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 April 14th was mostly bearish. US Commercial Inventories rose by 0.6Mb to 493Mb (versus an expected decline of 3.3Mb). Demand last week fell as total consumption came in down 1.57Mb/d to 18.8Mb/d. Net Imports fell 417K/d or by 2.9Mb on the week which would have made the inventory build even higher if it stayed flat. Gasoline demand rose by a modest 160Kb/d to 9.1Mb/d and Jet Fuel consumption fell 181Kb/d to 1.18Mb/d. US lower 48 production recovered by another 100Kb/d. Refinery Utilization remained flat at 85.0% and is above last year’s 67.6%. Cushing Inventories fell last week by 1.3Mb to 45.4Mb.

Baker Hughes Rig Data: The data for the week ended April 16th showed the US rig count rising by seven rigs (rise of two rigs in the prior week). Canada had a decline of two rigs (11 rigs lower last week) as we are still in the spring break-up season. Canadian activity is now 87% above the lows of when the pandemic fears were at their highest. There are 56 rigs working in Canada now compared to 30 rigs working at this time last year. In the US there were 439 rigs active down only 17% now from 529 rigs working a year ago. The oil rig count in Canada fell by two rigs to 17 rigs working but is up from seven rigs last year. The natural gas rig count was unchanged at 39 rigs active but is up from last year’s level of 23 rigs working at this time last year.

Conclusion:

Crude oil prices have declined US$0.57/b to US$62.10/b on the weekly crude inventory increase and the US lower 48 production 100Kb/d rise. We remain in a US$58-64/b trading range. A closing over US$64/b would energize the bulls and a close below US$58/b would accelerate the bearish view.

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 and will help to drive crude prices lower. We expect to see a sustained breach of US$60/b shortly. A repeat close below US$58/b could set up a quick decline to the US$48-52/b level.

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 its cuts by 250Kb/d in May, 350Kb/d in June and 400Kb/d in July.
2. Significant OPEC cheating is occuring (Iran, Iraq, Libya, Nigeria and Venezuela). China plans to buy 1.0Mb/d from Iran this month (January 2021 they imported 600Kb/d) as they get a nearly 10% price discount and very generous payment terms. China is not concerned about the US sanctions regime. Iran could increase production quite quickly by about 650Kb/d more if sanctions were removed in a revised nuclear deal. Discussions are ongoing in Vienna and appear to be making progress. Other sanction busting buyers of Iranian crude now include: India, Turkey and North Korea.
3. US production has recovered by 1.3Mb/d from the pandemic low so far. The recovery in the US rig count supports the view that US production could rise by another 1.0Mb/d this year to 12.0Mb/d.
4. The US and Canada are being hit by more cases and faster spread of the mutations (now over 50% of all cases). Some Provinces are putting in border restrictions for non-essential travel. BC, Ontario and Quebec are among those imposing restrictions.
5. India is seeing more lockdowns as daily infections rise to 274K/day (up over 100K from a week ago) and the total number of cases has risen to 15.3M (ahead of Brazil and second only to the US).
6. Vaccine hesitation is at 30% of the US population so herd immunity may not happen by the summer time as expected. Also a new study in Israel shows a reduced effectiveness of the Pfizer vaccine against Covid variants.
7. Japan’s two largest cities (Tokyo and Osaka) are moving to a declaration of emergency to contain a surge in cases just three months before the delayed summer Olympic games.

Bullish pressure on crude prices:

1. War tensions are escalating between Russia and Ukraine over the Donbas region and in China over its desire to annex Taiwan. If either turns into a shooting war the price of crude could see a war premium. Russia has now moved 150,000 troops and a significant number of war planes into the area and has established a likely war event situation as they have even set up triage hospital facilities.
2. Rising vaccination levels in the US is increasing the comfort of going out, lifting energy consumption. If the variant mutations increase caseloads and severity this could reverse this demand increase.
3. Libya has imposed a force majeure on exports of 180,000 b/d from their Hariga port as the country faces another budget and financial sharing crisis.

We see the technical support levels for WTI crude now at US$57.63/b intraday and US$58/b on a close. Energy and energy service stocks are overbought. We remain in the bear camp. The most vulnerable companies are energy and energy service companies with high debt loads, high operating costs, declining production, current balance sheet debt maturities of some materiality within the next 12 months and those that produce heavier crude barrels.

CONCLUSION:. The next few months should see significant more downside for the energy sector. The topping process for the general stock market is ongoing and some ‘Black Swan’ event will prick this bubble. A bubble burst event for the crypto currencies appears to be one of the newest possible reasons. 

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 27 energy and energy service companies with regular updates. He holds quarterly subscriber webinars and provides Action BUY and SELL Alerts for paid subscribers. Learn more. 

EIA Weekly Data: The EIA data on Wednesday April 7th was mixed. On the positive side US production fell last week by 200Kb/d to 10.9Mb/d (volumes should recover in the next week or so and then grow from there to 12.0Mb/d this summer) and Commercial Crude inventories fell by 3.5Mb (forecast of a decline of 1.6Mb). Of this decline Exports rose 260Kb/d lowering US supplies by 1.8Mb. On the bearish side Motor Gasoline inventories rose by 4.0Mb while Distillate volumes rose by 1.5Mb on the week. Refinery Utilization recovered 0.1 points to 84.0% from 83.9% and is above last year’s 75.6%.

The most bearish part of the report was consumption last week. Total Product consumed fell 1.1Mb/d to 19.2Mb/d. Gasoline demand fell 109Kb/d to 8.8Mb/d. Jet Fuel usage fell 99Kb/d to 1.3Mb/d. This fall off in consumption is likely due to the Easter holiday season and the end of spring break. Inventories at Cushing fell 0.8M to 46.3Mb and are down from 49.2Mb a year ago.

Baker Hughes Rig Data: The data for the week ended April 1st showed the US rig count rising by 13 rigs (rise of six rigs in the prior week). Canada had a decline of 12 rigs (11 rigs lower last week) as we are in the spring break-up season. Canadian activity is now above the lows of when the pandemic fear was at its highest. There are 69 rigs working in Canada now compared to 41 rigs working at this time last year. In the US there were 430 rigs active, but that is down 35% from 664 rigs working a year ago. The US oil rig count rose by 13 rigs. The Permian saw an increase of three rigs to 224 rigs working and activity is 36% below last year’s level of 351 rigs working. The rig count for oil in Canada fell by seven rigs to 24 rigs working but is up from the pandemic fear level of 9 rigs last year. The natural gas rig count fell by five rigs to 45 rigs active but is up 41% from last year’s level of 32 rigs working at this time last year.

Conclusion:

Crude oil prices have fallen over US$9/b in the last month from US$67.98/b to US$58.79/b now. Pressure on OPEC from China, India and the US helped to get them to agree to add material volumes versus the expectation of keeping production flat. Over the next three months OPEC will increase production by 2.0Mb/d, more than is needed for world wide demand growth into late 2021 and will help to drive crude prices lower. We headlined last week that we expected an imminent breach of US$60/b and this has happened. Our next downside target is US$57.63/b. A close below that level could set up a quick decline to the US$48-52/b level.

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.
2. The  Saudis will separately ease its cuts by 250Kb/d in May, 350Kb/d in June and 400Kb/d in July.
3. Europe is seeing a severe third wave of Covid mutations and has gone into longer lockdowns. Germany, the engine of Europe, is extending its lockdown until April 18th and may extend it further if case-loads and deaths don’t decline. Cases doubled in Germany over the last month. Nearly a third of France just entered a month-long lockdown and they may face a full national lockdown shortly.
4. The US and Canada are being hit by higher and faster spread of the mutations. Alberta is going back to tougher restrictions due to the pick up in caseload and mutation spread.
5. Energy demand is showing signs of softening in various countries in Asia as tourism remains lackluster. The EIA has again lowered its demand forecast for 2021.
6. Significant OPEC cheating is occuring (Iran, Iraq, Libya, Nigeria and Venezuela). China plans to buy 1.0Mb/d from Iran this month (January 2021 they imported 600Kb/d) as they get a nearly 10% price discount and very generous payment terms. China is not concerned about the US sanctions regime.
7. US production has recovered by 1.2Mb/d so far. The Federal Reserve of Dallas sees the break-even price for crude in the Permian at US$50/b, providing lots of incentive to add barrels now. The rise in the US rig count supports the view that US production may be able to rise by another 1.0Mb/d this year.

With the big decline in the last few weeks, we see the technical support levels for WTI crude now at US$57.63/b on a close. Energy and energy service stocks are overbought and have been chased by hot momentum money adding to the inflation and economic recovery part of their portfolios.

We remain in the bear camp now. The most vulnerable companies are energy and energy service companies with high debt loads, high operating costs, declining production, current balance sheet debt maturities of some materiality within the next 12 months and those that produce heavier crude barrels. Results for most companies for Q4/20 have been released and many were not strong enough to justify current lofty stock price levels. If crude prices retreat below US$50/b these stocks will get battered.

CONCLUSION:. The next few months could see significant downside for the energy sector. The topping process for the general stock market is ongoing and some ‘Black Swan’ event will prick this bubble. Rising interest rates appear to be one of the most likely reasons as the US 10-Year Treasury yield has increased to a new 2021 high of 1.74% more than triple the 0.52% of last August. 

Energy Stock Market: The S&P/TSX Energy Index now trades at 118 and is part of a lengthy, extended, and broadening topping process from the peak at 128 three weeks ago. The S&P/TSX Energy Index is likely to fall substantially in the coming months. A breach of 111.59 should initiate the next sharp decline. Our target, once 100 is busted, is down to the 60-70 area with WTI trading in the US$42-48/b area. In this range we will be looking for a bottom and the next low risk BUY signal.

We are setting up models on five pipeline and infrastructure stocks and will launch coverage of these new ideas in our April SER Monthly to be distributed on Thursday April 22nd. Our research presentation for all of our covered companies is now falling under three designations: Conservative, Growth and Entrepreneurial. Investors interested in this new coverage should become subscribers to get access to our expanded research coverage.

Our April Interim Report will be out on Thursday April 8th and will include updates on 13 of our Coverage List companies. This should make for interesting reading for subscribers so they can focus on favourite ideas to BUY when we get the next low risk BUY signal.

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 27 companies that we cover. Our coverage in the April SER Monthly will rise to 32 companies. 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.

To get access to our research go to  https://bit.ly/34iKcRt  to subscribe.

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 27 energy and energy service companies with regular updates. He holds quarterly subscriber webinars and provides Action BUY and SELL Alerts for paid subscribers. Learn more. 

EIA Weekly Data: The EIA data on Wednesday March 31 was mixed. US lower 48 production rose by 200Kb/d to 10.7Mb/d and Total Domestic Production rose by 100Kb/d to 11.1Mb/d.  Commercial Crude inventories fell by 0.9Mb, just above the consensus and was due to exports rising 693Kb/d or by 4.9Mb last week. Net Imports fell 170Kb/d or 1.2Mb on the week so we would have had a build this week if not for this stock movement. Motor Gasoline inventories fell by 1.7Mb due to stronger demand while Distillate volumes rose by 2.5Mb on the week as the weather improved. In the coming weeks US production should continue to rise as drilling activity is robust and could recover another 0.9Mb/d to reach 12.0Mb/d before the end  of the summer. Private operators are driving the growth in production as large public companies are under pressure to pay down debt and provide shareholder returns. Refinery Utilization recovered 2.3 points to 83.9% from 81.6% and is now above last year’s 82.3%. It appears the Texas Polar Vortex weather event is now behind us. Overall Commercial Crude inventories are 32.6Mb above last year or up by 7.0% to 501.8Mb.

As we are now one year into the pandemic and its initial impact, we are seeing recovery in the consumption levels of the various products, compared to the full Covid-19 shut down level of last year. Spring break holidaying is helping the numbers. Total Product consumed rose 1.61Mb/d to 20.3Mb/d but remains 4.9% below a year ago on a four week basis. Gasoline demand rose 275Kb/d to 8.89Mb/d. Jet Fuel consumption rose 324Kb/d to 1.36Mb/d and is now slightly above the decimated level of 1.34Mb/d of a year ago. Inventories at Cushing rose 0.8M to 47.1Mb and are up from 42.8Mb a year ago.

Baker Hughes Rig Data: The data for the week ended March 26th showed the US rig count rise of six rigs (nine rig decline in the prior week). Canada had a decline of 11 rigs (24 rigs lower last week) as we are in the spring break-up season. Canadian activity is now above the lows of when the pandemic fear was at its highest. There are 81 rigs working in Canada now compared to 54 rigs working at this time last year. In the US there were 417 rigs active, but that is down 43% from 728 rigs working a year ago. The US oil rig count rose by six rigs. The Permian saw an increase of five rigs to 221 rigs working and activity is 42% below last year’s level of 382 rigs working. The rig count for oil in Canada fell by 10 rigs to 31 rigs working but is up from the pandemic fear level of 18 rigs. The natural gas rig count fell by one rig to 50 rigs active but is up 39% from last year’s level of 36 rigs working at this time last year.

Conclusion:

Crude oil prices have fallen US$8/b in less than four weeks from US$67.98/b after the Saudi announcement of extending their official 1.0Mb/d production cut. Today’s low so far is US$59.96/b. The price now is US$60.78/b.

Bearish pressure on crude prices:

1. The Suez canal has re-opened and the transit risk has now fallen off.
2. Europe is seeing a third wave of Covid mutations and has gone into longer lockdowns. Germany, the engine of Europe, is extending its lockdown until April 18th and may extend it further if case-loads and deaths don’t decline. Cases doubled in Germany over the last month. Nearly a third of France just entered a month-long lockdown and they may face a full national lockdown shortly.
3. The CDC Director made an emotional plea Monday for continued masking and social distancing even though vaccination rates are now at 3M people per day. Her concern relates to the higher and faster spread of the mutations and an increase in 31 US States of hospitalizations and use of ICU beds. The death rate has risen to  550K in the US and 2.8M worldwide.
4. Canada is worrying about a third wave looming over the country as there has been a lack of active testing, and active variant cases are up 50% since early March in British Columbia, Alberta, Saskatchewan, Ontario and Quebec. Vaccination rates are much slower than the US due to slow receipt of product. The new case-load increase is occurring in people in their 40’s and 50’s.
5. Energy demand is showing signs of softening in various countries in Asia as tourism remains lackluster.
6. Significant OPEC cheating is occuring (Iran, Iraq, Libya, Nigeria and Venezuela)
7. US production has recovered by 1.4Mb/d so far. The IEA in their recent monthly report noted “global oil inventories and supply remain plentiful”. The Federal Reserve of Dallas sees the break-even price for crude in the State at US$50/b, providing lots of incentive to add barrels now.
8. A stronger US dollar has a negative impact on commodity prices. The US dollar has risen recently to 93.32.

Bullish support for crude prices:

1. OPEC is planning a meeting tomorrow (April 1st) to discuss production levels for May and it appears that the Saudi line is to continue current levels into the end of June with only moderate increases for Russia and Kazakhstan. They will put pressure on the many cheaters.
2. Seaborne crude may take longer to reach consuming nations that have low inventories. Most large consuming nations have strategic reserves so overall not a big impact.
3. Speculative hedge funds have lowered their long positions by 73Mb to a net short level of 824Mb.
4. Refineries will be building inventories to produce products for the summer driving season.
5. Vaccination rates are rising around the world providing a desire to get back to normal this summer. All who want vaccines in the US should have them by the July 4th holiday.

With the big decline in the last few weeks, we see the technical support levels for WTI crude now at US$57.75 on a close (not much below where we are now). Energy and energy service stocks were overbought and had been chased by hot momentum money and quarterly window dressing as we near the end of Q1/21. We remain in the bear camp now. The most vulnerable companies are energy and energy service companies with high debt loads, high operating costs, declining production, current balance sheet debt maturities of some materiality within the next 12 months and those that produce heavier crude barrels. Results for most companies for Q4/20 have been released and many were not strong enough to justify current lofty stock price levels. If crude prices retreat below US$50/b these stocks will get battered.

CONCLUSION:. The next two months could see significant downside for the energy sector. The topping process for the general stock market is ongoing and some event will prick this bubble. Rising interest rates appear to be the most likely reason as the US 10-Year Treasury yield has increased to a new 2021 high of 1.76% more than triple the 0.52% of last August. 

Three weeks ago we got a second 100% Bullishness signal from the S&P Energy Bullish Percent Index which is the first time in my career that we have seen back to back clear SELL signals in any one year. The danger is clear and the downside is significant. We are now at 65.2% bullishness so there is quite a distance downward before the next BUY signal could occur and we will notify subscribers immediately.

Energy Stock Market: The S&P/TSX Energy Index now trades at 117 and is part of a lengthy, extended, and broadening topping process from the peak at 128 three weeks ago. The S&P/TSX Energy Index is likely to fall substantially in the coming months. A breach of 111.59 (the low close last week) should initiate the next sharp decline. Our target, once 100 is busted, is down to the 60-70 area with WTI trading in the US$42-48/b area. In this range we will be looking for a bottom and the next low risk BUY signal.

We are setting up models on five pipeline and infrastructure stocks and will launch coverage of these new ideas in our April SER Monthly to be distributed on Thursday April 22nd. Our research presentation is moving for all of our covered companies falling under three designations: Conservative, Growth and Entrepreneurial. Investors interested in this new coverage should become subscribers to get access to our expanded research coverage.

Our April Interim Report will be out next week Thursday April 8th and will include updates on 13 of our Coverage List companies. This should make for interesting reading for subscribers so they can focus on favourite ideas to BUY when we get the next low risk BUY signal (potentially late April or during May).

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 27 companies that we cover. Our coverage in the April SER Monthly will rise to 32 companies. 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.

To get access to our research go to  https://bit.ly/34iKcRt to subscribe