As we write this, WTI for October is up modestly over US$40/b. We don’t see this as lasting as inventories will start to build again once all US production returns on the Gulf and other places shut-in last week. In addition the increase in production by OPEC will at some point depress prices. It is likely with the rise in coronavirus cases and more business closures that energy demand will wane and OPEC may be forced to cut production once again. The psychological level of US$40/b is being tested and if we breach support at US$36.13/b then it is likely that any bad news on the vaccine or the US moving into a Wave Two situation would trigger WTI crude prices falling below US$30/b during Q4/20.
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 also 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 is now at the 69 level today. From the June high at 96 when we recommended profit taking, the index is down by 28%. We see much more downside over the coming months. The support is now at 66.99. When this is breached the next downside target for the index is around the 50 level. Further lows are likely in Q4/20 as tax loss selling is sizing up to be very nasty this year.
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