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 35 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:
The FOMC meeting ended today and there was no change to the Fed Funds rate. However the commentary was hawkish. Inflation is still a problem with rising food prices and more importantly rising pressure from the significant increases won by unions after strike action. The UAW success of gaining wage increases of 40% over the four year life of the recently arranged contracts is forecast to add US$850-900/car.
Some other economic data from the world’s largest economy are:
- US Consumer Confidence fell for the third month in a row.
- Durable goods orders rose 0.5% (forecast was for only 0.2%). Month over month they picked up 4.7%.
- US GDP grew by 4.9% in Q3/23 led by an inventory build of 1.3% of the overall number. Additionally the government sector added nearly 1%. The bulk came from consumers spending and using more credit card debt.
- Core PCE increased 0.3% month over month (MoM) in September. This is the biggest MoM increase in four months and is an important indicator for the Fed.
- The US Savings Rate fell again and has fallen for four straight months. This is back near record low levels and indicates that the consumer binge of recent months may be over.
- Government workers are seeing pay increases of 7.8% year over year. Again a problem for the Fed’s target of keeping inflation under 2%.
- The US Treasury plans to borrow US$776B during Q4/23. This is a record borrowing level for this quarter.
- Banks are closing 100’s of branches and laying off 1000’s of workers. It should be expected that lending standards will tighten and be more costly going forward. Banks are writing off more bad loans this year than they have since Covid in 2020.
- Junk bond yields have soared as credit tightens. They are now over 9%.
Overall, this is mixed data, but the stronger growth and inflation pressure that are persisting may force the Fed to continue tightening. They meet next on December 12-13 and if the data continues hot they are likely to raise rates at that meeting.
The war in Gaza has become more brutal and deadly for the terrorists but also for the two million innocent civilians held hostage by Hamas being used as human shields. Pressure for a cease fire has spread around the world and Israel is now on the defensive politically. Memories of the massacres on October 7th are fading as the world sees the daily bombings and deaths in Gaza. One bright spot is that more aid is now coming into the NGOs in Gaza via Rafah in Egypt and Egypt has allowed individuals with foreign passports to exit Gaza.
Some other noteworthy moves are:
- Secretary of State Blinken is pushing for a revitalized Palestinian Authority (PA) to govern Gaza after the fighting is over and Hamas is destroyed.
- Iran is egging Yemen’s Houthis to fire ballistic missiles at Israel to achieve a widening of the war. Israel has sent warships into the Red Sea to knock down these attacks alongside US warships in the area.
- More evidence has come out that Iran’s Quds forces trained Hamas terrorists in Iran in September.
- The US has warned Iran not to send its proxies to attack US bases in Iraq and Syria which are there to fight Al-Qaeda and other Islamic terrorist groups. The US is sending more missile defense systems, like the Iron Dome, to those bases.
- Israel has released data that Hamas has been using the ground below hospitals and school buildings to hide their extensive tunnel systems. These are large facilities over 100 feet below street level and Israel has needed to use large bunker bombs to destroy these key command and control facilities. They announced yesterday that they had killed one of the key architects of the October 7th massacre and his surrounding Hamas fighters.
- Israel has been targeting internet and cellular communications in Gaza to disrupt Hamas’s operations.
- Israel’s IDF is now close to surrounding Gaza City and they plan to destroy all the tunnels they find before the gruesome battle to destroy Hamas in the city.
- Hostage negotiations continue with Qatar to free more foreign citizens held in Gaza with the trade-off being more supply convoys being allowed in with humanitarian aid.
- The FBI sees a higher terrorist threat level in the US after the Hamas attack in Israel. Terrorists have entered via the porous southern US border or have been in the US for some time and now being activated by Iran.
Market Movement: We have warned about a breach of the 33,600 level for the Dow (today at 33,064), which completes a topping formation for the Dow. A close below 32,300 (last week’s low) should set up the waterfall decline phase to below 30,000. While the Dow could fall 10% from here, the S&P 500 should fall even more and the NASDAQ the most as the overvalued FAANG and Magnificent Seven get hit hard due to their high valuations. Stay patient with cash reserves.
Once this correction has lowered stock prices and fear has returned to the markets over the coming weeks, 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 various wars (Israel/Hamas, Israel/Hezbollah and Russia/Ukraine. If Iran gets involved directly, versus now via their proxies, then crude will get a big quick lift as the broader war increases uncertainty about oil production and shipments from the Middle East.
Bearish pressure for crude comes from the weakness in OECD economies in the US, Europe and Japan. The significant rise of 1.3 Mb/d in US production this year is justification enough for crude to retreat and breach US$80/b. I still expect WTI crude to bottom between US$74-US$78/b over the coming weeks. More production is expected from non-OPEC in 2024 to alleviate concern about OPEC production levels. Brazil and Guyana should together add 670 Kb/d according to Economist data and Canada will have TMX volumes moving west to BC ports for export to Asia.
EIA Weekly Oil Data: The EIA data (data cut-off October 27th) was bearish for crude prices. Commercial Crude Stocks rose 0.8 Mb to 421.9 Mb as Net Imports rose 349 Kb/d (2.4 Mb on the week). The SPR saw no change on the week. Motor Gasoline inventories rose 0.1 Mb. Refinery activity was at 85.4% down 0.2% from the prior week, and down from 90.6% seen last year at this time. Distillate Fuels saw a decline of 0.8 Mb/d. US crude production stayed at their new yearly high of 13.2 Mb/d. Production in 2023 is up 1,300 Kb/d above year ago levels, as longer reach horizontal wells are producing more. Cushing inventories rose 0.3 Mb to 21.5 Mb. Motor Gasoline consumption fell 167 Kb/d to 8.70 Mb/d. Jet Fuel saw a decline of 14 Kb/d to 1.71 Mb/d. Total Demand fell 233 Kb/d to 19.87 Mb/d as Distillate demand fell 387 Kb/d to 3.68 Mb/d. Total US consumption is below last year on a year-to-date basis by 0.6%. Consumption was at 20.16 Mb/d versus 20.28 Mb/d last year.
EIA Weekly Natural Gas Data: The EIA data released last Thursday October 26th was bullish for natural gas prices as it showed a build of only 74 Bcf for the week ending October 20th as electricity demand remains strong. Storage is now at 3.70 Tcf. The biggest increase was in the Midwest (25 Bcf). This compares to the five-year injection rate of 22 Bcf and the 2022 injection of 107 Bcf. US Storage is now 9.2% above last year’s level of 3.39 Tcf and 5.2% above the five year average of 3.52 Tcf. NYMEX is today priced at a very healthy US$3.16/mcf.
Our forecast is for NYMEX to rise above US$3.50/mcf during late November as cooler winter weather arrives. NYMEX should rise over US$4.50/mcf during the coldest days of winter 2023-2024. Europe should see tightened supplies this winter as war premiums impact available LNG cargoes. European gas prices have risen in recent weeks as Egypt LNG shipments have been halted. The source of their gas exports was from the Israeli offshore natural gas fields.
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 October 27th the US rig count rose one rig to 625 rigs (up 2 rigs last week). Rig activity is now 19% below the level of 768 in 2022. Of the total rigs working last week, 504 were drilling for oil and this is 17% below last year’s level of 610 rigs working. The natural gas rig count is down 25% from last year’s 156 rigs, now at 117 rigs. The natural gas focused Haynesville now has 39 rigs working down from 70 rigs working last year or down by 44%.
In Canada, there was a two rig decrease in the rig count (5 rig increase last week) to 196 rigs. Canadian activity is down 8% versus last year when 212 rigs were working. Activity for oil is down 16% to 122 rigs compared to 145 last year. Activity for natural gas is up 10% at 74 rigs up from 67 last year. The main focus on natural gas drilling has been on the liquids rich condensate Montney and Duvernay plays.
Energy Stock Market: The S&P/TSX Energy Index today is at 268, up four points from last week. As the general market decline continues and the Dow Jones Industrials breaches 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 in early 2024 as winter demand should exceed supplies.
CONCLUSION:
We see the crude price decline in March to US$64/b as being the low for 2023. The current decline from the high of US$95.03/b in late September should find a bottom in the US$74-78/b level in the coming weeks.
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 recently was at a 2023 high of 96%, a warning signal of too much euphoria by energy stock investors. It fell to 48% two weeks ago but has bounced to 70% due to the Israel/Hamas war. It should send out a BUY signal as it falls below 10% Bullishness.
WTI is priced today at US$81.55/b down US$2.00/b from last week. As the stock market retreat continues we should see WTI crude get dragged down further. We expect to take advantage of the bargains in energy stock prices as this downside pressure gets extreme. 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.
The results for Q3/23 for the energy sector may (for many) not show good year over year comparisons. WTI last year in Q3/22 was at US$91.56/b and in Q3/23 was at US$82.26 or down 10%. Natural gas prices were even more negatively impacted with AECO at $4.62/mcf last year and only $2.70/mcf this year. So if we have a weak overall stock market and corporate results are shabby for Q3/23 then we may see the energy stock area retreat providing the next low risk entry point. Remember we see much higher prices for both commodities in 2H/24.
Our November reports will cover Q3/23 results of companies we cover. The first issue out on Thursday November 9th, covers those who have reported by our cut-off date on November 2nd. There should be seven company updates in this report. If interested in these upcoming Q3/23 results reports on the 35 companies we cover, please become a subscriber. Go to https://bit.ly/2FRrp6k.
Our Q4/23 quarterly Webinar takes place on Thursday November 23rd at 7:00PM MT. We plan to review Q3/23 results of those that performed well and also those that lagged expectations. We will also spend time on the near term market outlook and our expectation that we should soon see another low risk BUY window occurring. To join this webinar one needs to be a subscriber. Subscribers should send topics they would like me to cover during the webinar to info@schachterenergyreport.ca.
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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