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 August 11th was mostly negative for crude oil prices as Commercial Crude Inventories fell by a modest 0.4Mb (forecast was for a decline of 1.3Mb). The main reason for the modest decline was that Exports rose by 759Kb/d, or by 5.3Mb on the week. Had there been a flat Net Import number, Commercial Crude Inventories would have risen by 4.9Mb on the week. Refinery Utilization rose 0.5% to 91.8% last week (last year was 81.0% and in 2019 was 94.8%). Gasoline Inventories fell 1.4Mb and Distillate Fuel Inventories fell by 0.4Mb.

US Crude Production rose last week by 100Kb/d to 11.3Mb/d. Over the coming months we see US crude production continuing to lift and getting close to the 12.0Mb/d levels, as the rig count continues to rise and companies are increasing field activity due to their higher cash flows. Private energy companies are the most focused on growth and are taking advantage of cheap land and access to equipment. We expect the majority of public and private energy companies to indicate a go-forward strategy of increased drilling activity with production growth in 2H/21 and even more growth in 2022.

Total Product Demand surprisingly fell by 1.65Mb/d to 19.5Mb/d. Demand is now materially below mid-August 2019 levels when consumption was 22.1Mb/d. Is this due to Covid worries and reticence to travel? Gasoline consumption fell 345Kb/d to 9.43Mb/d (9.93Mb/d consumed in mid-August 2019). Jet Fuel Consumption fell 367K/d to 1.28Mb/d (much below the pre-pandemic level of 2.02Mb/d of mid-August 2019). This across the board consumption decline is why we are expecting lower crude prices in the coming months. Cushing Inventories fell last week by 0.3Mb to 34.6Mb compared to 53.3Mb last year.

Baker Hughes Rig Data: The data for the week ending August 6th showed the US rig count with a rise of three rigs to 491 rigs (down by three rigs last week). Of the 491 US rigs active, 387 were drilling for oil and 103 were focused on natural gas activity. This overall US rig count is up 99% from 247 rigs working a year ago. The US oil rig count is up 120% from 176 rigs last year. The natural gas rig count is up a more modest 49% from last year’s 69 rigs.

Canada had a three rig increase last week (versus a four rig increase in the prior week) to 156 rigs. Canadian activity is now up 3.3x from the low of 47 rigs last year. There were 95 oil rigs working last week, up from just 13 last year. There are 60 rigs working on natural gas projects now, up from 34 last year.

The material increase in rig activity in both the US and Canada over the last year should continue to translate into rising liquids and gas production. The data from the companies that have reported Q2/21 results are supporting this rising production profile.

Conclusion:

OPEC+ have turned on the spigots and there should be increasing amounts of crude oil arriving in the market over the coming months (Russia even shipped 212Kb/d to the US last week versus nothing a year ago or two years ago). Starting in September when the summer driving season is over there should be weekly builds in Commercial Crude Stocks around the world as inventories build to meet the winter 2021-2022 needs. If we see weekly repetitive rises of some significance in US storage levels, WTI crude should decline below US$60/b this fall. 

A new more virulent variant ‘Kappa’ is now occurring around the world. This originated in both Belgium and Colombia and has now reached the US. Those who died in Belgium had been fully vaccinated. This and other new variants mutations may have a viral load 1,000 times higher than the Alpha variant, warned Dr. Anthony Fauci. They are reported to have high capability of transmitting and also may be more severe to those infected. The worry is that as the virus mutates this fall and winter that more severe strains will break out and the current vaccines may be insufficient.

Bearish pressure on crude prices:

1. The White House on Wednesday called on OPEC to boost production even further (than the 400Kb/d per month announced by OPEC+) as high gasoline prices at the pump causes consumer anxiety. US Gasoline prices are up US$1/gallon from last year to an average of US$3.19/gal. In California prices exceed US$5/gal. The US is requesting a bigger boost in production as rising inflation could derail the nascent US economic recovery.
2. Southwest Airlines says the Delta variant is impacting bookings and cancellations (of close in trips) are accelerating. They see September revenue likely down 15-25%.
3. The CDC says travellers should avoid France, Iceland, Israel and Thailand due to very high levels of Covid-19. International travel is being impacted, meaning lower consumption of Jet Fuel. Flight capacity within China is down sharply as well. China cancelled all large-scale exhibitions and events for the remainder of August. Imports of crude into China fell from 10.4Mb/d to 9.7Mb/d in July as demand declined. This is now the fourth month of imports below 10.0Mb/d. Sinopec has announced refinery runs will be down nearly 10% this month. China’s new lockdowns will surely impact world supply chains. Nike and Adidas AG have announced shutting down some of their Asian factories.
4. Low vaccination rate countries in Asia are imposing new growth-sapping restrictions due to the fast rise in the new more lethal and faster spreading variants.
5. Australia has locked down two-thirds of the country, lowering consumer spending by 15% since the new lockdowns started. The worst caseloads are in the big cities of Sydney and Melbourne.
6. Countries such as Argentina, Australia (military sent in to enforce Zero Covid lockdown) Bangladesh, China (14 of 32 provinces seeing spikes – including Wuhan where the outbreak started, as well as in the capital Beijing), Cuba, Guatemala, Indonesia, Iran, Iraq, Japan, Malaysia, Mexico, Morocco, Saudi Arabia, South Africa, South Korea, Sri Lanka, Thailand and Vietnam are seeing rising caseloads and are tightening movement and putting in curfews. This list is up five countries from last week. Death counts are now up to 4.3M worldwide and are over 617K in the US.
7. The US is seeing a rapid rise among both the vaccinated and unvaccinated. Intensive care beds are now being rationed as caseloads reach last winter’s wave. Some of the disturbing trends are:

• The Texas Governor is asking for help (while still banning masks) as case loads rose to 17,000 new cases last Saturday and hospitalizations have doubled from two weeks ago. Patients in Houston are being transferred out of the city and as far away as to North Dakota hospitals.
• Florida’s caseload rose to 157,000 cases last week, the highest number in the US. The state’s record level of hospitalizations is now at 10,000 beds. Florida also now has the highest number of children hospitalized. The state has asked the Feds for 300 more ventilators.
• The US now has a seven day average of 127,000 cases and there still are 100M unvaccinated people in the US. Over 50% of new cases in the US are reported being in children.

Bullish pressure on crude prices:

1. Rising vaccination levels of the adult US population toward herd immunity level has lifted summer travel both by air and land. The US now has 50.2% of Americans completely vaccinated and 55.8% with an initial dose. Worldwide crude demand rose by 1.5-2.0Mb/d during the summer travel months. This demand increase should last into early September.

2. Weather impacts (hurricane season has started) may necessitate shutting in some of the offshore Gulf of Mexico production. The most severe part of the hurricane season starts next month. Tropical storm Fred (number six hurricane event for the year) is heading now to Puerto Rico and may hit Florida thereafter.

3. Extreme heat waves, crippling droughts and shortage of electricity for air conditioning across the US and Canada is 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 are now at US$4.08/mcf. AECO prices have drifted lower but are still at an attractive C$2.98/mcf.

CONCLUSION: 

WTI has fallen nearly 11% from an early June high of US$76.98/b to US$68.78/b today as the ‘Delta’ variant spreads and ‘Kappa’ rears up, slowing down many economies around the world.  A breach of the recent low of US$65.01/b (expected later in August) should set up a decline to the US$60/b level during September. We see even lower crude prices in Q4/21 if worldwide economic activity slows more materially. Our downside WTI crude case is for US$48-54/b if the pandemic worsens and the two largest economies of the US and China are under health duress.  

Energy Stock Market: The S&P/TSX Energy Index trades currently at 122 and is down 23 points from 145 in mid-June, or down so far by 16%. The level to watch now is the low of  118.46 from last week. A close below this level would set up the next support level of the 111 area. A bust of US$65/b for WTI would likely mean a decline in the Energy Index to the 100 level or lower, or down by an additional 18%. This is likely to occur in September. Just falling to the 100 level means a nasty decline of over 31% from the mid-June high. Much lower levels are possible later this fall. If WTI breaks US$60/b then 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. Some of the hardest hit energy and energy services companies are down 40-50% so far.

Subscribe to the Schachter Energy Report (SER) and receive access to our two monthly reports, all  archived Webinars, Action Alerts, TOP PICK recommendations when the next BUY signal occurs, as well as our Quality Scoring System review of the 30 companies that we cover. We go over the markets in much more detail and highlight individual companies’ financial results in our reports. Our August Interim Report went out last week and started the review of Q2/21 results with the coverage of ten companies. Our next two SER reports will focus on the remaining results of Q2/21 for the 30 companies on our Coverage List.

We are holding our quarterly SER Black Gold webinar tomorrow night for subscribers at 7PM MT and will discuss our views on the energy and stock markets as well as cover the results of the companies that have reported Q2/21 results to date. Some companies have reported good results, others OK results and some not so good results. We will go over the company results from each group during the 90 minute webinar. 

If you want to join the webinar or access our reports then you will need to become a subscriber. Go to https://bit.ly/34iKcRt to subscribe.