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:
There is good news on the inflation front to keep Central Banks from further raising interest rates but also some data that is not supportive of this optimistic view. Next Wednesday, the betting line is that the Fed raises its key rate by 25 BP and waits for more data before their September meeting to decide if another increase is warranted.
On the positive side:
- CPI and PPI data for June was very muted and heading downward to the 2% Central Bank targets.
- US Retail Sales rose a modest 0.2% versus the 0.5% in the prior month as consumers have less discretionary spending capability.
- US Industrial Production fell 0.5% versus the forecast of a flat number.
- Economic growth in China fell to 0.8% in Q2/23 versus a 2.2% rise in Q1/23.
- The US dollar has fallen from 103 to below 100 helping on the import inflation front.
On the Negative side:
- Crude prices which were a big part of the inflation declines are now reversing. WTI is up US$10/b from a month ago. Electricity prices have risen double digits as electricity providers are running flat out and brownouts are expected during key usage periods from 4PM to 9PM.
- Food inflation is persisting as drought conditions means smaller and less fulfilling crops. Animal herds are shrinking which mean higher meat prices in coming months.
- Russia has cut off Ukraine grain exports.They want equal treatment access to the Swift system to settle transactions as given to Ukraine. The UN is working to get one of the Russian agricultural banks to be given this access so that Russia can also sell its wheat and corn and fertilizers to buyers in the Middle East. Wheat prices have lifted as a result of the cut-off of Ukraine supplies.
- Record high and sweltering temperatures around the world are impacting water supplies and many cities may have to ration water and prices could rise materially for imported water.
- Pay increases will make things harder for Central Banks given the tight labour conditions. United Airlines just settled for 40% over four years. Delta Airlines settled for 34% over three years. UPS plans on striking August 1st (they carry 5% of the US GDP each day). BC port workers rejected the recent four year offer and want a two year deal with more concessions.
- Grasshoppers are becoming a plague across the US and are eating up everything in their path. The USS Citrus crop may shrink in half as a citrus greening disease impacts the trees. Orange Juice prices will be much higher this fall.
The war in Ukraine is not seeing progress for the Ukrainians. It seems a stalemate is occurring as both sides wait for more munitions, weapons and trained soldiers to use the new NATO or Iranian equipment. The death toll on both sides has been horrendous. President Zelensky himself acknowledges that the counter-offensive had to be paused. He blames it on NATO delaying the weapons and munitions promised which have not yet arrived. The speed and consumption is so rapid that NATO supply chains can’t replace usage fast enough. The problem is that NATO inventory of 155MM shells are nearly out of stock. That is why President Biden authorized cluster bombs (which most of NATO are opposed to) as he does not have much left in inventory to send to Ukraine to keep them fighting. He has sent over US$41B of materials and is now out of Javelins, 155MM artillery rounds, tank rounds and Stingers and the US ability to replace and produce precision munitions is a multi-year solution that needs Congress to approve multi-year contracts.
One high profile NATO announcement was that Ukraine would receive F-16s in the future. None have yet been delivered as it takes over six months to train a fighter pilot on this new equipment. So seeing Ukrainians fighting Russia for the control of their air appears to be a 2024 plan.
What I am perplexed about is why wasn’t Ukraine fully stocked up with sufficient munitions before the counter-offensive started. Were they set up to fail? Did the west expect the Wagner group to topple Putin? With half the fighting season over for 2023 (before wet weather starts in October) this year’s offensive by Ukraine looks to have churned through weapons, munitions and manpower with minimal to show for it. If NATO gets tired of supporting a stalemate, Ukraine may be forced to the bargaining table which will mean the territory captured by Russia may stay with Russia.
Market Movement: Today the bulls are elevating stock prices. The Dow is up 0.5% or 187 Points to 35,139. 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 84, pushing near a record high. 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$6/b over the last three 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 14th) was mixed for crude prices as Crude Commercial Crude Stocks fell 0.7 Mb (forecast a decline of 2.44 Mb) to 457.4 Mb as Net Imports fell 376 Kb.d or 2.6 Mb on the week. This is 30.8 Mb above last year’s 426.6 Mb in Commercial Stocks. The SPR saw no change this week, the first such result this year. Motor Gasoline inventories fell 1.1 Mb while Distillate Fuels saw no change. Refinery Utilization rose 1.6% to 94.3%. US crude production stayed steady at 12.3 Mb/d. Cushing inventories fell 2.9 Mb to 38.3 Mb.
Motor Gasoline consumption rose 99 Kb/d to 8.86 Mb/d as the summer driving season is ongoing. Jet Fuel saw a minor rise of 34 Kb/d to 1.57 Mb/d as airlines had fewer cancellations. Total Demand rose 2.07 Mb/d to 20.8 Mb/d as Distillate demand rose 700 Kb/d to 3.67 Mb/d and Other Oils consumption rose 780 Kb/d to 5.40 Mb/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 2.4% (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%.
OPEC Monthly Report:
The July 2023 report released July 13th showed that in June OPEC saw a rise in production of 91 Kb/d to 28.2 Mb/d, not the 500 Kb/d cut that was expected. OPEC had planned on cutting 1.2 Mb/d starting in May and then an additional 1.0 Mb/d in July/August so the cuts were rhetorical and not real barrels. The Saudis added 22 Kb/d to 10.0 Mb/d, Iraq by 54 Kb/d to 4.18 Mb/d and Iran by 56 Kb/d to 2.75 Mb/d. Even Venezuela was able to add 23 K/b/d to 767 Kb/d. Offsetting this were decreases by Angola of 46 Kb/d to 1.10 Mb/d and Algeria by 16 Kb/d to 957 Kb/d. Russia appears to be continuing to produce nearly 11.0 Mb/d (and selling more than the Saudis) and selling 90% of the exports to China and India which are taking advantage of the significant discount versus Brent (around US$20/b). Some Urals sales are occurring above the sanction price of US$60/b but are a bargain for the buyers versus US$80.78/b for Brent today.
OPEC sees demand rising in Q3/23 to 102.0 Mb/d and to 103.23 Mb/d in Q4/23 if there is no global recession. This would mean the call on OPEC would be 30.8 Mb/d in Q4/32 versus the 28.2 Mb/d they produced in June and would imply a shortage situation and declining world inventories. We are not so optimistic but see demand exceeding supply in Q4/23 by around 1.0 Mb/d which could lift WTI crude back over US$90/b.
EIA Weekly Natural Gas Data: The EIA data released July 12th showed a build of a very low 49 Bcf for the week ending July 7th as electricity demand picks up during this very hot summer. Storage is now at 2.93 Tcf. The biggest increase was in the Midwest (19 Bcf). This compares to the five-year injection rate of 53 Bcf and the 2022 injection of 32 Bcf. US Storage is now 24.1% above last year’s level of 2.36 Tcf and 14.2% above the five year average of 2.57 Tcf. NYMEX is at US$2.62/mcf as summer demand for electricity for air-conditioning has increased electricity demand significantly and shortages are expected in the coming weeks.
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 14th the US rig count fell five rigs to 675 rigs. Rig activity is now 11% below the level of 756 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, 537 were drilling for oil and this is 10% below last year’s level of 599 rigs working. The natural gas rig count is down 13% from last year’s 153 rigs, now at 133 rigs. The natural gas focused Haynesville now has 45 rigs working down from 68 rigs working last year or down by 34%. The Highly prolific Permina basin saw a decline of five rigs to 337 rigs working compared to 350 rigs working last year. Natural gas 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 twelve rig increase last week to 187 rigs as summer drilling activity picked up. Canadian activity is now only down 2% versus last year. Activity for oil is now at 114 rigs compared to 125 last year. Activity for natural gas was up nine rigs to 73 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.
Energy Stock Market: The S&P/TSX Energy Index today is at 233 up one point from last week on the further 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.
CONCLUSION:
We see the March crude price decline to US$64/b as being the low for 2023. However, we may test levels below US$70/b 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$76.85/b up over US$1/b from last week. 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.
Our next SER Report comes out Thursday July 27th. We start the Q2/23 earnings and results runs with our August issues. If interested in our review of the 39 covered companies in our upcoming Q2/23 result write-ups please become a subscriber. Go to https://bit.ly/2FRrp6k. Please also note that we are having our third quarter webinar for subscribers on Thursday August 17th at 7PM MDT. This will be a 90-minute review of Q2/23 reporters and highlighting the best BUYS that we see at that time if the decline we expect in the coming weeks occurs.
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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