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 May 19th was mixed. Commercial Crude Inventories rose 1.3Mb to 486.0Mb but would have risen more if not for Net Imports falling 587Kb/d or by 4.1Mb last week. Motor Gasoline Inventories fell 2.0Mb as gasoline demand rose while buyers lined up to fill their gas tanks due to the Colonial Pipeline ransomware attack. Refinery Utilization rose 0.2% to 86.3% last week (last year 69.4%). US Crude Production remained at 11.0Mb/d. Over the coming months we see this 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 rose last week by 1.79Mb/d to 19.3Mb/d reversing most of last week’s 2.21Mb/d decline. Gasoline Demand rose by 424Kb/d to 9.2Mb/d as consumers rushed to keep their tanks full. Jet Fuel Consumption fell by 96Kb/d to 1.19Mb/d. So far this year overall demand for products is 4.9% above last year as we recover from the pandemic plunge. Motor Gasoline Demand is up by 8.4% from last year but Jet Fuel remains a negative component, down 4.8% from a year ago. Cushing Inventories fell last week by 100Kb to 45.8Mb compared to 56.9Mb last year.

Baker Hughes Rig Data: The data for the week ending May 14th showed the US rig count rise  by five rigs (up eight rigs in the prior week). Canada had its second weekly rise with an increase of four rigs (up four rigs in the prior week). Canadian activity is now up 156% from the pandemic lows of last year. There are 59 rigs working in Canada now compared to 23 rigs working last year. In the US there were 453 rigs active, up 34% from 339 rigs working a year ago. The oil rig count in Canada was up three rigs to 25 rigs working and is up from seven rigs working last year. The natural gas rig count was up by one rig to 34 rigs active, up from last year’s level of 16 rigs.

Conclusion:

The Colonial Pipeline system ransomware disruption lifted gasoline prices to over US$3.00/gallon with some stations gouging patrons at over US$7.00/gallon and now face Federal charges for this extortion move. Reuters reported that almost 12,000 gasoline stations in the US east coast had closed as they ran out of product to sell as of Monday May 17th. The company, Colonial, has started up again but with some products moving at a speed of 5 MPH, it may take two more weeks for denser products to be fully available again in all the markets.

Over the next two months OPEC will increase production by 2.1Mb/d with latest industry  reports showing them having increased production by 1.0Mb/d this month. With worldwide demand now around 95Mb/d we expect by year-end demand may rise to 97Mb/d, but not back to pre-pandemic levels of 100-101Mb/d.

Bearish pressure on crude prices:

1. Vaccine hesitation and vaccine resistance is likely to delay herd immunity. Many individuals in the US who have their first shot of the Pfizer or Moderna vaccine have not gone to get their second shot even though they are eligible. The US as of yesterday was at 586K deaths. Worldwide deaths have risen to 3.39M.
2. The US economy is slowing down to a more sluggish pace. The recent declines in core retail sales, in housing starts (down 9.5% in April due to higher lumber and other input costs) and housing sales (single family home sales down 13.4% in April) was not expected. Weak and stagnating economies in many places in Asia, North America and Europe mean the full recovery in consumption to pre-pandemic levels will likely not happen until 2022. Rising mutation caseloads in Singapore and Taiwan are new outbreak areas. Japan’s economy fell by 5.1% in Q1/21 adding to the recessionary worries for three of the five largest economic areas (Japan, the EU and India).

Bullish pressure on crude prices:

1. Rising vaccination levels in the US is increasing the comfort of going out, lifting energy consumption. Studies for children under 12 years old are underway and if successful, the FDA may approve some spectrum of these younger people in the week ahead.
2. Optimism over international travel as restrictions are lifted, is gaining momentum and some forecasters expect global Jet Fuel demand will rise by 1.0Mb/d by year end. The exception is India which is seeing international flights cancelled due to the rapid spread of the disease.
3. Vaccine passports (or certificates) are getting more support from countries, increasing the likelihood of 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. Canada’s Health Minister Patty Hajdu expects to come up with a ‘certification’ process to allow Canadians to travel safely and internationally.

CONCLUSION:. We remain skeptical of the optimism about a full recovery in energy demand before year-end. The challenges we face in Alberta, Ontario, Manitoba and Nova Scotia highlight how quickly things can change from re-openings to lockdowns as caseloads explode. Alberta now has the highest positivity rate at over 11% on the continent with Fort McMurray being the hardest hit area. We think it is likely that the US and Europe will face equivalent reversals in the weeks and months ahead. The tug of war between the normal summer seasonal holiday travel demand and the worsening Covid-19 infections remains the key determinant of future energy consumption and crude oil prices. 

WTI crude oil prices are down today by US$3.44/b to US$62.05/b or down by 5.3% on the day. From last week, prices are down over US$4.50/b. The fear about the Colonial Pipeline had taken prices up to nearly US$67/b. A breach of USS$60/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.

Energy Stock Market: The S&P/TSX Energy Index now trades at 125 as energy stocks retract with the general stock market correction. A close below 111.00 (the mid-April low) should initiate the next sharp decline. An initial downside target after such a breach is the 100 area. The current general stock market weakness is the catalyst for the energy sector to lose its  current strength and back off meaningfully.

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. If you are interested in the energy industry this should be of interest to you.

We had a very successful 90 minute webinar last Thursday May 13th.  If you want to review it in our archives, go to  https://bit.ly/34iKcRt  to subscribe. Our topics for discussion started with an update on the overall stock market and our bearish concerns and an analysis of Q1/21 results of companies we cover (the good and the not so good results). In addition we focused on the investment opportunities in the five Pipeline & Infrastructure stocks that we recently introduced coverage on. There were also two Q&A sessions.  

We are completing our review of 12 energy, energy service and infrastructure companies for our May Monthly SER which will be  released next Friday May 28th. It will include reviews of all of the five Pipeline & Infrastructure companies we now follow.

The price of lumber has more than doubled over the past year, and economists warn that things might stay this way for a while. That’s why people like Hans Dow are getting crafty.

“I was like, well, I want a sawmill. I can make a lot of stuff with it. I also need to learn how to weld …,” Dow says as he hefts a 9-foot log onto the deck of his hand-built sawmill. It sits in the corner of his South Anchorage, Alaska, backyard.

Dow spent the winter in his garage building this sawmill from scratch. He collected the scrap metal and the machinery parts from all over the city. He says his brother urged him to take on the project.

“He was working on his house and we were kind of joking like ‘man, lumber is really expensive. We could probably build or buy a sawmill and make our own siding and break even or come out ahead.’ And then I started to do the math,” he says. “And I was like, ‘oh yeah, it would be cheaper.'”

It took him three weeks and $3,000 to build.

Dow says furniture projects are in his future. But his first major home improvement effort is to build garden boxes for his wife. If he were to buy this lumber today, it would cost him at least $2,000. But for Dow, spruce logs are free. He picks them up from Paul’s Tree Service in Anchorage, where he works as a crane operator. The company removes beetle-infested spruce throughout the city.

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Atlanta’s Colonial Pipeline said Wednesday evening it is beginning to return to service, days after it halted most operations following a ransomware attack, leading to fuel shortages along the East Coast.

Colonial Pipeline initiated the restart of pipeline operations today at approximately 5 p.m., the company said in a statement.

“Following this restart, it will take several days for the product delivery supply chain to return to normal. Some markets served by Colonial Pipeline may experience, or continue to experience, intermittent service interruptions during the start-up period. Colonial will move as much gasoline, diesel, and jet fuel as is safely possible and will continue to do so until markets return to normal,” the company said.

Full Story

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 and energy service companies with regular updates. We hold quarterly subscriber webinars (next one May 13th) and provide Action BUY and SELL Alerts for paid subscribers. Learn more. 

EIA Weekly Data: The EIA data on Wednesday May 12th was mixed. Commercial Crude Inventories fell 0.4Mb to 484.7Mb but would have fallen more if not for net imports falling by 2.36Mb/d, as exports fell by 2.33Mb/d. Motor Gasoline Inventories rose a modest 0.4Mb. Refinery Utilization fell 0.4% to 86.1% last week (last year 67.9%). US crude production rose 100Kb/d to 11.0Mb/d. Over the coming months we see this lifting to 11.5-12.0Mb/d as the increase in drilling activity and higher energy company cash flows is re-invested to stabilize production volumes which are still declining for many producers.

Total Product Demand fell 2.21Mb/d to 17.5Mb/d.  Gasoline Demand fell a modest 64Kb/d to 8.80Mb/d while Jet Fuel Consumption rose by 198Kb/d to 1.28Mb/d. So far this year overall demand for products is 4.4% above last year as we recover from the pandemic plunge. Motor Gasoline Demand is up by 7.1% from last year but Jet Fuel remains the only negative component, down 7.4% from a year ago. Cushing Inventories fell last week by 400Kb to 45.9Mb compared to 62.4Mb last year.

Baker Hughes Rig Data: The data for the week ending May 7th showed the US rig count rise  by eight rigs (up two rigs in the prior week). Canada had its first rise now that break-up season is ending with an increase of four rigs (down four rigs in the prior week). Canadian activity is now up 112% from the pandemic lows of last year. There are 55 rigs working in Canada now compared to 26 rigs working last year. In the US there were 448 rigs active, up 20% from 374 rigs working a year ago. The oil rig count in Canada was up two rigs to 22 rigs working and is up from seven rigs working last year. The natural gas rig count was up by two rigs to 33 rigs active, up from last year’s level of 19 rigs.

OPEC May Monthly: The May report came out yesterday. OPEC has kept its forecast for the year at 96.46Mb/d. It has lowered the nearby quarter again but optimistically raised the consumption level for Q3/21 and Q4/21. They see Q2/21 consumption at 94.79Mb/d (down from 95.09Mb/d in their prior forecast) and see it rising to 97.9Mb/d in Q3/21 and to 99.74Mb/d in Q4/21. We don’t expect either of those forecasts to be correct. With current consumption in the 94-95Mb/d area we see only a maximum of 97Mb/d of consumption by year end. As OPEC continues to lower near term demand it should, at some point, have a negative impact on prices especially if OPEC brings on the additional production of 2.1Mb/d in the next two months. This month they are adding 600Kb/d. For the month of May OPEC production rose by a modest 26Kb/d to 25.1Mb/d. The largest increases came from cheaters. Iran raised production by 73Kb/d as they found buyers for their discounted crude in China. Nigeria raised production by 75Kb/d. The surprise was the decline from Venezuela which saw a fall of 81Kb/d to 445Kb/d. They had been seeing rises in prior months as China and Russia were buying their crude.  OECD Inventories according to the report were 102 days or 4.53Bb. This is down from 120 days in Q1/20 but is up from 93 days in pre-pandemic days.

Conclusion:

The Russian mob’s (cybercrime gang Darkside) ransomware attack against the 5,500 mile Colonial Pipeline system that runs from the Gulf Coast to the New England area (45% of east coast consumption) and moves 2.5Mb/d of gasoline, diesel, jet fuel and other products, has lifted gasoline price. Many gas stations are now closed (over 1,000 so far) as they run out of product to sell. Gasoline prices now exceed US$3/gallon (highest since 2014) and many stations are seeing five hour plus line-ups and some very angry customers. The company, Colonial, sees starting up feeder lines already and hopes to be back on fully across their system by the weekend. With products moving at a speed of 5 MPH it may take 19 days for denser products to be fully available again in all the markets. This has lifted crude prices by over US$1/b to US$66.40/b, similar to levels seen last week.

Over the next two months OPEC will increase production by 2.1Mb/d, more than is needed for world wide demand growth into late 2021 which will help to drive crude prices lower. We expect to see a sustained and meaningful breach of US$60/b in the coming weeks.

Bearish pressure on crude prices:

1. OPEC (outside of the Saudis) will be adding 350Kb/d in May, 350Kb/d in June and 440Kb/d in July. The  Saudis will separately ease their cuts by 250Kb/d in May, 350Kb/d in June and 400Kb/d in July.
2. Vaccine hesitation and vaccine resistance is likely to delay herd immunity. Many individuals in the US who have their first shot of the Pfizer or Moderna vaccine have not gone to get their second shot even though they are eligible. The US as of yesterday was at 582K deaths.
3. The US economy is slowing down to a more sluggish pace. The April jobs report came in at just 266K job growth versus the 1.0M expected. The unemployment rate rose to 6.1% from 5.8% expected. Most disconcerting was Manufacturing jobs fell by 18K in the month. Canada’s labour market lost 207,000 jobs in April. The unemployment rate rose to 8.1% from 7.5% in March. Ontario led the way lower with job losses of 153,000. Weaker economies in North America and Europe mean the recovery in consumption may not happen until late this year or into 2022.

Bullish pressure on crude prices:

1. Rising vaccination levels in the US is increasing the comfort of going out, lifting energy consumption. By July the US should have most adults who want a vaccine covered and those 12-15 years old are now eligible for the Pfizer vaccine. Studies for children under 12 years old are underway and if successful the FDA may approve some spectrum of these younger people in the week ahead.
2. Optimism over international travel as restrictions are lifted, is gaining momentum and some forecasters expect global Jet Fuel demand will rise by1.5Mb/d by year end. The exception is India which is seeing international flights cancelled due to the rapid spread of the disease.
3. Vaccine passports (or certificates) are getting more support from countries, increasing the likelihood of 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. Canada’s Health Minister Patty Hajdu will come up with a ‘certification’ process to allow Canadians to travel safely and internationally.
4. Increased violence and rocket attacks in Israel and Gaza is adding a war premium to crude prices. Iran has provided Hamas (who control Gaza) with longer range missiles that can now hit Israel’s largest city Tel Aviv. If these attacks continue Iran could get dragged in with Israel striking at the weapons supplier to Hamas.

CONCLUSION:. We remain skeptical of the current optimism about a full recovery in energy demand before year-end. The challenges we face in Alberta, Ontario, Manitoba and Nova Scotia highlight how quickly things can change from re-openings to lockdowns as caseloads explode. Alberta now has the highest positivity rate at over 12% on the continent with Fort McMurray being the hardest hit area. We think it is likely that the US and Europe will face equivalent reversals in the weeks and months ahead. The tug of war between the normal summer seasonal demand growth hopes and the worsening Covid-19 infections remains the key determinant of future energy consumption and crude oil prices. 

The decision on what is to happen on the Line 5 Enbridge pipeline is expected later today. Whatever the decision it will be taken by the loser side into the State or Federal court system. It may take a final court ruling at the highest level for this to be resolved. This Line is important for many of the US States it passes through and is of great importance to Ontario and Quebec which get nearly half of their liquids supplies from this pipeline.

Energy Stock Market: The S&P/TSX Energy Index now trades at 127. We expect the current enthusiasm to wane and the S&P/TSX Energy Index to reverse direction falling substantially in the coming months. A breach of 111.59 should initiate the next sharp decline. An initial downside target after such a breach is the 100 area. The current general stock market weakness may be the catalyst for the energy sector to lose its  current strength and back off meaningfully.

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. If you are interested in the energy industry this should be of interest to you.

We will be having our second quarter 90 minute webinar tomorrow Thursday May 13th at 7PM MT.  If you want to join us go to  https://bit.ly/34iKcRt to subscribe. Our topics for discussion will start with an update on the overall stock market and on the energy market and an analysis of Q1/21 results of companies we cover (the good and the not so good results). In addition we will focus on the investment opportunities in the five Pipeline & Infrastructure stocks that we recently introduced coverage on. There will also be two Q&A sessions.  Please join us for a detailed review of the sector and the best ideas to consider for investing in when we get the next low risk BUY signal.