Schachter’s Eye on Energy: US Stock Build Adds To Downside Price Pressure. A Breach Of US$75/b Is Likely In The Near Term. – 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:

Market bulls lifted the Dow over 40,000 last week but worries about interest rates and Treasury record refundings have pulled it back to 39,800, a still overvalued level. Everyone is waiting on the market’s Santa Claus ‘Nvidia’ to show steller new AI products and record profits to give the M7 bulls another reason to push their favorite momentum stocks higher. We are late in the game in this investment cycle and any disappointments could cause a stampede out from the small exit funnel, when bulls disappear with their BUY orders. Look at MEME Gamestop (GME) which got its pied piper to recommend the stock and the early followers saw it rise from US$10.70 per share to US$64.83 per share two weeks later. Did the pumpers sell?  “Of course” and the follower lemmings are left with a stock now trading at US$20.85 per share. 

Some of the new economic data points we are watching include:

• China home sales are falling faster despite government lending and intervention. Taking luxury homes and converting them to low cost housing will not work as the new owners don’t have equity to be buyers and the amount provided for conversions is too small to have an impact.
• China and Japan are selling US treasuries at record amounts to build up their reserves and also are buying gold as they see the US financial picture deteriorating and the upcoming US Presidential election as divided as ever. Neither is seen as supportive of either country. 
• US Industrial Production stagnated in April as manufacturing struggled for traction. Boeing is a big casualty as orders it should have gotten are being moved by buyers to Airbus due to the increase in BA’s problems and management ineptness in solving the manufacturing and testing of its jets. They need to sweep the house and add quality control steps that are not there now.
• The IEA is warning that the energy transition may be slowed considerably due to a short supply of critical minerals. China and Russia provide these to the world so sanctions against the two countries could backfire. 
• Cuba’s banks have collapsed leaving citizens stunned and destitute. Bank accounts have been emptied and ATM’s are void of cash. One more disaster for the people and their failed socialist experiment. 
• OPEC is now planning a virtual June 1st meeting, rather than in Vienna as global inventories remain close to the long-term seasonal average according to Reuters. They plan to keep their present quota system and gamble that international growth doubles the IEA forecast.
• President Biden and Candidate Trump have agreed to two debates. Mikes can be cut off by CNN in the first debate and by ABC in the second if one of them speaks over their allotted time. There will be no audience. 
• President Biden can’t seem to do anything about the border crisis but seems to have grabbed Congressional power to forgive US$7.7B of student loan debt of 160,000 young people today. He has lost young supporters but those given this largesse may change their mind and vote for their benefactor. In the meantime those already with debt forgiveness have used their funds saved to pay their student loans to invest in MEME stocks on Reddit recommendations and used Robinhood Markets to lift their trading to record highs. Clearly a risky gamble.

On the wars front:

• Israel’s incursion into Rafah continues and four hostages that were killed have had  their bodies taken home for burial. 
• The US built pier is now unloading large amounts of needed supplies but as the trucks leave the protected area they are stolen by gangs and Hamas. The poor 2.5 million civilians are not on the receiving end of this aid. 
• NATO is talking about sending Trainers (likely to start French troops in french uniforms) into Ukraine to help utilization of the new military equipment being sent in. This would be seen as a clear NATO attack on Russia and this could quickly escalate. Where are the diplomats trying to de-escalate things?
• A Panamanian Oil tanker was struck by a missile off the Yemen coast so this threat has not been fully controlled by allied forces. 
• Russia has renewed exports of gasoline and diesel as their refineries are back producing products after the Ukrainian air attacks. 
• Russia has made progress in space based weapons and plans to add more hit and kill missiles to kill allied satellites that are aiding Ukraine. Russia could even add a nuclear weapon and be the first to do so. It will be hard for the US to catch up. If NATO sends troops into Ukraine (even trainers) wearing NATO uniforms, the war drums will be noting the start of WWIII. 

Market Update: The general consensus of bullish stock market investors is that the Fed will cut rates in September and that earnings will hold up justifying much higher levels for the indices. If earnings become problematic as we are seeing from many of the S&P 500 (except for the AI, M7 and FAANG names) then stocks have a lot of air in them.  We are watching the economic data carefully as it appears that consumers are getting tapped out and this could drag down the economy at some point. The offset is the 6% US deficit and large war spending that are keeping some areas of the US, with hot economies.  

Energy stocks peaked in early April as crude reached its high of US$87.67 on the mideast war premium expansion. The run from early February was very rewarding and the ideas on our SER BUY List for the most part did very well. We see the general market and the energy sector as vulnerable. A correction should occur and that would provide the next low risk BUY signal which we see occurring during Q3/24. The S&P/TSX Energy Index peaked at 308 in week two of April and has fallen today to a low of 293 (now 294). A downside target below 240 in the coming months is likely. The overbought condition can be confirmed from the S&P Energy Sector Bullish Percent Index which rose from 39% bullish in February 2024 to 91% three weeks ago. Recent weakness has pulled this Index down to 65% today (down 5% in a week). Over 90% is an overbought reading. It  should decline below 20% to give off an oversold level and a BUY window once again. 

Our new SER issue feature called ‘TOP PICKS NOW’ highlights the best ideas at the time of each SER report. The ideas have worked out very well as not all stocks rise and peak at the same time nor do they bottom at the same time. 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 an expansion in the Middle East war. Iran just lost their President in a helicopter crash and the question becomes does a more radical person (IRGC) become the President. 
2. The Ukrainian success in attacking refineries in western Russia and the Iranian backed Houthis Red Sea and Gulf Of Aden attacks on shipping. 
3. OPEC is planning to extend 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 and there is now more than adequate world supplies. 
4. The area to watch now is China demand. It is quite weak now but could rebound if the government’s stimulus moves take hold.

Bearish pressure for crude comes from demand weakness in many OECD economies. Also, the US is an exporter of crude (4.7 Mb/d last week). We expect a decline below US$75/b based upon fundamentals as demand falls during the spring shoulder season by 2.0 – 2.5 Mb/d. Note the build in US stocks this week (next section). 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. Today’s intraday low was US$77.28/b.

We see a war premium still in the price of crude. If a ceasefire and hostage release is obtained during the talks sponsored by Egypt, Qatar and the US we may see a fall in prices of US$5-6/b as a result of this action alone. Overall we could see prices US$10/b lower than today if events unfold successfully. 

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 May 22nd showed material increases in overall inventories. US Commercial Crude Inventory rose 1.8 Mb despite a rise in Refinery activity to 91.7% from 90.4%. The Strategic Reserve showed an increase of 1.0 Mb on the week to 358 Mb and is above last year’s level by 10.9 Mb. Motor gasoline inventories fell 0.9 Mb and are now 10.5 MB above 2023 levels. Distillate fuels saw a rise of 0.4 Mb and are 11.1 Mb above last year’s storage levels. Total Stocks including the SPR rose 8.5 Mb last week and are now 29.8 Mb above last year or at 1,589.5 Mb. Cushing inventories rose 1.6 Mb to 36.3 Mb. US Exports rose 595 Kb/d to 4.73 Mb/d and lowered US stocks by 4.2 Mb so the inventory build would have been greater except for this increase in exports. 

US Crude production was flat at 13.1 Mb/d and is up 800 Kb/d above last year’s level. Motor Gasoline consumption rose by 439 Kb/d to 9.32 Mb/d while Jet Fuel saw a rise of 16 Kb/d to 1.65 Mb/d. Total Demand fell 23 Kb/d to 20.0 Mb/d as Other Oils demand fell 665 Kb/d to 4.24 Mb/d. Year-to-date US demand is up 0.2% (down from up 0.4% last week) to 19.88 Mb/d. 

EIA Weekly Natural Gas Data: 

The natural gas report out last Thursday showed a lower rise than expected in storage levels. The increase was 70 Bcf, with the largest rise in the East at 28 Bcf. This compares to an injection of 99 Bcf last year and the 5-year average injection rate of 68 Bcf. Storage is now at 2.56 Tcf. US Storage is now 19.0% above last year’s level (down 2 points in a week) and at 2.63 Tcf is at 30.8% (down 2.5% points in the week), and above the five year average of 2.01 Tcf. 

NYMEX is today priced at US$2.77/mcf, up $0.44 from last week and up 67% from the low of US$1.65/mcf seen in mid-April. The recovery was due to the Freeport Texas LNG facility reopening and exports rising. Demand in Asia is picking up and Egypt is now importing more LNG as it is in short supply ahead of an expected very hot summer season and high air-conditioning usage.

We recommend buying the very depressed natural gas stocks during periods of market weakness (these stocks are very cheap now) as we see higher natural prices in Q4/24 (above US$3.00/mcf) 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 May 17th, the US rig count finally saw a rise of only one rig to 604 rigs (they fell two rigs in the prior week). Rig activity is now 16% below the level of 720 rigs in 2023. Of the total rigs working last week, 497 were drilling for oil and this is 14% below last year’s level of 575 rigs working. The natural gas rig count is down 27% from last year’s 141 rigs, now at 103 rigs due to the weak natural gas prices at this time. This sharp decline in drilling should continue for a few more months but the industry is seeing declining production. Recent data shows US daily natural gas production at 95.5 Bcf/d down from the high in December 2023 of 105.5 Bcf/d. Once storage comparisons improve we should see natural gas prices lift even faster. 

In Canada, there was a decline of two rigs to 114 rigs working  (versus a decline of four rigs last week). Canadian activity is up 34% from last year’s 85 rigs. Activity for oil is at 57 rigs compared to 39 last year or up by 46% as companies add more oil to meet TMX pipeline heavy crude demand and diluent to move the crude. Activity for natural gas is at 57 rigs compared to 46 last year and condensate rich wells are the focus of this activity. 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.

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. 

Subscribe now to lock in the savings! 

Energy Stock Market: The S&P/TSX Energy Index today is at 294. We would not chase the sector here but wait for the developing correction to lower prices and then add to portfolios. We are bulls but we don’t want to chase stocks. 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. 

Please take advantage of the current SER pricing structure to become a subscriber before our price increase on June 1st. We are in an exciting energy super cycle and there is a lot more to the upside. To get our specific views and to learn about the companies we cover, become a subscriber. Getting a subscription will help you navigate your energy investments as this cycle unfolds into the end of this decade. 

WTI is priced now (as we write this report) at US$77.33/b. Near term we see a break of US$75/b occurring as inventories build during this shoulder season. 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 quarterly webinar was held on Thursday May 9th. It covered details of the markets and I spent time on the best ideas now (Top PIcks Now). If you are interested in listening to this 90 minute event in our archives this is another reason to become a subscriber before the June 1st price increase. 

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. 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. 

I was interviewed last Friday with Michael Campell on MoneyTalks and we had a lengthy discussion (23 minutes) on the super commodity and energy cycle expected to last into the end of this decade. It starts at the six minute mark. The show aired on Saturday May 18th. You can listen in the archives as it was one of our best interviews. Mike sure knows how to ask great questions. The Topic of LNG got lots of attention and we talked about our new section in each SER report “TOP PICKS NOW” which is working out very well. Not all stocks peak at the same time nor bottom at the same time. We are recommending the best bargains when we write each issue. If there are none we state that.

https://mikesmoneytalks.ca/category/mikes-content/complete-show/ 

Mike’s listeners always get a special offer from Mike and the MoneyTalks team as the team there helped conceptualize the SER product at their 2017 World Outlook Financial Conference and we launched our SER product in April of that year. So this is our seventh anniversary. A big thanks to Michael, Grant, Victor, Nina and Mark (Leibovit) for getting us started on this successful path. It has been a wonderful journey and the growth of the team has helped us create this wonderful business for individual investors interested in the energy industry. We see an exciting and rewarding future ahead. 

We are now actively booking companies for our 2024 CTE conference and the first ad with confirmed company presenters will come out next month.

As usual subscribers will receive two complimentary tickets to the event, so another great reason to become a subscriber before the June 1st price increase. 

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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