The Arctic Polar Vortex brought near century lows in temperatures last week to most of North America with frigid temperatures that knocked out electricity grids. Texas was the hardest hit with water, heat, refineries and power out due to the freezing temperatures. It may take a few weeks to get remediation done now that the weather has warmed up and repairs are underway. The price of crude spiked to US$63/b (up one dollar from last week). The data for the next few weeks should see divergences from the norm as these issues take time to be resolved. While natural gas prices have backed off from the cold weather spikes, crude oil remains elevated due to speculative forces pushing up crude oil futures and options. Some option positions into Q4/21 are positioned for WTI to exceed US$100/b. We see this enthusiasm as nuts. Has the pandemic gone away? Have we had everyone vaccinated who wants one of the vaccines? Has herd immunity arrived? Are the mutations irrelevant? I do see consistent US$100/b for WTI in the ‘future’ but not until 2024 onward.
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.
EIA Weekly Data: The EIA data on Wednesday February 24th was mixed. Commercial Inventories rose by 1.3Mb on the week compared to a forecasted decline of 5.2Mb/d. The difference was due to demand falling by 1.98Mb/d (13.9Mb on the week) and exports falling by 1.55Mb/d offset by imports falling by 1.30Mb/d. Motor Gasoline Inventories were unchanged while Distillate Inventories fell 5.0Mb due to strong winter demand. Refinery Utilization fell 14.5 points to 68.6% from 83.1% as most of the Texas refinery industry was shut down. US Domestic Crude Production fell by 1.1Mb/d to 9.7Mb/d and is down 3.3Mb/d from last year’s 13.0Mb/d. This level is better than forecast as production has recovered faster than expected.
With many parts of the US shut down last week due to the extreme winter weather Total Product Consumption fell 1.98Mb/d to 18.7Mb/d, Finished Motor Gasoline Consumption fell by 1.2Mb/d to 7.2Mb/d and Jet Fuel consumption fell by 196Kb/d to 979Kb/d. Cushing Oil Inventories rose last week by 2.8Mb. Inventories at Cushing are now at 47.8Mb and are up from 39.1Mb a year ago.
Baker Hughes Rig Data: The data for the week ended February 19th showed the US rig count unchanged despite the freezing weather in Texas, and a decline of four rigs for the Canadian rig count. In the US there were 397 rigs working, but that remains down 50% from 791 rigs working a year ago. The US oil rig count fell by one rig offset by a one rig increase for natural gas drilling. The Permian saw an increase of one rig to 204 rigs working and remains 50% below last year’s level of 409 rigs working. Canada saw a decline of four rigs last week with 172 rigs working. This is 30% lower than the 244 rigs active last year. The rig count for oil fell by one rig to 100 rigs working but is down 41% from 169 rigs working last year. The natural gas rig count fell by three rigs to 72 rigs active and is down from 75 rigs working at this time last year. In a few weeks we head into break up season so the rig count will start to fall off sharply as the road bans come on.
Conclusion: WTI crude oil is up almost US$11/b from the start of February. Of this rally US$8-9/b is due to the infusion of speculative money (from sources like the Robinhood and Reddit novice retail horde) who are buying futures and call options. These horde investors, a gang of over 14M retail investors, are trying to squeeze the energy Commercials (refiners, petrochemical companies and energy companies etc.) shorts who are short 1.71Bb (the prior week 1.64Bb). Commercials are now net short 621Mb. Historically commercials are right in the end and speculative investors get burned. We see this outcome occurring again once winter is over and world demand for crude falls 2.0-2.5Mb/d.
We believe that there is US$14-16/b of downside risk for WTI as markets begin to reflect the demand situation post-winter, the recovery in US production and OPEC cheating and/or raising approved production levels. We see WTI crude breaching US$50/b in April and going lower thereafter. OPEC meets on March 4, 2021 to ease curbs and are likely to increase production materially to lower Brent and WTI crude prices and not negatively impact the economic recovery or give incentive to the US shale industry to increase production after the winter weather event is over. Russia and Iraq are the most interested in seeing quota’s raised.
Technically the near-term support level for WTI crude is US$58.60/b. Energy and energy service stocks are very overbought and being chased by hot momentum money. We are clearly in the bear camp now. 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 Q4/20 are now being released and are not strong enough to justify current stock price levels if crude retreats. The cold weather had lifted AECO natural gas to C$5.31/mcf last week but AECO today is down to $2.99/mcf. The NYMEX US price now at US$2.86/mcf is down from US$3.24/mcf a week ago. The speculative players are not involved in natural gas so we see a major divergence in the price activity between the two commodities.
We now have a SELL signal in place since January 14, 2021. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of 14 stocks and the prices at which we think the ideas be harvested. We sent out a second sell signal on February 5th and added four additional ideas for harvesting. We ourselves have sold a large portion of our energy holdings for substantial profits. We sit in cash or defensive positions. The next few months could see significant downside for the energy sector. The topping process is ongoing and some surprise events will prick this bubble as the GameStop, AMC, cannabis and other bubbles were busted this month.
Energy Stock Market: The S&P/TSX Energy Index now trades at 117 and is part of a lengthy and extended broadening topping process. While we had expected this bubble to burst already, market manias can extend even longer and with crazier valuations than rational expectations would forecast. The S&P/TSX Energy Index is expected to fall substantially in the coming months. A breach of 103.60 should initiate the sharp decline.
