Each week Josef Schachter will give 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 30 energy, energy service and pipeline & infrastructure companies with regular updates. We hold quarterly subscriber webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more. 

EIA Weekly Data: The EIA data on Wednesday July 21st was mixed for crude oil prices as energy product demand rose however Commercial Crude Inventories also rose. The headline Commercial Crude Inventories data showed a rise of 2.1Mb on the week (forecast was for a draw of 4.47Mb) to 439.7Mb. The main reason for the rise was a sharp decline in exports of lighter crudes which see little demand from US refineries which are focused on processing heavier crudes. Last week exports fell by 1.56Mb/d to 2.46Mb/d or down by 10.9Mb on the week highlighting the reason for the forecast miss. Refinery Utilization fell 0.4% to 91.4% last week (last year was 77.9% and in 2019 was 93.1%). Gasoline Inventories fell 0.1Mb and Distillate Fuel Inventories fell by 1.3Mb.

US Crude Production was flat versus last week or at 11.4Mb/d of production, but is up 400Kb/d so far this month, and up 1.7Mb/d from the pandemic low. Over the coming months we see US crude production continuing to lift and getting close to the 12.0Mb/d level. The increase in drilling activity and higher energy company cash flows are causing a growth in reinvestment to stabilize production volumes which were declining for many producers. Private energy companies are the most focused on growth. We expect the vast majority of energy companies to indicate a go-forward strategy of increased drilling activity with production growth in 2H/21 and much more growth in 2022 than in their prior forecasts.

Total Product Demand rose by 1.28Mb/d to 20.6Mb/d. However, demand is below late July 2019 when consumption was 21.6Mb/d. Gasoline Demand rose a modest 12Kb/d to 9.29Mb/d (9.67Mb/d consumed in late July 2019). Jet Fuel Consumption fell 151Kb/d to 1.41Mb/d (below the pre-pandemic level of 1.84Mb/d in late July 2019). Cushing Inventories fell last week by 1.4Mb to 36.7Mb compared to 50.1Mb last year.

Baker Hughes Rig Data: The data for the week ending July 16th showed the US rig count with a rise of five rigs to 484 rigs (up four rigs last week). Of the 484 US rigs active, 380 were drilling for oil and 104 were focused on natural gas activity. This overall rig count is up 91% from 253 rigs working a year ago. The US oil rig count is up 111% from 180 rigs last year. The natural gas rig count is up a more modest 46% from last year’s 71 rigs.

Canada had a big 13 rig increase (up by one rig in the prior week) to 150 rigs. Canadian activity is now up 4.7x from the low of 32 rigs last year. Of the Canadian increase there were six more oil rigs working last week for a total of 94 oil rigs working, up from just six last year. There are 55 rigs working on gas projects now, up from only 26 last year.

The increase in rig activity in both the US and Canada should continue to translate into rising liquids and gas production.

Conclusion:

On Sunday July 18th OPEC agreed to resolve their quota and production levels standoff. The agreement provided for a rise of 400Kb/d over each month from August to the end of the year and would add 2.0Mb/d before year-end. The big concession was to raise quotas for the UAE and Russia and the Saudis took an increase as well. It appears that this deal is a result of the pressure by the US, China and India, as the largest consuming nations, to force the members to an accommodation and ensure adequate supplies for the rest of this year. The UAE got a 332Kb/d increase in their quota to 3.5Mb/d starting in May 2022 (production June 2021 – 2.68Mb/d). Russia and the Saudis took 500Kb/d increases. The chaos in OPEC is not over. Cheating by OPEC members desperately needing revenues (like Iraq) may see a current shrinking worldwide inventory level move to a regular weekly build starting this fall. The UAE agreed to this deal for now but still wants to lift their production to 4.0Mb/d as they have invested heavily to increase their productive capacity.

On Monday July 19th the stock market was pummeled (Dow Jones Industrials were down 725 points to 33,963) as more ‘Delta’ Covid cases exploded around the world. Over 83% of US new cases are due to this more virulent mutation and is impacting mainly the unvaccinated. Most of the pain was felt by the ‘reopening’ trade stocks led by the energy sector which faced the most downside pressure. WTI fell US$5.53/b to US$66.30/b. It is bouncing back now from this sharp one day decline.

Bearish pressure on crude prices:

1. The Delta Covid variant is spreading around the world and more countries are facing renewed lockdowns as this new variant takes hold and becomes the dominant version. Australia is facing over half the country under lockdown. US caseloads are up over 100% in just one week to more than 32,000. Some US states with vaccine hesitancy are seeing their highest increase in hospitalizations and deaths. Most of the ICU patients are young and anti-vaxxers.  Asian demand is being hit in China, South Korea, Indonesia, Japan and Vietnam as they tighten movement restrictions again. The rate of vaccination in these countries is very low and plans to increase vaccination rate are not occurring. One indicator of lower demand in China is that steel production fell 5.6% in June according to a Reuters report on July 14th. China crude imports were reported as down for the first half of 2021, the first time this has happened in eight years. Refiners in China are saddled with excess jet fuel which cannot be stored for long periods as the fuel deteriorates in quality over time.
2. Iran is working to return to the 2015 UN nuclear deal and an accord is likely to be completed in August under the auspices of the newly elected President. Iran is cash strapped and their economy is imploding, facing rapidly rising inflation and shortages of food and medicine. It needs a deal if they are going to afford necessary imports. They have started to ship crude to China from their new export terminal at Jask in the Gulf of Oman. They should be able to lift production to 4.0Mb/d from 2.47Mb/d produced in June 2021 if a deal is concluded in the coming weeks.
3. China lowered imports by 3% in Q2/21 as the Chinese government import quotas were shrunk and refineries went into maintenance cycles. With the current price level for crude many refiners are not seeing adequate returns and have lowered their buying.

Bullish pressure on crude prices:

1. Rising vaccination levels of the adult US population toward herd immunity level has lifted summer travel both by air and land. Worldwide demand should rise by 1.5-2.0Mb/d during the summer travel months. This demand increase should last into early September and then we should see a seasonal slowdown of 1.5-2.0Mb/d of consumption and an inventory build to meet winter peak demand.
2. Weather impacts (hurricane season has started early) may necessitate shutting in some of the offshore Gulf of Mexico production.
3. Extreme heat waves, crippling droughts and shortage of electricity for air conditioning across the US and Canada is aiding consumption of natural gas. It is a big beneficiary of this increase in electricity demand as hydro has in many cases low water levels. NYMEX natural gas prices are now at US$3.87/mcf. AECO prices are at C$3.83/mcf. These are awesome prices for this time of year.

CONCLUSION: We remain skeptical of the optimists projected 4-5Mb/d full recovery in energy demand to 100Mb/d before year-end. The tug of war between the normal summer holiday travel demand pick-up and the 3-4Mb/d increase in crude oil supplies this year remains the key determinant of future energy consumption and crude oil prices. 

We see demand picking up by around 2Mb/d before year-end which is less than the amount of production that will be brought on by OPEC (ex-Iran) alone. Between some OPEC cheating, US production growth and Iran adding 1Mb/d+, the additional product will be in excess of current demand and will build global inventories this fall. This would endanger the OPEC bullish scenario for crude prices of over US$80/b before year-end.

WTI crude oil prices bounced today  to US$69.53/bon the US consumption recovery. While up today by US$2.33/b it is down from US$73.30/b at this time last week. We see this bounce from the low of US$65/b on Monday as just a short-term oversold recovery. In the coming days we see the decline commencing again. Once we see a close below the intraday low of Monday the next plunge should take WTI down to the US$60-62/b level and then it should again churn for a while at that level. Lower prices should occur once the summer driving season ends in September. The price of crude remains above the pre-pandemic price of early 2020, yet demand is 3-4Mb/d less and OPEC is ramping up production while still having lots of spare capacity. Lower crude oil prices will follow the economic impact of this fourth pandemic wave. If the caseloads rise and economic activity stumbles and vaccination hesitancy continues, then the more pessimistic case for demand and crude oil prices becomes more likely.

Energy Stock Market: The S&P/TSX Energy Index trades currently at 126 (down 19 points from 145 in mid-June or down so far by over 13%). The close below 132 that we mentioned last week has occurred. The level to watch now is the intraday low of this Monday at 119.02. A close below this level would set up the next support level of the 111 area. A bust of US$60/b for WTI would likely mean a decline in the Energy Index to the 100 level or lower. This is likely to occur in September. Much lower levels are likely. Just to the 100 level means a nasty decline of over 30% from the mid-June high.

Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all  archived Webinars, Action Alerts, TOP PICK recommendations when the next BUY or SELL signal occurs, as well as our Quality Scoring System review of the 30 companies that we cover. We go over the markets in much more detail and highlight individual companies’ financial results in our reports. Our next three SER reports will focus on the results of Q2/21 for the 30 companies on our Coverage List.

Our July SER Monthly Report comes out tomorrow Thursday July 22nd, and includes our normal Stock Market and Energy Market Updates and a guest climate change article from P. Eng. – Ron Barmby. If you want to access our reports and our forthcoming quarterly reviews then become a subscriber. Go to https://bit.ly/34iKcRt to subscribe. 

We will have our third quarter 90 minute webinar on Thursday August 12th at 7PM MT. It will focus on the third quarter results of the companies we cover. If you want to join in, one must become a subscriber for access to this event.

Each week Josef Schachter will give 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 30 energy, energy service and pipeline & infrastructure companies with regular updates. We hold quarterly subscriber webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more. 

EIA Weekly Data: The EIA data on Wednesday July 14th was mostly bearish for crude oil prices as energy product demand declined and US crude production rose again. The headline Commercial Crude Inventories data showed a decline of 7.9Mb on the week (forecast was for a draw of 4.1Mb) to 437.6Mb. The main reason for the decline was the increase in exports of lighter crudes which have little demand from US refineries using heavier crudes. Last week exports rose by 1.397Mb/d or by 9.8Mb on the week. If not for this export increase US Commercial Stocks would have risen. Refinery Utilization fell 0.4% to 91.8% last week (last year was 78.1% and in 2019 was 94.4%). Gasoline Inventories rose by 1.0 and  Distillate Fuel inventories rose by 3.7Mb.

US Crude Production growth was the bearish part of the report as the US industry added 100Kb/d last week to 11.4Mb/d of production, up 400Kb/d so far this month, and up 1.7Mb/d from the pandemic low. Over the coming months we see US crude production continuing to lift and getting close to the 12.0Mb/d level. The increase in drilling activity and higher energy company cash flows are causing a growth in reinvestment to stabilize production volumes which were declining for many producers. We expect the vast majority of energy companies to indicate a go-forward strategy of increased drilling activity with production growth in 2H/21 and much more growth in 2022 than in their prior forecasts.

Total Product Demand fell by 2.245Mb/d to 19.3Mb/d. Demand fell below mid-July 2019 when consumption was 20.3Mb/d. Gasoline Demand fell by 760Kb/d to 9.28Mb/d (9.21Mb/d consumed in mid-July 2019). Jet Fuel Consumption rose 186Kb/d to 1.56Mb/d (below the pre-pandemic level of 1.876Mb/d in mid-July 2019). Cushing Inventories fell last week by 1.7Mb to 38.1Mb compared to 48.7Mb last year.

Baker Hughes Rig Data: The data for the week ending July 7th showed the US rig count with a rise of four rigs to 479 rigs (up five rigs last week). Of the 479 US rigs active, 378 were drilling for oil and 101 were focused on natural gas activity. This overall rig count is up 86% from 258 rigs working a year ago. The US oil rig count is up 109% from 181 rigs last year. The natural gas rig count is up only 35% from last year’s 75 rigs.

Canada had a one rig increase (up by 10 rigs in the prior week) to 137 rigs. Canadian activity is now up 5.3x from the low of 26 rigs last year. Of the Canadian increase there was one more oil rig working last week for a total of 88 oil rigs working, up from just six last year. There are 48 rigs working on gas projects now, up from only 20 last year.

The increase in rig activity in both the US and Canada should continue to translate into rising production.

Conclusion:

The next OPEC meeting may occur soon as the disputes from the last meeting seem to be getting close to resolution. There were three key issues that were outstanding.

1. The Saudis wanted to see an increase of 400Kb/d in each of the remaining five months of the year which would add 2.0Mb/d into the year end. The UAE and Russia wanted to see the increase to be 500Kb/d per month or 2.5Mb/d before year end. Russia is currently producing 100Kb/d over its official quota and wants to raise production materially in the coming months. Russia and the UAE are pressuring OPEC to open the spigots to fill current demand and lower the price so that demand is not destroyed once the summer seasonal demand growth subsides. It looks like a deal for 500Kb/d is likely now that they and the UAE have resolved the base quota level. This will create a glut and pressure crude prices in 2H/21.
2. The Saudis wanted to extend the deal to the end of 2022 from the current agreement to end in April 2022. The UAE and Russia had opposed this. It now looks like a deal into the end of 2022 is likely but with more volumes to be added over the additional time. 
3. The UAE wanted a higher quota level as they have been investing in new productive capacity and felt they were being penalized by those not reinvesting in their energy industry. The UAE produced 2.64Mb/d in June versus 3.1Mb/d in Q4/19 and its capacity of 3.8Mb/d. They are spending US$25B per year so that they can raise their productive capacity to 5.0Mb/d before the end of the decade. It appears according to Bloomberg reports today that the Saudis have agreed to lift the base quota for the UAE to 3.65Mb/d, or near their desired level of 3.8Mb/d, which will add 1.0Mb/d of additional production in the near term. 

It appears that the proposed agreement by the Saudis and OPEC+ is a result of the pressure by the US, China and India, as the largest consuming nations, to force the members to an accommodation.

Bearish pressure on crude prices:

1. The Delta Covid variant is spreading around the world and more countries are facing more lockdowns as this new variant takes hold and becomes the dominant version. This Delta version has now been found in over 100 countries and with cases rising in 69 of them. Over 4.0M people have died from the Covid pandemic of which the US has exceeded 607K deaths. The biggest single case load increases this week are occurring in Bangladesh, Colombia, Indonesia, Iran, Iraq, Malaysia, Russia, Singapore, South Africa, Tunisia and Zimbabwe. The US is experiencing a rise in caseloads and filling up of hospital ICU beds in States with low vaccination rates and where the young are getting the most severe reactions. Even New York City infections are rising in the unvaccinated.
2. Iran is working to return to the 2015 UN nuclear deal and an accord is likely to be completed this month under the auspices of the newly elected President. Iran is cash strapped and their economy is imploding, facing rapidly rising inflation and shortages of food and medicine. It needs a deal if they are going to afford necessary imports.
3. Rising crude and product prices may again dampen worldwide demand. Overall the US has an average cost over US$3/gal with many places seeing price spikes to US$5/gal.
4. China lowered imports by 3% in Q2/21 as the Chinese government import quotas were shrunk and refineries went into maintenance cycles.

Bullish pressure on crude prices:

1. Rising vaccination levels of the adult US population to herd immunity level has lifted summer travel both by air and land. Worldwide demand should rise by 1.5-2.0Mb/d during the summer travel months. This demand increase should last into early September and then we should see a seasonal slowdown of 1.5-2.0Mb/d of consumption and an inventory build to meet winter peak demand.
2. Weather impacts (hurricane season has started early) may necessitate shutting in some of the offshore Gulf of Mexico offshore production.
3. High temperatures, crippling droughts and heatwaves across the US and Canada are cranking up demand for air conditioning and natural gas is a beneficiary of this increase in electricity demand. NYMEX natural gas prices are now at US$3.65/mcf. AECO prices are at C$3.64/mcf.

CONCLUSION: We remain skeptical of the optimism about the projected 4-5Mb/d full recovery in energy demand to 100Mb/d before year-end. The tug of war between the normal summer holiday travel demand pick-up and the 3-4Mb/d increase in crude oil supplies this year remains the key determinant of future energy consumption and crude oil prices. We see demand having picked up by around 2Mb/d before year-end which is less than the amount of production that will be brought on by OPEC (ex-Iran) alone. Between some OPEC cheating, US production growth  and Iran adding 1Mb/d+ beginning sometime in August (once a new nuclear deal is concluded and sanctions removed), the additional product will be in excess of current demand and will build global inventories. This would endanger the OPEC bullish scenario for crude prices.

WTI crude oil prices have fallen today by US$1.95/b to US$73.30/b and down US$3/b over the last week due to the EIA report and the likely revised OPEC deal. A decline below US$67/b for WTI should start the corrective phase we have been forecasting. The current enthusiasm by speculative forces including hedge fund futures traders, appears to be like that seen in late 2018 just before OPEC entered another market share war. That’s when crude oil prices were at US$76.90/b in September and three months later, had declined to US$42.36/b, down by 45%. The price of crude now is above the pre-pandemic price of early 2020, yet demand is 3-4Mb/d less and OPEC is ramping up production while still having nearly 9Mb/d of spare capacity.

Energy Stock Market: The S&P/TSX Energy Index trades currently at 133 (down 12 points from 145 in mid-June or down so far by over 8%). A close below 132 should initiate the next sharp decline. An initial downside target after such a breach is down to the 111 area. The current stock market weakness is likely an additional catalyst for the energy sector to lose its current momentum and back off meaningfully. A revised OPEC deal with more production, Iran launching a large increase in volumes once sanctions are removed, and rising US production are all likely to drive WTI crude below US$60/b and energy related stocks should fall sharply. August could be a very nasty month for the sector.

Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all  archived Webinars, Action Alerts, TOP PICK recommendations when the next BUY or SELL signal occurs, as well as our Quality Scoring System review of the 30 companies that we cover. We go over the markets in much more detail and highlight individual companies’ financial results in our reports. Our next SER reports will focus on the results of Q2/21 for the 30 companies on our Coverage List.

Our July SER Monthly Report comes out next Thursday July 22nd, and includes our normal Stock Market and Energy Market Updates  and a guest climate change article from Engineer – Ron Barmby. If you want to access this report and our forthcoming quarterly reviews then become a subscriber and go to https://bit.ly/34iKcRt to subscribe.