Energy & Commodities
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 Thursday June 3rd was mixed. Commercial Crude Inventories fell 5.1Mb to 479.3Mb as Exports fell by 889Kb/d, or by 6.2Mb on the week. Motor Gasoline Inventories rose by 1.5Mb as Refinery Utilization rose 1.7% to 88.7% last week (last year 71.8% and two years ago 91.8% as refiners ramped up for the summer holiday driving season). Distillate Fuel oil volumes rose by 3.7Mb on the week. US Crude Production fell by 200Kb/d to 10.8Mb/d which may have been due to the Colonial Pipeline problems which normally moves 3.0Mb/d of crude from Texas to the east coast markets. Colonial is still ramping back up after the ransomware attack. Over the coming months we see US crude production lifting to 11.5-12.0Mb/d as the increase in drilling activity and higher energy company cash flows are reinvested to stabilize production volumes which are still declining for many producers.
Total Product Demand fell last week by 817Kb/d to 19.14Mb/d. Gasoline Demand also fell and was down by 333Kb/d to 9.15Mb/d. Jet Fuel Consumption rose as more people flew during the Memorial long weekend with a rise of 42Kb/d to 1.44Mb/d. Air travel is now back over the pre-pandemic levels of early 2020. So far this year overall demand year-to-date for products is 6.6% above last year as we recover from the pandemic plunge. Motor Gasoline demand is up by 10.0% from last year and Jet Fuel now is above last year as well with an increase of 1.9% from a year ago (year-to-date). Cushing Inventories rose last week by 700Kb to 45.5Mb compared to 51.7Mb last year.
Baker Hughes Rig Data: The data for the week ending May 28th showed the US rig count rise by two rigs (up two rigs in the prior week). Canada had an increase of four rigs (up one rig in the prior week). Canadian activity is now up 310% from the pandemic lows of last year. There are 62 rigs working in Canada now compared to 20 rigs working last year. In the US there were 457 rigs active, up 52% from 301 rigs working a year ago. In the US they had an increase of three rigs drilling for oil to 359 rigs which is up 62% from a year ago. The state with the biggest increase in rigs this week was Texas with a four rig increase of which two were in the Permian. This drilling rig pick up should soon translate into rising production on both sides of the border.
Conclusion:
This month OPEC will increase production by 700Kb/d, after raising production by 600Kb/d in May, and then in July plan to lift production by 840Kb/d With worldwide crude demand now around 95-95.5Mb/d (OPEC forecast) we expect by year-end demand may rise by 2Mb/d to 97-97.5Mb/d, but not back to pre-pandemic levels of 100-101Mb/d forecast by energy bulls, including OPEC. Goldman Sachs and Barclays are calling for US$80/b by Q4/21 if demand rises over 100Mb/d. OPEC is now in this camp as well and expects that there will be a 2Mb/d shortage by the end of 2021. They will keep a watchful eye on demand and add production as needed but they want inventories to fall below the five-year average before they do so. OPEC’s next meeting is scheduled for July 1st.
Bearish pressure on crude prices:
- Rising mutation caseloads in Vietnam, Malaysia, Singapore and Taiwan are new outbreak areas. Japan’s ICU health care system is at capacity and their largest cities (Tokyo and Osaka) are facing rising case loads. There is increasing pressure to cancel the Olympic summer games. Vaccination rates in the country are extremely low at 5% inoculated so far. The US State Department has issued a travel advisor for the country. In Canada, Manitoba still has record case loads in ICU beds and is accessing other provinces for beds for their serious patients.
- Iran is in the final stages of talks to return to the 2015 UN nuclear deal and if an accord is completed this month or in July in Vienna, they could increase production quickly by 1.0- 2.0Mb/d to 4Mb/d up from 2.39Mb/d produced in April 2021. Iran last produced over 4Mb/d in 2016. A deal would lift current sanctions on Iran’s oil, banking and shipping sectors. Iran has a new 1,000Km – 1Mb/d pipeline which started up this month that bypasses the Strait of Hormuz. It is situated at Jask, in the Gulf of Oman. It will make shipping crude cheaper to buyers in Asian countries. China and India are expected to be the biggest buyers of this new crude supply. Iran holds Presidential elections on June 18th so this may be the date for a nuclear deal to be announced.
Bullish pressure on crude prices:
- Rising vaccination levels across the US is lifting energy consumption.
- Weather impacts should start soon in the Gulf of Mexico which would necessitate shutting in some of the offshore production.
- Vaccine passports (or certificates) are getting more support from countries, increasing the prospects for a 2021 summer tourism industry in Europe. The UK may lead the way with passports and may start to issue them as early as next month. Re-opening across North America will increase gasoline consumption as people re-engage with family and friends and start to travel as they had done before the pandemic. In Calgary, the Stampede is going to occur this year with some restrictions (no chuck-wagon races).
CONCLUSION: We remain skeptical of the optimism about the projected 4-5Mb/d full recovery in energy demand to 100Mb/d before year-end (OPEC forecast 99.8Mb/d). 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 and the US alone. Between some OPEC cheating and Iran adding 1-2Mb/d by August (if a deal is concluded), this additional product will be in excess of current demand and will build inventories. This would endanger the OPEC bullish scenario. Iran returning to full production is the danger to the US$80/b forecast.
WTI crude oil prices are down modestly today to US$68.65. A breach of US$61.56/b would have negative implications. Technically, a close below US$57.63/b (the early April low) would be very bearish and set up a decline to US$48-52/b. The current enthusiasm for the sector appears to us to be like that seen in late 2018 when crude oil prices rose to US$76.90/b in September and three months later had declined to US$42.36/b or down by 45%. The price of crude now is above the pre-pandemic price of early 2020, yet demand is 5Mb/d less and production is ramping up by 2.1Mb/d from OPEC alone. This does not make sense!
Energy Stock Market: The S&P/TSX Energy Index trades currently at 137 having risen 16 points in the last two weeks as crude prices rose. A close below 111 (the mid-April low) should initiate the next sharp decline. An initial downside target after such a breach is the 100 area. The expected general stock market weakness would be the catalyst for the energy sector to lose its current momentum and back off meaningfully.
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- OPEC and its non-OPEC partners agreed on Tuesday to gradually ease production cuts.
- The group opted to stick to the plan agreed upon in April, whereby 2.1 million barrels per day of supply would be brought back to the market between May to July.
- OPEC Secretary General Mohammad Barkindo said Monday he did not believe higher Iranian supply would be a cause for concern.
LONDON — A group of some of the world’s most powerful oil producers agreed on Tuesday to continue gradually easing production cuts amid a rebound in oil prices.
OPEC and its oil-producing allies, known as OPEC+, will boost output in July, in accordance with the group’s April decision to return 2.1 million barrels per day to the market between May and July.
Production policy beyond July was not decided on, and the group will meet again on July 1.
International benchmark Brent crude futures traded at $71.17 a barrel on Tuesday, up around 2.7%, while West Texas Intermediate crude futures stood at $68.65, for a gain of more than 3% and the contract’s highest level in more than two years. Oil prices have climbed more than 30% this year.
The Middle East-dominated group, which is responsible for over one-third of global oil production, is seeking to balance an expected upswing in demand with the potential for an increase in Iranian output.
The alliance announced massive crude production cuts in 2020 in an effort to support prices when the coronavirus pandemic coincided with a historic demand shock.
Over the weekend, hackers hit the only piece of American infrastructure more critical than the Colonial Pipeline: the burger supply.
JBS, the world’s largest meat processor, had to shut down North American and Australian operations Monday following a coordinated ransomware attack. The company told the White House that it believes a criminal organization based in Russia is behind the hack.
In the US, which accounts for half of JBS revenues, nearly 20% of beef production was impacted by temporary plant shutdowns.
It does appear to be temporary, though. JBS said that the “vast majority” of its facilities would be operational today due to progress it made in resolving the attack.
If operations had remain paused for days or weeks, the hiccup could’ve turned into a real headache for JBS customers like supermarkets and fast-food chains that require a continuous supply of meat.
Extra bad timing
While wholesale meat prices remained mostly stable yesterday, extended disruption from the cyberattack threatened to send meat prices—already on the rise—soaring even higher.
Compared to 2020, April’s pork and beef prices were up 4.8% and 3.3%, respectively, due to labor shortages, restaurant reopenings, rising grain and transportation costs, and high demand for meat exports. And Memorial Day weekend just kicked off the summer grilling season, which means even more demand for meat in the US.
Zoom out: As a greater proportion of corporate operations are tied to IT systems, hackers are presented with more opportunities to prey on links in critical supply chains. The JBS incident comes just weeks after hackers forced the shutdown of the Colonial Pipeline and disrupted gas supplies up the East Coast.
The world’s biggest meat supplier has become the latest casualty of a cybersecurity attack, posing a fresh threat to global food security already rattled by the Covid-19 pandemic.
JBS SA shut its North American and Australian computer networks after an organized assault on Sunday on some of its servers, the company said by email. Without commenting on operations at its plants, JBS said the incident may delay certain transactions with customers and suppliers.
The attack sidelined two shifts and halted processing at one of Canada’s largest meatpacking plants, while the company canceled all beef and lamb kills across Australia, industry website Beef Central said. Some kill and fabrication shifts have also been canceled in the U.S., according to a union Facebook post.
Hackers now have the commodities industry in their crosshairs with the JBS attack coming just three weeks after the operator of the biggest U.S. gasoline pipeline was targeted. It’s also happened as the global meat industry battles lingering Covid-19 absenteeism after recovering from mass outbreaks last year that saw plants shut and supplies disrupted.
Canadian Facility
The cyber assault affected a Canadian beef plant in Brooks, Alberta, about 190 kilometers (118 miles) east of Calgary, on Monday, according to Scott Payne, spokesman for United Food and Commercial Workers Canada Union Local 401. The facility accounts for more than a quarter of the nation’s capacity, and according to a job ad, processes about 4,200 head of cattle a day.
Finland is moving forward with a revolutionary solution for how to dispose of high-level nuclear waste and spent fuel from atomic reactors.
Among the greatest challenges of the nuclear era remains what to do with all the high-level nuclear waste produced by our existing fleet of nuclear reactors. The preferred method is deep geologic storage. In the U.S., tens of billions of dollars have been spent on proposals to place such nuclear waste under Yucca Mountain, Nevada, or within thick salt layers under Carlsbad, N.M. Yet due to the politics of NIMBY, the United States does not yet have a permanent storage plan.
Finland does. In early May the Finnish waste management company Posiva Oy, announced the start of excavation on their deep geologic nuclear waste repository for their spent nuclear fuel (SNF) at ONKALO.
The repository will be the first in the world to start final disposal of spent nuclear fuel.
The Radiation and Nuclear Safety Authority of Finland has certified the process. Operation of the repository is expected to begin in 2023. The total cost estimate is about €2.6 billion ($3.4 billion).
This has been decades in coming. Their disposal program started in 1983 and they have two spent fuel storage sites in operation. Posiva Oy was set up 1995 to implement deep geological disposal.
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