Each week Josef Schachter gives 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 39 energy, energy service and pipeline & infrastructure companies with regular updates. We also hold quarterly webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more.
Global Economic, Political & Military Update:
US CPI inflation fell back and this lifted stock markets worldwide as hope lifted that the Federal Reserve may hold off lifting its Fed Funds rate on Wednesday July 26th by the prior expectation of a rise of 25 BP. The US Dollar has retreated to 100.60 today, near the early May low. The Dollar low for 2023 was 100.42 in mid-April. Yields on the two-year Treasury have backed off from 4.99% a week ago to 4.73% today as optimism about Fed restraint spreads.
The CPI month over month came in at 0.2% and the year over year for June at 3.0%. The latter decreased from 4.0% in May. Core CPI (ex food and energy) remained too high at 4.8% but was down from 5.3% in May. The big help in getting a lower number was the decline in gasoline prices which fell 26.5% from last year. Also helping was a decline in used car prices (down 5.2% from June 2022). Rents however continued to lift inflation costs to consumers as they rose 0.5% in the month (6% annual rate).
While this CPI report indicates that inflation pressure is subsiding, the Fed’s concern about a tight labour market and rising wage inflation has not gone away. The June jobs report of last week showed average hourly earnings rose 4.4% year over year and was above the 4.2% forecast. The unemployment rate fell to 3.6% from 3.7% in May.
Tomorrow the PPI comes out and that should also show declining inflation pressures. We still expect the Fed to increase rates at the end of this month as more strikes are planned by workers to get large wage increases (UPS – 340K drivers, UAW against the big three US automakers, etc.). In Canada the west coast port workers strike (7,400 employees) is already slowing exports of potash, coal and arriving items like cars from Asia. These supply chain issues can drag on for a while and add to costs and embed itself into higher inflation. Nutrien announced today that it has halted production at its Cory potash mine in Saskatchewan as there was no more storage capacity at the Neptune bulk terminal at the Vancouver port. The Bank of Canada raised its key rate by 25 BP to 5.00%, its highest rate in 22 years as it fights to get core inflation below 2%.
The 2% goal of the Fed is something that may take into the end of the decade to occur unless some significant black swan event knocks the economies hard.
Today the bulls are elevating stock prices. The Dow is up 0.8% or 270 Points to 34,531, with the broader averages up even more. The end of this week starts Q2/23 earnings season and we will be watching comparisons and guidance. Overall expectations are for the S&P 500 to see a decline of 7% in earnings comparisons. If results come in worse or guidance is negative then the markets exuberance will reverse. Stock multiples are high and if earnings are heading downward there can be a material near term correction. We are watching the 33,600 level for the Dow, which if breached would complete a topping formation for the Dow. A close below 32,600 would set up the waterfall decline phase to below 30,000. Stay patient with cash reserves and be ready to BUY at the next low risk entry point. Don’t get trapped by this current euphoria.
Get ready to be buyers once this expected correction has lowered stock prices and fear has returned to the markets. The CNN Fear & Greed Index today is at an extreme greed reading of 80. Bottoms usually occur below a 20 reading.
We are waiting for the stock market to get oversold again to add to our energy investments. Many energy stocks are down over 50% from their 2022 highs. If you want to see what our subscribers are looking at, sign up now for access to the Schachter Energy Research reports at https://bit.ly/2FRrp6k. We expect to add additional ideas during this next decline phase especially if the S&P Energy Bullish Percent Index falls below 10% and triggers the next BUY signal.
Bullish pressure for crude prices comes from the announcements of August production cuts by Saudi Arabia, and Russia. This squeezed crude short sellers and drove the price of WTI up by over US$5/b over the last two weeks. The question is are these real barrel cuts at the levels announced or just more rhetoric to squeeze shorts. The cuts that have been announced have been mostly of heavier sour grades, while light oil grades remain plentiful. Iraqi exports via Turkey remain held up by the Iraqi government adding to the tightness.
Bearish pressure for crude comes from the weakness in economies in the US, Europe (Germany now officially in recession) and Japan. The US alone has consumption down by 2.4% from 2022 levels according to today’s EIA Weekly Petroleum Report (see below).
EIA Weekly Oil Data: The EIA data (data cut-off July 7th) was bearish for crude prices as Commercial Crude Stocks rose 5.9 Mb to 458.1 Mb. This is 31.1 Mb above last year’s 427.1 Mb. The rise was partially due to Net Imports which rose 599 Kb/d or 4.2 Mb on the week. The SPR saw a release of only 0.4 Mb of crude last week. Motor Gasoline inventories were unchanged and Distillate Fuels saw a rise of 4.8 Mb. Refinery Utilization rose 2.6% to 93.7%. US crude production fell 100 Kb/d to 12.3 Mb/d. Cushing inventories fell 1.6 Mb to 41.2 Mb.
Motor Gasoline consumption fell 844 Kb/d to 8.76 Mb/d as bad weather across the eastern US impacted demand. Jet Fuel saw a fall of 153 Kb/d to 1.54 Mb/d due to flight cancellations. Total Demand fell 2.54 Mb/d to 18.7 Mb/d as Distillate demand fell 844 Kb/d to 1.54 Mb/d and Propane consumption fell 527 Kb/d to 626 Kb/d again due to the weather issues.
Demand destruction is real in the US but comparisons are getting positive. The numbers gyrate weekly but the important point is that demand is still down from last year. On a cumulative daily average for 2023 versus 2022, demand is down 2.4% (19.9 Mb/d versus 20.4 Mb/d). What is positive is that the comparison is tightening each week as demand begins to recover as we enter the active summer driving season. In recent months this divergence was over 5%.
EIA Weekly Natural Gas Data: The EIA data released July 5th showed a build of 72 Bcf for the week ending June 30th. Storage is now at 2.88 Tcf. The biggest increase was in the East and Midwest (each up 20 Bcf). This compares to the five-year injection rate of 64 Bcf and the 2022 injection of 60 Bcf. US Storage is now 25.0% above last year’s level of 2.30 Tcf and 14.6% above the five year average of 2.51 Tcf. NYMEX is at US$2.65/mcf as summer demand for electricity for air-conditioning has increased electricity demand.
Our forecast is for NYMEX to rise to US$3.50/mcf this fall as hurricane season commences and to rise over US$4.50/mcf during winter 2023-2024. Europe may see rising natural gas prices as the Netherlands closes Europe’s largest gas field (Groningen) in October. This will tighten up supplies for winter 2023-2024 and if winter is cold, lift prices materially. We recommend buying the very depressed natural gas stocks during periods of general market weakness. We intend to add additional natural gas names to our Action BUY list when we get the next low risk energy BUY signal.
Baker Hughes Rig Data: In the data for the week ending July 7th the US rig count rose six rigs to 680 rigs. Rig activity is now 10% below the level of 752 in 2022 as low commodity prices slow down spending. If this lower activity persists over the next few months then production will fall off for both commodities and this will set the stage for the next upward cycle for crude and natural gas pricing. Of the total rigs working last week, 540 were drilling for oil and this is 10% below last year’s level of 597 rigs working. The natural gas rig count is down 12% from last year’s 153 rigs, now at 135 rigs. The natural gas focused Haynesville now has 46 rigs working down from 69 rigs working last year or down by 33%. Supplies could fall 3-4 BCF/d due to the lack of drilling and demand should pick up once annual maintenance is completed at key LNG facilities.
In Canada, there was an eight rig increase last week to 175 rigs as activity picked up. Canadian activity is now flat versus last year. Activity for oil is now at 111 rigs compared to 116 last year. Activity for natural gas was up six rigs to 64 rigs. The focus on drilling has been on the liquids rich condensate Montney and Duvernay plays. In the coming weeks we expect the rig count in Canada to recover to over 200 rigs as we enter the peak summer drilling season.
CONCLUSION:
We see the March crude price decline to US$64/b as being the low for 2023. However, we may test those lows over the coming weeks. Our optimism on the sector is due to our view that in Q4/23 we see WTI breaching US$90/b and in 2024 US$100/b as demand rises and exceeds supplies.
WTI is priced today at US$75.42/b. In the coming weeks we see crude trading below US$70/b. As markets retreat we expect to take advantage of the bargains in energy stock prices. More BUY ideas will be added to our Action BUY List when we get the next low risk BUY window. Down market days during that time are the best days to build your positions for the lengthy energy super cycle we see lasting into the end of the decade.
Energy Stock Market: The S&P/TSX Energy Index today is at 232 up 12 points from last week on the sharp rise in WTI. As the general market decline unfolds and the Dow Jones Industrials breaches 30,000, we expect the S&P/TSX Energy Index to fall below 200. This would trigger another key BUY signal for us. Get your BUY List ready!
New BUY ideas will be issued as energy stocks fall into our BUY ranges. Decide what you want your energy weighting to be for this long energy super cycle. Our Coverage List includes ideas from the Pipeline & Infrastructure area, Canadian oil and natural gas ideas, energy service ideas and companies working internationally. Our list includes large Conservative ideas and small to large caps in our Growth and Entrepreneurial categories. Add to your current ideas or add new ideas when we send out the next low risk entry point recommendations. We expect that WTI should lift above US$90/b as demand recovers and demand exceeds supplies. That should give the energy sector large capital appreciation potential.
Our next SER Report comes out tomorrow Thursday July 13th and features the two new ideas on our Coverage List. These international E&P companies are very exciting and have significant growth and capital appreciation potential. This takes our team research coverage to 39 companies. If interested in these companies and our upcoming Q2/23 results write-ups please become a subscriber. Go to https://bit.ly/2FRrp6k.
Please feel free to forward our weekly ‘Eye on Energy’ to friends and colleagues. We always welcome new subscribers to our complimentary energy overview newsletter.
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