Energy & Commodities

Trading Desk Notes For May 8, 2021

 

Stocks, commodities and gold surge higher, the US Dollar falls

The S+P 500, the Dow Jones Industrials and Transports, and the TSE Index closed the week at All-Time Highs. The Transports (up ~145% since March 2020 lows) have closed higher for 14 consecutive weeks – for the first time in their 137 year history.

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COMMODITY NEWS OF THE DAY

 

Assets of all types have exploded in 2021. There’ve been NFTs, trading cards, and crypto.

The latest rage: commodity prices.

We tapped one of finance Twitter’s most popular accounts (@ParikPatelCFA, who writes at Bullish Studios) to explain what’s happening:

  • Lumber: The pencil is mightier than the sword… because it’s made of wood. The price per thousand board feet of lumber recently hit an all-time high of ~$1.4k (up 280% since the start of the pandemic).

    The price is being spurred on by strong housing demand met with tightening supply and rising input costs.

Oil: If you ever think that you can’t recover from something, remember that West Texas Intermediate crude bounced back from negative $37.63 to ~$66 in just over a year.

After tumbling to negative prices in April of last year due to a Saudi-Russia price war and the COVID-19 pandemic, crude has made quite the comeback and is expected to rise to $77 a barrel in just 6 months.

  • If you’re looking to buy some, I have 17 barrels still sitting in my backyard from April. Don’t ask.

Palladium: You know how everyone says that cars are a depreciating asset… Well, there’s one part of your car that’s actually appreciated in value.

The catalytic converter. Found attached to your vehicle’s tailpipe, it contains a precious metal called palladium that has soared to a record high due to expected supply constraints and rebounding demand from automakers.

 

 

This morning: Forget fears of rising interest rates – the big threat is how the global economy will cope with supply chain bottlenecks and the coming commodities supercycle. These will create all kinds of friction. The West is particularly vulnerable to microchip supply instability – which could take years to resolve.  

Interesting moment for markets yesterday as former fed-head, Janet Yellen, misspoke and revealed the truth we all know is coming: interest rates will rise as the economy overheats. No! Surely Not! …. We all know higher real rates will trigger untold market misery – crashing stock markets, closing down millions of zombie junk companies, house prices to tumble and cause the very stars to fall from heaven… Well.. maybe. Its gonna happen…

Yellen directly contradicted current fed head Jerome Powell’s promise rates aren’t rising till pandemic recovery is complete in a few years. She later back-walked her comments, but it reminded everyone what is coming when rates do eventually rise – stocks, especially Tech, took a bath.

Yellen’s comments are best summed up by one of my key market mantras; “no point worrying today about stuff you are going to have to worry about tomorrow.” Interest rates fall into that category. They are going to normalise and rise. Get used to it.

Instead, this morning, let me try to connect some dots on global supply chains, particularly microchips, and the current on-trend market buzz – the new commodities “supercycle” that is apparently upon us…

The Microchip “D’oh” Moment…….   Click for more

 

Schachter’s Eye on Energy – May 5th

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 5th was mostly bearish. While the market was pleased with the Commercial Crude Inventories falling  by 8.0Mb to 485.1Mb it would have shown an 11.2Mb rise if not for imports falling by 1.16Mb/d or by 8.1Mb last week and by exports which rose by 1.58Mb/d or by 11.1Mb last week. This inventory change makes the  bullishly perceived first inventory headline as nonsensical. One needs to see the overall complete picture, including inventory changes, to understand the data points importance. Motor Gasoline inventories rose a modest 0.7Mb due to Refinery Utilization rising to 86.5% from 85.4% last week (last year 70.5%).

Total Product Demand last week fell 704Kb/d to 19.7Mb/d.  Gasoline Demand fell a modest 12Kb/d to 8.86Mb/d while Jet Fuel Consumption fell by 101Kb/d to 1.08Mb/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 6.4% from last year but Jet Fuel remains the worst component down 11.6% from a year ago. Cushing Inventories rose last week by 200Kb to 46.3Mb compared to 65.4Mb last year.

Baker Hughes Rig Data: The data for the week ending April 30th showed the US rig count rise  by two rigs (down one rig in the prior week). Canada had a decline of four rigs (one rig lower in the prior week) as we are still in the spring break-up season and the road bans have not been lifted. However, Canadian activity is now up nearly 90% from the pandemic lows of last year. There are 51 rigs working in Canada now compared to 27 rigs working last year. In the US there were 440 rigs active, up 8% from 408 rigs working a year ago. The oil rig count in Canada was up three rigs to 20 rigs working and is up from seven rigs working last year. The natural gas rig count was down seven rigs to 31 rigs active, but is up from last year’s level of 20 rigs at this time last year.

Conclusion:

The optimism over vaccinations and getting back to a more normal life has lifted crude oil prices. In the US President Biden is hoping for 70% of adults to be vaccinated by July 4th allowing family holiday celebrations to occur. In addition, Europe desperately needs a job creating tourism industry this summer, so they are talking about allowing reopenings for tourists with vaccination passports or immunity certificates. Many European countries are now in recession and are trying to dig themselves out of this situation.

This renewed optimism lifted crude prices over the past week by US$4/b to US$66/b despite OPEC lifting production by 600Kb/d at the start of May. The bulls on crude are talking about demand rising by 6Mb/d between Q2-Q4/21 and getting back to the level seen before the pandemic. We see this level of 101Mb/d as unlikely given the continued problems with the mutations and lockdowns occurring. Our view is that demand around year-end will rise to 96-97Mb/d so the OPEC production increase will meet this growth alone. If the US production level increases or OPEC members continue to cheat (very likely) then there will be an inventory build in Q3 and Q4 of this year cratering crude prices.

Just yesterday, Alberta went into a three week lockdown as the per-capita caseload rose to the highest level on this continent. This third wave is using up most of the ICU beds and is straining the hospital system. The tightening is to forestall health care rationing. Most elective surgeries are postponed for now as the government is expecting the caseload to increase as large super spreader events have occurred recently. Fines have been doubled to $2,000 per infraction and repeat offenders are being aggressively targeted. Fort McMurray has the highest level of cases and hospitalizations on a per capita basis.

Over the next three 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. India is seeing more lockdowns as daily infections rise to 368K/day and the total number of cases has risen to 20.3M (up 2.6M in just one week, and ahead of Brazil and second only to the US). The country is facing a severe shortage of oxygen supplies. Fuel demand has fallen 90% in some cities. Prior to the virus flare-up in India motor fuel demand was 750Kb/d and diesel sales were 1.75Mb/d.
  3. Vaccine hesitation is at 30% of the US population so herd immunity may not happen by the summer time as expected. The US as of yesterday was at 578K deaths.

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 vaccines. 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.

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 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 13% on the continent. 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. 

Energy Stock Market: The S&P/TSX Energy Index now trades at 124, up 13 points from the 111 level two weeks ago as the recent rise of crude oil has investors buying. We expect this 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.

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.

Tomorrow we release our May Interim Report to our subscribers. We cover the first of four companies that reported before our cut-off of last Friday. Of these four entities one outperformed our forecast and the other three were disappointing.

We will be having our second quarter 90 minute webinar next Thursday May 13th at 7PM MT.  If you want to join us go to  https://bit.ly/3jjCPgH to subscribe. Our topics for discussion will start with an update on the overall stock market and on the energy market and then we will go over the Q1/21 results of companies we cover (the good and the not so good results in detail). 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.

 

The S+P 500 stock index hit All-Time Highs in February 2020 but tumbled ~35% within the next five weeks as the virus contagion shattered investor confidence. Central banks and governments launched unprecedented monetary and fiscal stimulus to counteract the effects of the virus, and the S+P roared back from the March lows to make new All-Time highs by August.

For the next ten weeks, the index drifted sideways, correcting ~10%, and then in early November, Biden was elected, Pfizer announced a vaccine, and the market rally resumed with a vengeance. At the end of April 2021, the S+P and the DJIA are up ~90% from last year’s panic lows, the Nasdaq is up ~112%, and the small-cap Russell is up ~140%.

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