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.
Global Economic, Political & Military Update:
Some of the positive and negative issues facing the US and other major economies are:
- For the US:
- The US CPI accelerated in August as gasoline prices soared 10.5% (month over month). On a monthly basis the overall CPI rose 0.6% (7.2% annualized), the quickest pace in a year. Core CPI rose a more modest 0.3% and is up 4.3% annually. Food prices also hit the data due to drought conditions in part of the US. Wage pressures continue to be passed through to consumer prices. If it occurs this week, the auto industry strike action would add to this concern as the auto workers are asking for very large increases in pay and reversal of cuts made when the industry was in trouble during Covid. Airlines warned of fuel surcharges as jet fuel prices have surged 20% since mid-July (United, Southwest and Alaska all warned).
- Most economic forecasters still expect no increase in the Fed Funds rate at the end of the September 19-20 FOMC meeting. As usual the Fed is data dependent and there is still a lot of data to come out before that meeting. The one thereafter, on October 31/November 1st, is where the markets are worried about the next rate hike. The risk of a federal shutdown remains a concern as it is two weeks away from Congress’s deadline to fund the government.
- The US banking system remains fragile as regulatory capital increases (effective October 1st) mean less ability for banks to lend and those banks with large real estate portfolios (commercial real estate the big headache) are facing large write-downs. Banks that have a lot of Treasuries on their books, if marked to market versus kept to maturity, would hit their P&L statements. If their liquidity dried up they would be forced to sell.
- Apple shares have been hit by China planning to ban IPhone use to state owned corporations and the recent new phones have not been well received. The stock reached a high of US$197.96 in mid July and is now down to US$175.12 per share.
- For the rest of the major economies in the world:
- China is facing a difficult economic period as exports fall and domestic spending by consumers withers. More real estate companies and shadow non-bank financial entities are facing interest payment arrears and refunding problems. The Yuan is under pressure and will need more stabilization by their Central Bank. China’s exports fell 8.8% in August, with technology products like computers (which China has led for years) falling 18.2%.
- German industrial production fell 0.8% in August. Auto sales and manufacturing were particularly hit.
- The UK economy shrunk by 0.5% in July battered by strikes in the health and education sectors.
The war in Ukraine is seeing more escalations as one side hits the other. This is now spreading to daily drone attacks on Moscow by Ukraine and the Black Sea Ukrainian grain export ports being blockaded and attacked by Russia.
Some recent events:
- The US has announced that they will send depleted uranium anti-tank rounds to Ukraine following the UK. This is an escalation of munition types. These rounds will be used by the 31 M1A1 tanks the US is delivering this fall.
- The Ukrainian offensive may have only 30-45 days left until the rainy and muddy season halts ‘fighting weather’ according to the US Joint Chief of Staff, General Mark Milley. He has been making more pessimistic comments as the pace of the counter offensive has stalled.
- To gain more trained soldiers, Ukraine has contracted a Spanish company to recruit volunteers at up to 3,400 Euros per month.
- Putin met this week with North Korean leader Kim Jong Un at a spaceport in eastern Russia. Russia wants more munitions and workers (Russia’s economy now has labour shortages as more Russian men are drafted) and North Korea wants access to oil, food and satellite technology.
- Russia has been sending more Russian troops to the front lines in Ukraine to halt and to reverse the gains made by Ukraine before the rainy season starts.
- Ukraine has successfully attacked Crimean shipyards and damaged a number of Russian ships (reports indicate a Russian sub was severely damaged).
Market Movement: We are watching the 33,600 level for the Dow (today at 34,712), 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 the current market enthusiasm. Investors may want to take some profits in non-taxable accounts due to the sizable move in energy stocks over the last six months. Traders may take a more aggressive approach. We have noted before and have now harvested some of our currently held positions. We are however keeping core weightings. Subscribers please watch SER Ownership releases to see what we have done via our partial harvesting.
Once this correction has lowered stock prices and fear has returned to the markets over the next few months, be ready to buy the bargains that develop. As the general stock market declines we expect energy prices to back off and the Energy Bullish Percent Index to retreat back to below 10% and ring the bell for the next BUY window. The last BUY signal was in March and we added 14 new ideas to our Action BUY List. Many energy stocks are down from their 2022 highs, and many trade around Proved Developed Producing (PDP) Reserve valuations levels. 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 the production cuts by Saudi Arabia and Russia which has been extended through the end of the year. The original Saudi plan was for the 1.0 Mb/d cut to last just the two months of July and August. They then extended the cuts to the end of September and now to the end of 2023. This extension of the Saudi production cut of 1.0 Mb/d squeezed crude short sellers again, and drove the price of WTI up. Over the last two months these multiple announcements have lifted crude prices by over US$22/b. Russia has shaved sales from its western ports but has increased sales from their eastern ports.
Bearish pressure for crude comes from the weakness in OECD economies in the US, Europe and Japan. China’s recent trade and manufacturing weakness and sluggish consumer spending add to the economic problems in that country. New production could come on stream this fall from the weak sisters of OPEC (Iran, Iraq, LIbya, Nigeria and Venezuela). The biggest increase would likely be from Iraq which is negotiating with the Kurds and the Turkish regime to reopen the northern border pipeline which can move over 450 Kb/d. It has been closed for most of this year due to revenue sharing disagreements. Iran is talking about adding more barrels to reach 3.5 Mb/d by Q4/23. The August OPEC report shows that they raised production to 3.0 Mb/d from 2.86 Mb/d in July. This is the highest production rate for Iran since 2018. The deal to release US and Iranian hostages and also release US$6B held in South Korean banks appears to be moving forward. The US approachment is not being tied to Iran’s nuclear ambitions but as part of the Saudi/Iran improved relations. Also, the US may be trying to drive a wedge between Russia and Iran and halt Iran’s providing drones to Russia in their war in Ukraine. Iranian leaders may want to see less tension as they need to show economic progress in the country which is in a severe economic malaise.
The US$28/b Urals discount is finding lots of buyers and some who don’t care about sanctions are now paying over the sanction limit price of US$60/b to get supplies. Russia is also playing a game of cutting crude exports but increasing product sales so that they are not really cutting overall supplies and energy revenues continue to meet their war needs. Russia keeps on finding new buyers for its discounted crude and products. OilPrice.com recently had an article that noted that Brazil had become a buyer of crude and diesel.
EIA Weekly Oil Data: The EIA data (data cut-off September 8th) was very bearish for crude prices as Crude Commercial Crude Stocks rose 4.0 Mb to 420.6 Mb. The SPR saw another injection, this time, 0.3 Mb to 350.6 Mb. Motor Gasoline inventories rose 5.6 Mb while Distillate Fuels saw a rise of 3.9 Mb/d. Total Stocks (excluding the SPR) rose 10.4 Mb.The big increases were due to Net Imports rising 2.65 Mb/d. Refinery Utilization rose 0.6% to 93.7%. US crude production rose to a yearly high of 12.9 Mb/d, up 100 Kb/d on the week and up 800 Kb/d above year ago levels, as longer reach horizontal wells are producing more. Cushing inventories fell 2.4 Mb to 25.0 Mb. Motor Gasoline consumption fell post the summer driving season by 1.01 Mb/d to 8.31 Mb/d. Jet Fuel saw a rise of 175 Kb/d to 1.79 Mb/d. Total Demand rose 787 Kb/d as Other Oils consumption rose 2.45 Mb/d to 6.65 Mb/d. Total US consumption is below last year by 0.7%. Consumption was at 20.15 Mb/d versus 20.29 Mb/d last year at this time.
OPEC Monthly Report:
The September 2023 report released September 12th showed that in August OPEC saw an increase in production of 113 Kb/d to 27.4 Mb/d as Iran (up 143 Kb/d to 3.0 Mb/d), Nigeria (up 98 Kb/d to 1.27 Mb/d) and Iraq (up 38 Kb/d to 4.28 Mb/d) raised production. In the same month the Saudis cut production by 88 Kb/d to 8.97 Mb/d fulfilling their plan to cut production by 1.0 Mb/d (in June they produced 9.99 Mb/d). So far total OPEC cuts have been 751 Kb/d as Saudi cuts have been offset by increases by other OPEC members. So while significant cuts, they are not the 2.2 Mb/d cuts that were announced. Russia has not made the 500 Kb/d cut that was announced but rather only a net cut of 100 Kb/d to 10.8 Mb/d as they increased exports of crude products from eastern ports.
OPEC sees demand rising in Q4/23 to 103.2 Mb/d. This would mean the call on OPEC would be 30.8 Mb/d in Q4/23 versus the 27.4 Mb/d they produced in August and would imply a >3 Mb/d shortage situation and materially declining global inventories. We are not so optimistic due to China’s economic difficulties. China consumes about 15.6 Mb/d currently and imports nearly 11 Mb/d of their consumption. We surmised last month that If they cut back by 2-3 Mb/d due to economic weakness then supply and demand would be more in balance. The data from OPEC supports this as they showed China imports down 2.65 Mb/d in July to 11.27 Mb/d from 13.92 Mb/d in June. In addition we are watching Iraq which could add 450 Kb/d of production from Kurdistan (now shut in) if a deal is done between Iraq, Turkey and the Kurds. Negotiations seem to be progressing and these volumes could come on thorough existing pipelines during Q4/23. There may be a storage decline during winter 2023-2024 but it should be like its normal winter usage drawdown. The next few months should see normal storage increases as the industry prepares for peak winter demand.
EIA Weekly Natural Gas Data: The EIA data released on September 7th was bullish for natural gas prices as it showed a build of a low 33Bcf for the week ending September 1st as electricity demand remains strong given the current heat wave. Storage is now at 3.15 Tcf. The biggest increase was in the Midwest (24 Bcf) while there was a decline in storage in the South Central area of 15 Bcf. This compares to the five-year injection rate of 36 Bcf and the 2022 injection of 41 Bcf. US Storage is now 17.2% above last year’s level of 2.69 Tcf and 7.6% above the five year average of 2.93 Tcf. NYMEX is today priced at US$2.75/mcf.
Our forecast is for NYMEX to rise above US$3.50/mcf in the coming weeks as hurricane season hits the Gulf coast. Tropical storms are forming in the Caribbean and will soon enter the Gulf of Mexico. If they shut down offshore oil and natural gas production then NYMEX could rise to over US$4.50/mcf during winter 2023-2024. Bloomberg today reported that the Texas power grid is again close to the edge of blackouts due to high usage and possibility of some shutdowns as the hurricanes approach.
Europe should see tightened supplies this winter and if winter is colder than last year should 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 September 8th the US rig count rose 1 rig to 632 rigs (down one rig last week). Rig activity is now 17% below the level of 759 in 2022. Of the total rigs working last week, 513 were drilling for oil and this is 13% below last year’s level of 591 rigs working. The natural gas rig count is down 32% from last year’s 166 rigs, now at 113 rigs which will impact production levels materially in the coming months. The natural gas focused Haynesville now has 41 rigs working down from 71 rigs working last year or down by 42%. Natural gas supplies could fall 2-3 BCF/d by year end due to the lack of drilling and demand should pick up once annual maintenance is completed at key LNG facilities and winter demand ramp up.
In Canada, there was a five rig decrease (three rig decrease last week) to 182 rigs. Canadian activity is down 11% versus last year when 205 rigs were working. Activity for oil is down 19% to 113 rigs compared to 140 last year. Activity for natural gas is at 69 rigs up from 65 last year. The main focus on natural gas drilling has been on the liquids rich condensate Montney and Duvernay plays.
Catch the Energy Conference Update: Tickets are now on sale for the public. Become a subscriber and get two free tickets to the conference (tickets to the public are on sale at $119 per ticket each during the early bird window until September 15th (they then move to $179 each). To find out more go to www.catchtheenergyconference.com. We did sell out last year so if you would like to attend please get your tickets as soon as possible.
Our Premier, Danielle Smith has agreed to come and open the conference. This plenary session will take place in the Bella Hall.
Thank you to our Sponsors, Exhibitors and Presenters. It is going to be a great lineup this year!
We are working to fill the last two slots for the conference. Our current Presenter/Exhibitor and Sponsor list is as follows:
Energy Stock Market: The S&P/TSX Energy Index today is at 267, down three points from last week. As the general market decline unfolds and the Dow Jones Industrials breach 30,000, we expect the S&P/TSX Energy Index to fall below 220. 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 during winter 2023-2024 as winter demand recovers and demand should clearly exceed supplies.
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$75/b over the coming weeks as we enter the lower demand period of Fall. Our long term optimism on the sector is due to our view that in 2H/24 WTI will exceed US$100/b as demand rises and exceeds supplies. Before the end of this decade we expect WTI prices will exceed the high in 2008 of US$147.27/b. Near term we expect to see a backoff in prices as the general stock market correction impacts most areas and energy, a high beta area, is normally one that corrects during market declines. The S&P Energy Sector Bullish Percent Index has lifted to a 2023 high of 96%, a warning signal of too much euphoria by energy stock investors. It is prudent now to have decent cash reserves for the next low risk entry point. Usually each year you get two to three buy windows. We expect one more during Q4/23 after the two we saw during March. Consider harvesting some gains and building cash reserves.
WTI is priced today at US$89.05. As the stock market retreat continues we should see WTI crude get dragged down, falling below US$75/b this fall. Even lower levels are possible if China’s difficulties get a higher profile. 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 tomorrow Thursday September 14th. We go over the current market malaise and have another Insider Trading review update. If interested in our upcoming report please become a subscriber. Go to https://bit.ly/2FRrp6k.
Our 2023 ‘Catch The Energy’ has its Presenter line-up almost complete. We expect to have 45 Presenters (10 Presenters from the TMX on Clean Tech and important renewable materials, up from five in 2022). We have taken more space this year and have expanded our booth rooms so attendees can spend more time with the Presenter companies and their senior executives. We have increased MRU capacity to 750+ attendees due to the oversold condition last year. Early bird transferable tickets are available now for $119 each at www.catchtheenergyconference.com until the close of September 15th and then rise to $179 each until all are taken down before the conference. We recommend one buy a quarterly subscription to become familiar with our work and get two complimentary tickets to the event (a financially attractive offer).
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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