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 37 energy (rising to 39 in July), 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 Treasury Yields have lifted sharply from 3.75% in early May to today’s high of 5.04%. The decade high was in early March at 5.05% so we are close to breaking out in yields. The battle over economic slowdown or, inflation pressures continuing; make Central Bankers next moves tricky. In the minutes of the June 13-14 FOMC meeting some officials were reluctant to pause. Now we head into the July 25-26 meeting and the majority of economic forecasters are predicting a 25 BP rise followed by another pause at the September 19-20 meeting so that more economic data can be incorporated.
What remains problematic is inflation. The UPS strike action to start August 1st and impact 340,000 drivers will provide supply chain problems. In Canada the west coast strike 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. 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’s US ADP Nonfarm Employment change showed a rise in June payrolls of 497K. The forecast was for 228K and the jobs number tomorrow is forecast prior to this ADP release at 225K. The job market remains tight and wage pressure persists as workers try to keep pace with inflation. Core PCE Deflator came in at a hot 4.6%.
Today the bears are running rampant through the markets. The Dow is down 1.1% or 362 Points to 33,927. As mentioned before a breach of 33,600 (not far away) for the Dow would complete the topping formation for the Dow and 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.
We are bullish on the energy sector as we see a new energy super cycle lasting into the end of this decade as we move to add more renewable energy which will require inputs around the world to bring on more key minerals (lithium, cobalt, copper etc.) needed for this evolution. To bring on new production of these items more crude oil and natural gas will be consumed in the countries adding these important inputs to clean-tech. Overall world crude demand could rise from 101 Mb/d this year to 106-108 Mb/d by the end of this decade. OECD countries should see a decline from 46 Mb/d to 42 Mb/d or less but the non-OECD should rise from 55.0 Mb/d currently to over 65 Mb/d. This year alone demand will grow in the non-OECD by 1.5 Mb/d (according to the EIA). We see a tight balance between supplies and demand which if growth persists could lift WTI prices into year-end. We covered this in detail in our last SER Monthly for subscribers.
Get ready to be buyers on this correction. We are waiting for the next overall 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 5% and triggers a Table Pounding BUY signal.
Bullish pressure for crude prices comes from the announcement this week of August production cuts by Saudi Arabia, and Russia. This squeezed the short sellers and drove the price up by US$3/b. The recent stock market correction has taken crude down to US$70.85/b for WTI. The question is are these real barrel cuts or just more rhetoric to squeeze shorts. Any escalation of tensions or a blockade action against Taiwan by China could move crude prices significantly higher.
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 2.5% from 2022 levels according to today’s EIA Weekly Petroleum Report (see below).
EIA Weekly Oil Data: The EIA data (data cut-off June 30th) was moderately bullish for crude prices as Commercial Crude Stocks fell 1.5 Mb to 452.2 Mb. This is 28.4 Mb above last year’s 423.8 Mb. The SPR saw a release of 1.5 Mb of crude last week. Motor Gasoline inventories fell 2.5 Mb while Distillate Fuels saw a decline of 1.0 Mb. Refinery Utilization fell 1.1% to 91.1%.
US crude production recovered the 200 Kb/d that fell two weeks ago and is back 12.4 Mb/d. Cushing inventories fell 400 Kb to 42.8 Mb. Motor Gasoline consumption rose 293 Kb/d to 9.60 Mb/d while Jet Fuel saw a fall of 252 Kb/d due to flight cancellations as tornado weather hit parts of the US. Fire issues also affected where planes could fly. Total Demand grew 929 Kb/d to 21.2 Mb/d as Propane demand grew by 821 Kb/d.
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 2.5% (19.93 Mb/d versus 20.45 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 today showed a build of 76 Bcf for the week ending June 23th. Storage is now at 2.80 Tcf. The biggest increase was in the Midwest (up 27 Bcf). This compares to the five-year injection rate of 66 Bcf and the 2022 injection of 82 Bcf. US Storage is now 25.3% above last year’s level of 2.24 Tcf and 14.6% above the five year average of 2.45 Tcf. NYMEX is at US$2.64/mcf as summer demand for electricity for air-conditioning picks up. There are now warnings that during the early evening there will not be sufficient electricity generating capacity and restrictions are expected especially in places like Texas facing record high temperatures. Rising temperatures and low water supplies may severely impact grain harvests this year and add to inflation concerns.
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 plans to close 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 June 30th the US rig count was down eight rigs to 674 rigs. Rig activity is now 10% below the level of 740 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, 545 were drilling for oil and this is 8% below last year’s level of 595 rigs working. The natural gas rig count is down 19% from last year’s 153 rigs, now at 124 rigs. The natural gas focused Haynesville now has 44 rigs working down from 69 rigs working last year or down by 36%. 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 a 2 rig decrease last week to 167 rigs as activity picked up. Canadian activity is now up 1% from 166 rigs last year. Activity for oil is now at 109 rigs compared to 109 last year. Activity for natural gas was down one rig to 58 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$70.85/b. In the coming weeks we see crude trading towards the bottom of the expected trading range of US$65-74/b. As we near the lower end of this band 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 220 down 6 points on the day and down by 2.6%. 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. Review the coverage of all our companies and their Q1/23 results in our recent research reports. We expect that WTI should lift into the US$80s during Q3/23 and for crude to trade in Q4/23 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 Thursday July 13th and features the two new ideas for our Coverage List. These international E&P companies are very exciting and have significant growth and capital appreciation potential. This will take our team research coverage to 39 companies. If interested please become a subscriber.
If you are interested in access to the review of all 37 currently covered companies and our two upcoming write-ups on them. You will also get our timely BUY Action Alerts when they are issued. 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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