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 (SER) newsletter covering the general energy market and 30 energy, energy service and pipeline & infrastructure companies with regular updates. We hold quarterly subscriber webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more.
EIA Weekly Data: The EIA data on Wednesday September 22nd highlighted the continued return of US offshore production. Last week 500Kb/d came back on and overall US production is now 10.6Mb/d. There are still 900Kb/d to come back on stream to get back to the 11.5Mb/d of overall US crude production from before the hurricane season started. Some of the production, 200-250Kb/d, may take some time to return as Shell announced that major infrastructure repairs are needed. Commercial Crude Oil Stocks fell 3.5Mb on the week, below the fear number of a 6Mb decline. US exports rose 185Kb/d, or by 1.3Mb last week impacting the crude stock inventory. Gasoline Inventories rose by 3.5Mb as Refinery activity rose 5.4 points to 87.5% from 82.1%, as Gulf Coast refineries increased activity. We expect to see US crude oil production rising and reaching 12.0Mb/d before year end as the drilling pace picks up sharply and most of the remaining shut in offshore production returns.
Demand for all products rose last week. Total Product Demand lifted 1.23Mb/d to 21.1Mb/d as consumption of distillates and propane rose. Gasoline consumption picked up only a modest 4Kb/d to 8.9Mb/d while Jet Fuel Consumption rose by 111Kb/d to 1.49Mb/d. Cushing Inventories fell last week by 1.5Mb to 33.8Mb compared to 54.3Mb last year and 40.9Mb two years ago.
Baker Hughes Rig Data: The data for the week ending September 17th showed the US rig count rose by nine rigs (rose six rigs in the prior week). Of the total of 512 rigs working last week, 411 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 101% from 255 rigs working a year ago. The US oil rig count is up 130% from 179 rigs last year at this time. The natural gas rig count is up a more modest 37% from last year’s 73 rigs at 100 rigs. The Permian saw an increase of five rigs to 259 rigs and is up 111% from 123 rigs last year at this time.
Canada had a rise of 11 rigs (down nine the prior week) to 154 rigs. Canadian activity is now up 140% from 64 rigs last year. There were 95 oil rigs working last week, up from 30 last year. There are 59 rigs working on natural gas projects now, up from 34 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 once the impact of the hurricane/storm season is over. The data from the many companies that reported Q2/21 results and their plans for the second half of 2021 support this rising production profile expectation.
Conclusion:
Now that the summer driving season is over, we should soon see weaker crude oil consumption and 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 but if we see any increases over 5Mb in any week, that would put meaningful downward pressure on crude prices. The current spike in prices is speculative in nature and is not sustainable in our view.
Bearish pressure on crude prices:
- The Mu Variant is spreading around the world. This variant started in Colombia and now is impacting 39% of all people infected with the pandemic disease. This variant is now seen in more than 40 countries and in 49 US States. A London immunologist at the Imperial College in London says “that the early research indicates it appears to be highly effective at evading immunity”. Delta caseloads are growing around the world. Just note the challenges faced in Alberta. Formal QR code vaccine passports are to be the norm in Canada going forward.
- The Saudis are pricing crude oil for October delivery to Asia at US$1/b lower than previous months, as the fight for market share in the patchy economies in the area continues. China demand is especially sloppy. China plans on selling 7.4Mb from their state crude reserves on September 24th to cool off prices. Russia has announced that they plan on adding nearly 7% in additional production in 2022.
Bullish pressure on crude prices:
- Hurricanes, extreme heat waves, forest fires, crippling droughts and shortage of electricity for air conditioning across the US and Canada, are all aiding consumption of natural gas. It is a big beneficiary of this increase in electricity demand as hydro has, in many cases, low water levels. NYMEX natural gas prices have backed off and are now at US$4.83/mcf as air-conditioning demand wanes. AECO prices have taken a two for one sale to C$2.02/mcf but still attractive for this time of year. Prices for natural gas should continue to drift over the near term but should exceed recent highs this winter.
- Some OPEC countries like Nigeria, Libya and the Congo are having problems keeping crude oil production up due to their lack of funding for operations.
CONCLUSION:
WTI has fallen over the last week from a high of US$73.14/b to US$71.49/b as US offshore production has returned and mixed economic news has come out of the two largest energy consumers; the US and China. With more US offshore production expected to return in the coming weeks and significant new crude oil wells coming on from the active drilling in the shale basins, we see US production reaching 12.0Mb/d before year end. A breach of US$70/b is likely before the end of this month. October is likely to be a nasty month for prices depending upon the health of the largest world economic zones (the US, China and the EU) and how large the seasonal crude oil storage builds are. During Q4/21 we see WTI prices breaching US$60/b.
Energy Stock Market: The S&P/TSX Energy Index currently trades at 132, down slightly on the week. We expect that as crude prices decline the recent low for the Energy Index at 109.72, will be breached. The key breach level is US$61.74/b and the Energy Index should head towards 100.
When, not if, WTI breaks US$60/b, the S&P/TSX Energy Index is likely to breach 80 resulting in a painful 45% decline from the peak in mid-June. Over-invested bulls are likely to get hurt pretty badly. We recommend caution and holding cash for the next low risk entry point on that portion of one’s portfolio which is energy focused. The energy and energy service companies with the most downside are those with stretched balance sheets and have missed production, revenue or EBITDA forecasts. Take profits on decent up days and raise cash.
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The Evergrande Chinese property developer insolvency problem could be the catalyst for the expected decline we see ahead. They have over US$300B of debts that they can’t pay and large portions are owed to foreign investors and lenders. Near term interest payments if not paid later this week could push the entity into bankruptcy or Beijing controlled restructuring. The size of this problem is massive as they are building 1.6M apartments and homes that they don’t have funds to finish and as well, have taken large deposits from buyers. Protests at company offices are picking up by irate home buyers and suppliers. In any year they employ over 3M people in their construction activities and directly employ over 200,000 people. This could spiral out of control and become the ‘Lehman’ event to start a new financial crisis. We cover this in more detail in our Schachter Energy Report. Over the next few months this could lead to a domino effect of over leveraged companies getting into trouble and financial markets declining materially. The Dow Jones Industrials Index now at 34,350 could fall to below 30,000 in Q4/21 and to <25,000 in Q1/22. If you want to receive ongoing coverage of this possibility, become an SER quarterly or annual subscriber. For new people, the quarterly offering is a good way to peruse our product before you determine which subscription format makes the most sense for your needs.
On Monday, September 20th, the Dow Jones Industrials Index fell 614 points to 33,970 as this disaster in China was prominent in the news. If more excessively debt-laden entities fail and banks and lenders take big hits, then counterparty risk could be a material problem for the markets. We do not see this as a one day event. Multiple large point declines are likely to occur in Q4/21.
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