Schachter’s Eye on Energy: Fear Of War Directly Between Iran And Israel Lifts Crude Prices US$6/b Over The Last Week. – Canadian Energy News, Top Headlines, Commentaries, Features & Events – EnergyNow

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 36 energy, energy service and pipeline & infrastructure companies with regular quarterly updates. We also hold quarterly webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more. 

Economic, Political & Military Update:

Decent US economic growth accompanied by rising inflation (CPI and PPI) is making the pivot to lower rates more difficult for the Fed. The US 10-Year Treasury yield has risen from 4.09% at the beginning of March to 4.41% today. This is the highest yield for this maturity this year. At the beginning of 2024 investors expected six rate cuts but now the expectation is for three cuts. Some Fed members now think there will be only one cut this year and that would be in December after the US election cycle is over. As a result of this more restrictive policy expectation, the US Dollar has strengthened from 102 to over 104. With concerns about inflation and the worry about the upcoming US Presidential election, international Central Banks have been big buyers of Gold. The price has risen from the beginning of March at US$2,050/oz to US$2,316/oz. This is an all-time high in US Dollars. 

The recent attacks by Israel against the Iranian consulate in Damascus Syria killing a leading general (more on this below) and the mistaken drone attack on NGO personnel providing food aid in Gaza, have increased concern that the area may see an escalation in fighting.  Iran could move its proxies to attack (likely Hezbollah from Lebanon) and of greater concern would be if Iran attacks Israel with its accurate long range ballistic missiles. All of Israel is within their reach. 

Crude oil has lifted over US$9/b since mid-March as no hostage deal has been agreed to and Israel has continued to defer advice from its main supporter, the US. President Biden is livid over the deaths of the aid workers and that Israel’s Prime Minister Netanyahu continues to plan an attack in the coming weeks into Rafah in southern Gaza. Biden is annoyed that Israel does not have a plan for the safety of 1.5M Palestinian refugees before the assault commences. We see the war premium for crude at over US$15/b at this time. Could it go higher – YES, if there is a direct war that breaks out with Iran. US$100/b could happen if biological or chemical weapons are fired by Iran into Israel. We sure hope this doesn’t escalate but the evidence and war footings mean hostilities will increase.

Mixed economic data in the US continues with some data showing a sustainable economy with real GDP growth of 3% due to large Federal deficit spending, but also with data showing inflation reversings to the upside. A stagflation pivot is not what the bond and stock market want to see. So let’s go through the recent economic & political releases of significance. 

• One of the crown jewels of the FAANG’s and related names and of AI stocks has been TESLA. The stock rose to US$265 in late 2023 and today is at US$168 per share as it had a year over year decline in EV sales in Q1/24 (to 387K, down from 441K EV sales in Q1/23) which was way worse than market expectations. This stock price decline of 33% in one of the market darlings has brought concerns about the EV transition and the fate of the market darlings which have been the driving force of the market run from late October 2023 to now. This lift for the Dow Jones Industrials has been from 32,300 to 39,900 or a rise of 24%. A correction below 36,000 is now more likely in the coming weeks if earnings results for Q1/24 are disappointing or guidance is negative for high profile companies. 
• The ADP report today showed job growth of 184K, higher than the forecast of 150K new jobs. If Friday’s official US unemployment data shows growth over the 200K expected then US interest rates will move higher and will impact what investors are willing to pay for earnings. 
• The ISM Manufacturing PMI for March rose above the neutral 50 level to 50.3 and was the first reading above 50 since September 2022. This compares to the February reading of 47.8. 
• Investors have moved to all in on this buoyant stock market with equity holdings of financial assets at 48% of all household assets. This level is similar to the highs seen in 2008 and 2022, just before very nasty market declines. Cash levels in household portfolios is at a miniscule 2%, leaving no dry powder to launch a new major market increase. 
• US GDP in Q4/23 rose 3.4% ahead of the 3.2% forecast. In all of 2023 it grew 2.5% ahead of 2022’s 1.9%. The rise can be attributed to the large US$2T of deficit spending. 
• Core PCE (the Fed’s favourite inflation index) rose 0.3% in March and nearing a 4% annualized rate. This is far from the Fed’s 2% target and removes any hope of a near term cut in the Fed Funds rate. The super core inflation rate for Q1/24 came in at a 4.7% annual rate. 
• Consumer confidence continues to decline as inflation pressures persist for food and healthcare. Add in the increase in gasoline at the pump from the recent spike in prices of crude and household budgets are strained. 
• Agricultural products are up 21% annually at this time with  coffee now joining cocoa as the largest price risers. 
• US consumer delinquency rates (90 days or more) in auto loans and credit card debt has risen to the highest level since 2011. 

On the wars front:

• Israel assassinated the top IRGC Quds general leading Iranian backed militias (total 11 casualties) in Lebanon and Syria last week with a well targeted missile attack when he was in the Iranian Consulate in Damascus. This building was between the embassies of Canada and Iran. The general, Brigadier General Mohammad Reza Zahedi has been a target of Israel’s for a long time as he had orchestrated many attacks that have killed large numbers of civilians in Israel. Iran has vowed revenge. What stands out in this attack is that it hit a diplomatic building. Historically, embassies and consulates have not been attacked in war times and thus Israel has crossed an international red line. Will Iran attack Israel and US diplomatic missions around the world? Will Iran orchestrate Hezbollah opening an offensive in the north of Israel? Will they attack Israel directly with their long range ballistic missiles (conventionally or with biological or chemical weapons)? The next few months could be very messy and dangerous. 
• Israeli forces in Gaza had an airstrike that killed seven Gaza aid workers (World Central Kitchen) in a night attack that they say was unintentional. They plan to investigate the incident and see what transpired. President Biden is livid. Most aid provisions have been halted for the safety of the workers but 1M people remain starving in Gaza. Israel has shown willingness to allow aid in but not if it ends up in the hands of Hamas. Removing Hamas while leaving the civilians safe has become a very difficult situation and the more dire the fate of the civilians, the less world support for Israel after the massive Hamas terrorist attack in October.
• On the Ukraine front, drone attacks against Russian energy infrastructure have been their most successful on the battlefield. They have hit four of Russia’s refineries in recent weeks. The latest attack was against the third largest Russian refinery, this one 800 miles into Russia. The refinery, the Taneco refinery of Russian company Taftnet in Tatarstan processed 340,000 b/d. Russia says there was no serious damage and no casualties. In total Ukraine has attacked 14% of total Russian refinery capacity or about 900,000 b/d of product output. Russia says repairs are underway but how long to reopen all the facilities is unknown. 
• Ukraine is running out of munitions despite EU/NATO commitments. Production capacity in the EU is maxed out and is insufficient to meet the daily needs of Ukraine as it fights Russian increased activity and their move to gain more territory. 
• The US and NATO are working with Turkey to source 155mm artillery shells to provide Ukraine with weapons needed to keep Russian offensive forces at bay. Turkey is a key supplier of TNT (trinitrotoluene) crucial in producing the shells. Turkey plans to triple its production and likely will become the US’s largest international seller to the US. This has repercussions for Turkey as they are close to Russia. Providing these shells to kill Russian troops will not sit well with President Putin. 

Market Update:  We remain concerned about the general stock market which is very overbought. When, not if, the general stock market retreats, energy stocks, which are high beta, should weaken. When that happens be ready to buy the bargains that develop across all markets. 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. 

Bullish pressure for crude prices comes from:

1. The potential for a wider Middle East war if Iran gets directly involved. The Israeli attack on an Iranian consulate to get an IRGC general is a major escalation. 
2. The Ukrainian success in attacking refineries in western Russia and the Iranian backed Houthis Red Sea and Gulf Of Aden attacks. 
3. OPEC is seriously considering extending its official cuts to the end of 2024 with the hope this tightens up global inventories and raises oil prices much further. Compliance however is still a problem. 
4. The area to watch now is China demand. With their recent data release of rising exports and increased manufacturing data, they should be needing more oil soon and if they buy aggressively that could boost prices this summer. 

Bearish pressure for crude comes from demand weakness in some OECD economies. Also the US is an exporter of crude (4.02 Mb/d last week) and has been self-sufficient for a number of years. We see a decline possible below US$70/b based upon fundamentals as demand falls during the spring shoulder season by 2.0 – 2.5 Mb/d. Now we are higher as the war and political issues are impacting prices. For a refresher, during the last correction WTI fell (in December) to an intra-day low of US$67.71/b from US$79.60/b from just a few weeks before. In 2023, WTI fell from US$83.53/b in April to US$66.80 in June. In 2021, crude fell from US$76.98 in June to US$61.74/b in August. So remain patient and let the market do its normal swinging around and use the next period of market and energy price weakness to build up your energy weightings. 

EIA Weekly Oil Data: The EIA data released today April 3rd showed a healthy increase in inventories. US Commercial Crude Inventories rose 3.2 Mb to 451.4 M. The Strategic Reserve showed an increase of 0.6 Mb on the week to 363.6 Mb and is only 7.5Mb below last year’s 371.2 MB. Refinery levels fell 0.1 points to 88.6%. This compares to 89.6% last year. Motor gasoline inventories fell 4.3 Mb while Distillate fuels saw a decline of 1.3 Mb. Cushing inventories fell 0.3 Mb to 33.2 Mb. 

US Crude production was flat at 13.1 Mb/d and is up 900 Kb/d above last year’s level. Motor Gasoline consumption rose by 521 Kb/d to 9.24 Mb/d while Jet Fuel saw a rise of 160 Kb/d to 1.74 Mb/d. Total Demand rose quite sharply or by 1.76 Mb/d to 21.3 Mb/d as Other Oils demand rose 696 Kb/d to 4.88 Mb/d and Propane consumption rose by  674 Kb/d to 1.43 Mb/d. Year-to-date demand is up 0.4% or at 19.91 Mb/d versus 19.84 Mb/d last year. 

OPEC has extended its production cutbacks to the end of June and members are now talking about extending the official cuts to the end of 2024 to curtail inventories and firm prices up even further. OPEC will decide their next move at a face-to-face meeting in Vienna on June 1st. 

EIA Weekly Natural Gas Data: 

The natural gas report out last Thursday showed a  small decline in storage levels. The withdrawal was 36 Bcf with the largest decline in the Midwest of 23 Bcf. This compares to the withdrawal of 72 Bcf last year and the 5-year average withdrawal of 37 Bcf. Storage is now at 2.30 Tcf. US Storage is now 23.0% above last year’s level of 1.87 Tcf and 41.1% above the five year average of 1.63 Tcf. The warm weather and lower US LNG exports have caused natural gas prices to decline. 

NYMEX is today priced at US$1.85/mcf. US production is set to decline. Hedge funds have gone massively short of the commodity so any good news could cause prices to elevate quickly as the shorts cover. A Freeport Texas LNG facility has been closed for a month but is expected to be back shipping LNG in May. The current depressed natural gas prices have been seen before and the industry has slowed drilling which will move inventories into balance later this year.

We recommend buying the very depressed natural gas stocks during periods of market weakness as we see higher prices in Q4/24 and much higher prices in 2025.  We plan 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 March 28th, the US rig count fell  three rigs to 621 rigs (it fell five rigs in the prior week). Rig activity is now 18% below the level of 755 rigs in 2023. Of the total rigs working last week, 506 were drilling for oil and this is 15% below last year’s level of 592 rigs working. The natural gas rig count is down 30% from last year’s 160 rigs, now at 112 rigs due to the depressed natural gas prices at this time. This sharp decline in drilling should in the coming months produce noticeable declines in natural gas production. 

In Canada, there was a decline of 18 rigs to 151 rigs (down 38 rigs in the prior week) as spring breakup has started. Canadian activity is up 9% from last year’s 139 rigs. Activity for oil is at 75 rigs compared to 58 last year or up by 29% as companies add more oil to meet the upcoming TMX pipeline demand. Activity for natural gas is at 76 rigs, down five rigs from last year. In our discussion with E&P companies they are planning on lower spending during Q1-Q3 due to low natural gas commodity prices. They have mentioned that they might increase activity later in the year, if natural gas prices rise materially as LNG Canada starts up. The industry needs north of $2.50/mcf to see the economics attractive to drill more gas wells. As we get closer to LNG Canada ramping up in Q4/24 and natural gas fills the Coastal GasLInk pipeline, prices should lift. AECO prices are around $1.70/mcf now.

Current subscribers will not be affected by the price change as long as they keep an active subscription. Subscribers who sign up before Jun 1, 2024 will be grandfathered in at the original prices of $249 per quarter or $799 per year as long as their subscription remains active. 

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Energy Stock Market: The S&P/TSX Energy Index today is at 296, up 14 points from last week. The sharp rise is focused on Canadian oil stocks and this week’s big conference in Toronto is getting a lot of institutional interest from generalist portfolio managers. Natural gas stocks and most energy service companies are lagging behind. The sector is now quite overbought with the S&P Energy Bullish Percent Index at 87%, just below the 90% threshold that would indicate to take profits. We would not chase the sector here but wait for the inevitable correction to add to portfolios. We are bulls but we don’t want to chase stocks when the MEME investors are pushing prices up. We like to BUY when stocks are cheap and are being ignored. That is not the case now. There still are some stocks that are BUYS but that list has shrunk. We cover those that remain cheap in our TOP PICKS NOW  section of our SER reports. 

Investors should decide what you want your energy weighting to be for this long energy super cycle. Our BUY 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. We expect that WTI should lift above US$90/b in 2H/24 as winter 2024-2025 demand should exceed supplies at that time and we see recovering economies globally. 

CONCLUSION: 

Longer term we remain very bullish. Our view remains that before the end of this decade we expect to see WTI prices exceeding the high in 2008 of US$147.27/b. 

WTI is priced now (as we write this report) at US$85.47/b, up US$4/b from last week. We expect to take advantage of the bargains in energy stock prices with new BUY ideas if one more of our BUY signals is triggered. Down market days for energy stocks are the best days to build your positions for the lengthy energy super cycle we see lasting into the end of the decade. 

Our next SER Report comes out next Thursday April 11th. This report will cover 4 more companies that have reported since our last SER report. We are near the end of the Q4/23 reports. Starting in late May our reports will cover Q1/24 results. 

Our new ‘TOP PICKS NOW’ section in each report has been very well received and has had significant positive performance. It covers the best ideas from our five groupings that we cover (Pipelines/Infrastructure/Royalty Companies. Domestic Natural Gas Companies, Domestic Liquids Producers, International E&P Companies and Energy Service Companies). Not every issue will have an idea in every grouping if the stocks in such a group are not at bargain buy levels. In the upcoming issue we have three very attractively priced ideas that one can consider now. If interested in these reports, become a subscriber. Go to https://bit.ly/2FRrp6k.  

Please save the date for our 2024 ‘Catch The Energy’ conference on Saturday October 19th at MRU. We have received confirmation that the Honourable Brian Jean, Minister of Energy and Minerals of Alberta will be our opening Speaker. We have started to meet with Presenter energy companies and have started signing up presenters for this year’s conference. As this list develops we will start providing you with the names of the Presenting companies in our upcoming reports as we did last year. We have space for 35 companies in the energy industry of today and 10 spots for the TMX sponsored energy industry companies of the future (clean-tech, renewable energy, and critical minerals). This mix can change depending upon response from our meetings. If you know of companies that are public or nearing going public and have a compelling story to tell, have them contact us at info@schachtereenergyreport.ca. 

As usual subscribers will receive two complimentary tickets to the event, so another great reason to become a subscriber. 

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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