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 10th was clearly bearish for prices as both crude inventories rose and US production recovered meaningfully. Commercial Crude Inventories rose by 13.8Mb last week following a record build of 21.6Mb last week. The forecast this week was for a build of 816Kb. US production recovered, rising 900Kb/d in just one week, to 10.9Mb/d,but remains 2.1Mb/d below last year’s 13.0Mb/d of production. In the coming weeks this could recover another 1.1Mb/d to reach 12.0Mb/d as rig activity remains strong and some more weather related production shut-ins come back on line. Private operators are driving the growth in production at the current time as large public companies are under pressure to pay down debt and provide shareholder returns. Private companies see the less competitive landscape as attractive to build their companies. For example private company DoublePoint Energy is running more rigs than energy giant Chevron. In specific basins private companies have large footprints. In Haynesville 74% of rigs are operated by private companies, in the Eagle Ford 38% and in the Midland basin 41%.

Refinery Utilization recovered to 69.0% from 56.0% but remains below last year’s 86.4%. Overall Commercial Inventories are 46.6Mb above last year or up by 10.3% to 498.4Mb. This is the build problem we have been warning about. Inventories will continue to build until we start the summer driving season. Total Product consumed fell by 88Kb/d to 18.67Mb/d.  Gasoline Demand was the one bright spot rising by 578Kb/d to 8.73Mb/d as driving picked up with better weather driving conditions. Gasoline inventories fell as a result by 11.9Mb. Jet Fuel consumption fell by 436Kb/d to 849Kb/d. Overall US consumption of all products is 15% below a year ago, gasoline demand down by 8% and Jet Fuel demand down by 46%. Inventories at Cushing rose 500Kb to 48.8Mb and are up from 37.9Mb a year ago.

Baker Hughes Rig Data: The data for the week ended March 5th showed the US rig count up by one rig (five rigs up in the prior week). Canada had a decline of 22 rigs (nine rigs lower last week) as we have ended the winter drilling season and break up season has started. Canadian activity is 31% below last year when 203 rigs were working. In the US there were 403 rigs active, but that is down 49% from 793 rigs working a year ago. The US oil rig count rose by one rig. The Permian saw an increase of three rigs to 211 rigs working and activity is 49% below last year’s level of 415 rigs working. The rig count for oil in Canada fell by 12 rigs to 80 rigs working and is down 40% from 134 rigs working last year. The natural gas rig count fell by 10 rigs to 61 rigs active and is down from 69 rigs working at this time last year.

Conclusion:

Crude oil prices spiked up over the last week by nearly US$9/b to US$67.98/b as the Saudis held back from returning their shut in production (original cutback was for the two months of February and March with a 1.0Mb/d cut) that they were expected to bring back on in April. In addition the market was expecting a 500Kb/d increase from other OPEC+ members with Russia getting the largest allocation. Except for Russia and Kazakhstan all members rolled over their quotas. Russia received an increase of 130Kb/d and Kazakhstan an increase of 20Kb/d. So this approach was well received by oil markets and oil prices jumped. However, just this week the US added back 900Kb/d and with the addition of production by Russia alone, you have fully offset the Saudi quota move. In the coming weeks we expect to see further US production additions and if there is OPEC cheating as is likely, world inventories will grow in Q2/21 and prices will have reason to retreat meaningfully. Today WTI is down due to the big inventory build and is trading at US$63.43/b, down $0.58/b on the day. OPEC’s next meeting is on April 1st to discuss production levels for May.

Iran in the meantime is selling more oil into China and has plans to increase sales to India in the coming months as they see the Biden administration wanting a nuclear deal and willing to ignore Iran’s cheating on sanctions. The buyers love the lower prices that Iran is offering and as well payment terms are very generous with refiners not paying for the crude until after it is processed. Iran had been shipping 306Kb/d in 2020 but this has risen to 600Kb/d in January 2021 and to 850Kb/d in February according to Reuters and Chinese customs data.

Technically the support level for WTI crude is US$59.24/b now. Energy and energy service stocks are overbought and have 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 many companies for Q4/20 have been released and were not strong enough to justify current lofty stock price levels. If crude prices retreat these stocks could get battered.

We have had a SELL signal since January 14, 2021. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of 14 stocks and the prices at which we think they should be harvested. We sent out a second SELL Alert on February 5th and added four additional ideas for harvesting. The next two-three months could see significant downside for the energy sector. The topping process for the general stock market is ongoing and some surprise event will prick this bubble.

Energy Stock Market: The S&P/TSX Energy Index now trades at 123 and is part of a lengthy, extended, and broadening topping process. The S&P/TSX Energy Index is likely to fall substantially in the coming months. A breach of 107.66 should initiate the sharp decline.

I will be on MoneyTalks radio on the Corus (Global) network with Michael Campbell on Saturday March 20th at 10AM MT. If interested in our discussion on the risks in the general stock market and the energy market specifically, please listen in.

If you want to listen to our February 25th webinar in the archive please go to our subscriber page and become a subscriber. For new subscribers, the quarterly choice gives you three months to see if the product meets your needs. 

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. 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.

Commodities trader Mercuria Energy Group Ltd. struck a deal last summer to buy $36 million of copper from a Turkish supplier. But when the cargoes started arriving in China, all it found were containers full of painted rocks.

The saga unfolds like a gangland thriller, with the Swiss trading house saying it’s been the victim of cargo fraud. Before its journey from a port near Istanbul to China even began, about 6,000 tons of blister copper in more than 300 containers were switched with jagged paving stones, spray-painted to resemble the semi-refined metal.

The bizarre case highlights commodity traders’ vulnerability to fraud, even when security and inspection controls are in place. In 2014 and 2015, Mercuria took provisions to cover potential losses after metal contained in a warehouse in the Chinese port of Qingdao was seized by authorities as part of fraud investigation

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 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 3rd was clearly bearish. Commercial Inventories rose by a colossal 21.6Mb on the week compared to a forecasted decline of 735Kb. The biggest part of the difference was due to US production rising by 300Kb/d to 10.0Mb/d and net imports rising by 1.665Mb/d or by 11.6Mb on the week offset by lower Refinery Utilization and lower product components being made. Overall Commercial Inventories are 40.5Mb above last year or up by 9.1% to 484.6Mb. This is the build problem we have been warning about. It is just starting and will be a factor until we get into the summer driving season. Total Product demand rose a modest 72Kb/d. The best component was Gasoline Demand which rose 942Kb/d to 8.148Mb/d as driving picked up with better weather driving conditions. However this consumption level is down 11% from 9.186Mb/d consumed last year. Refinery Utilization fell 12.6 points to 56.0% from 68.6% as most of the Texas refinery industry was shut down and maintenance season is starting. Last year at this time Refinery Utilization was 86.9%. Because of this lower utilization Motor Gasoline Inventories fell 13.6Mb and Distillate Inventories fell by 9.7Mb. Inventories at Cushing rose 500Kb to 48.3Mb and are up from 37.2Mb a year ago.

Baker Hughes Rig Data: The data for the week ended February 26th showed the US rig count up by five rigs as the effects of the freezing weather in Texas subside. Canada had a decline of nine rigs as we are ending the winter drilling season and as the weather warms up, the break up season will start. Activity is 32% below last year when 240 rigs were working. In the US there were 402 rigs active, but that is down 49% from 790 rigs working a year ago. The US oil rig count rose by four rigs and there was a one rig increase for natural gas drilling. The Permian saw an increase of four rigs to 208 rigs working and activity is 49% below last year’s level of 411 rigs working. The rig count for oil in Canada fell by eight rigs to 92 rigs working and is down 44% from 163 rigs working last year. The natural gas rig count fell by one rig to 71 rigs active and is down from 77 rigs working at this time last year.

Conclusion:

We believe that there is a total of US$14-16/b of downside risk for WTI. WTI crude is down US$3/b over the last week, from the high of US$63.75/b to today’s US$60.69/b. Crude is lifting today due to product levels having sharp declines and a rumour as I am writing this that some in OPEC are recommending no increase in supplies in April. We are skeptical that such a deal will occur. Russia and many OPEC countries want to add more volumes as they need revenues desperately.

The top line commercial inventories should swing prices negative at some point after the OPEC meeting. A breach of US$58.60/b should start a rapid decline to the US$50-52/b area as the speculative horde retail money exits another losing trade. OPEC meets tomorrow March 4, 2021 to ease curbs and are likely to increase production 500Kb/d in April to lower Brent and WTI crude prices without impacting the nascent economic recovery or giving incentive to the US shale industry to increase production.  Russia and Iraq are the most interested in seeing quotas raised with Russia alone wants to raise production by 250Kb/d. In addition, Saudi Arabia will be disclosing when they bring on their cut of 850,000 b/d that they removed in February. It was supposed to have been a 1.0Mb/d cut for February and March.

Technically the support level for WTI crude is US$58.60/b. Energy and energy service stocks are overbought and have been chased by hot momentum money. We are clearly 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 Q4/20 are being released and are not strong enough to justify current lofty stock price levels if crude prices retreat. Some oil companies still have very high debt loads and when oil prices retreat their debt/cash flow ratios will become more precarious. These will face the largest percent declines.

We have had a SELL signal since January 14, 2021. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of 14 stocks and the prices at which we think they should be harvested. We sent out a second SELL Alert on February 5th and added four additional ideas for harvesting. The next few months could see significant downside for the energy sector. The topping process for the general stock market is ongoing and some surprise events will prick this bubble.

Energy Stock Market: The S&P/TSX Energy Index now trades at 115 and is part of a lengthy, extended, and broadening topping process. The S&P/TSX Energy Index is expected to fall substantially in the coming months. A breach of 103.60 should initiate the sharp decline.

Our Q1/21 120-minute recorded webinar took place on Thursday February 25th at 7PM MT. There were two investment presentation sections. The first covered the downside parameters we see for the stock market depending upon which of the many mania bubbles burst. The second section discussed how to build an energy portfolio for the new Energy Bull Market that we foresee lasting into 2025 after the coming market correction. The different approaches that conservative, growth and entrepreneurial investors should consider were discussed. Individual ideas for each investor approach were also covered. 

We also have decided to expand our product and add coverage of the pipeline and infrastructure areas via a Level Two research product. This will occur over the coming months. Consideration of covering special situations that would benefit from a resurging western Canadian economy is also being considered as part of the expanded product offering.

If you want to listen to our webinar in the archive please go to our subscriber page and become a subscriber. For new subscribers, the quarterly choice gives you three months to see if the product meets your needs. 

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. 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/3jjCPgH to subscribe.

A surge in commodity prices has Wall Street banks gearing up for the arrival of what may be a new—an extended period during which demand drives prices well above their long-run trend. A major impetus is the massive stimulus spending by governments as they juice up their economies following pandemic lockdowns. The evidence includes surging copper and agricultural prices and oil back at pre-COVID-19 levels. One theory is that this could be just the start of a yearslong rally in appetite for raw materials across the board, but the reality is more complicated.

1. What is a supercycle?

A sustained spell of abnormally strong demand growth that producers struggle to match, sparking a rally in prices that can last years or in some cases a decade or more. For some analysts, the current rally is rekindling memories of the supercycle seen during China’s rise to economic heavyweight status beginning in the early 2000s. Commodities have experienced three other comparable cycles since the start of the 20th century. U.S. industrialization sparked the first in the early 1900s, global rearmament fueled another in the 1930s and the reindustrialization and reconstruction of Europe and Japan following the Second World War drove a third during the 1950s and 1960s.

2. What did the last one look like?

From around 2002, China entered a phase of roaring economic growth, fueled by a rollout of modern infrastructure and cities on an unprecedented scale. Suppliers struggled to fulfill surging demand for natural resources. In commodities, there’s often a time lag to get the product where it’s wanted since adding capacity, such as opening a new mine, doesn’t happen overnight. For more than a decade, materials including iron ore were in tight supply. Copper, priced below $2,000 a ton for much of the 1990s, broke $10,000 and oil jumped from $20 a barrel to $140.

3. Who says this is another supercycle?

Among the bulls are analysts at JPMorgan Chase & Co. and Goldman Sachs Group Inc. The commodities rally will be a story of a “roaring 20s” post-pandemic economic recovery as well as ultra-loose monetary and fiscal policies, according to JPMorgan. Commodities may also jump as an unintended consequence of the fight against climate change, which threatens to constrain oil supplies while boosting demand for metals needed to build renewable energy infrastructure and manufacture batteries and electric vehicles, it said. Those include cobalt and lithium. Furthermore, commodities are typically viewed as a hedge against inflation, which has become more of a concern among investors.Play Video

4. Why might this not be one?

Longer-term trends point to a cooling down for some materials. For example, the energy transition that heralds a bright new age for green metals such as copper would be built on the decline of oil. Even producers of iron ore, the biggest market of mined commodities, expect prices to weaken over time as Chinese demand starts to decline and new supply comes online. It’s an even bleaker outlook for coal, with producers looking to exit the market altogether as the world switches away from the heavy-polluting fuel. Iron ore, coal and oil were the chief beneficiaries of China’s industrial expansion. Those markets dwarf copper in scale.

5. What’s been happening with oil?

Prices collapsed in 2020, even turning negative at one point, but have recovered as demand rebounded more strongly than many had expected. Early in 2021, the Organization of the Petroleum Exporting Countries and its allies were holding back crude equivalent to about 10% of current global supply. Market fundamentals have shifted, especially in the U.S. with the emergence of shale oil. Haunting traditional producers is the prospect that a prolonged period of high prices would trigger a new flood of supply beyond OPEC’s control. Even so, some oil bulls aren’t ruling out the eventual return of prices above $100 a barrel.

6. Which other commodities are rising?

Copper was on a tear in early 2021 thanks to rapidly tightening physical markets as governments plow cash into electric-vehicle infrastructure and renewables. Goldman Sachs, BlackRock Inc., Citigroup Inc. and Bank of America Corp. saw the metal moving toward all-time highs. While agricultural commodities have their own particular dynamics, soybeans and corn have rallied to multiyear highs, driven by relentless buying from China as it rebuilds its hog herd following a devastating pig disease. Agricultural prices are more dependent on global economic and population growth, rather than the decarbonization trend underpinning excitement in metal

The Arctic Polar Vortex brought near century lows in temperatures last week to most of North America with frigid temperatures that  knocked out electricity grids. Texas was the hardest hit with water, heat, refineries and power out due to the freezing temperatures. It may take a few weeks to get remediation done now that the weather has warmed up and repairs are underway. The price of crude spiked to US$63/b (up one dollar from last week). The data for the next few weeks should see divergences from the norm as these issues take time to be resolved. While natural gas prices have backed off from the cold weather spikes, crude oil remains elevated due to speculative forces pushing up crude oil futures and options.  Some option positions into Q4/21 are positioned for WTI to exceed US$100/b. We see this enthusiasm as nuts. Has the pandemic gone away? Have we had everyone vaccinated who wants one of the vaccines? Has herd immunity arrived?  Are the mutations irrelevant? I do see consistent US$100/b for WTI in the ‘future’ but not until 2024 onward.

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 February 24th was mixed. Commercial Inventories rose by 1.3Mb on the week compared to a forecasted decline of 5.2Mb/d. The difference was due to demand falling by 1.98Mb/d (13.9Mb on the week) and exports falling by 1.55Mb/d offset by imports falling by 1.30Mb/d. Motor Gasoline Inventories were unchanged while Distillate Inventories fell 5.0Mb due to strong winter demand. Refinery Utilization fell 14.5 points to 68.6% from 83.1% as most of the Texas refinery industry was shut down. US Domestic Crude Production fell by 1.1Mb/d to 9.7Mb/d and is down 3.3Mb/d from last year’s 13.0Mb/d. This level is better than forecast as production has recovered faster than expected.

With many parts of the US shut down last week due to the extreme winter weather Total Product Consumption fell 1.98Mb/d to 18.7Mb/d, Finished Motor Gasoline Consumption fell by 1.2Mb/d to 7.2Mb/d and Jet Fuel consumption fell by 196Kb/d to 979Kb/d. Cushing Oil Inventories rose last week by 2.8Mb. Inventories at Cushing are now at 47.8Mb and are up from 39.1Mb a year ago.

Baker Hughes Rig Data: The data for the week ended February 19th showed the US rig count unchanged despite the freezing weather in Texas, and a decline of four rigs for the Canadian rig count. In the US there were 397 rigs working, but that remains down 50% from 791 rigs working a year ago. The US oil rig count fell by one rig offset by a  one rig increase for natural gas drilling. The Permian saw an increase of one rig to 204 rigs working and remains 50% below last year’s level of 409 rigs working. Canada saw a  decline of four rigs last week with 172 rigs working. This is 30% lower than the 244 rigs active last year. The rig count for oil fell by one rig to 100 rigs working but is down 41% from 169 rigs working last year. The natural gas rig count fell by three rigs to 72 rigs active and is down from 75 rigs working at this time last year. In a few weeks we head into break up season so the rig count will start to fall off sharply as the road bans come on.

Conclusion: WTI crude oil is up almost US$11/b from the start of February.  Of this rally US$8-9/b is due to the infusion of speculative money (from sources like the Robinhood and Reddit novice retail horde) who are buying futures and call options. These horde investors, a gang of over 14M retail investors, are trying to  squeeze the energy Commercials (refiners, petrochemical companies and energy companies etc.) shorts who are short 1.71Bb (the prior week 1.64Bb). Commercials are now net short 621Mb. Historically commercials are right in the end and speculative investors get burned. We see this outcome occurring again once winter is over and world demand for crude falls 2.0-2.5Mb/d.

We believe that there is US$14-16/b of downside risk for WTI as markets begin to reflect the demand situation post-winter, the recovery in US production and OPEC cheating and/or raising approved production levels. We see WTI crude breaching US$50/b in April and going lower thereafter. OPEC meets on March 4, 2021 to ease curbs and are likely to increase production materially to lower Brent and WTI crude prices and not negatively impact the economic recovery or give incentive to the US shale industry to increase production after the winter weather event is over.  Russia and Iraq are the most interested in seeing quota’s raised.

Technically the near-term support level for WTI crude is US$58.60/b. Energy and energy service stocks are very overbought and being chased by hot momentum money. We are clearly 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 Q4/20 are now being released and are not strong enough to justify current stock price levels if crude retreats. The cold weather had lifted AECO natural gas to C$5.31/mcf last week but AECO today is down to $2.99/mcf. The NYMEX US price now at US$2.86/mcf is down from US$3.24/mcf  a week ago. The speculative players are not involved in natural gas so we see a major divergence in the price activity between the two commodities.

We now have a SELL signal in place since January 14, 2021. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of 14 stocks and the prices at which we think the ideas be harvested. We sent out a second sell signal on February 5th and added four additional ideas for harvesting. We ourselves have sold a large portion of our energy holdings for substantial profits. We sit in cash or defensive positions.  The next few months could see significant downside for the energy sector. The topping process is ongoing and some surprise events will prick this bubble as the GameStop, AMC, cannabis and other bubbles were busted this month.

Energy Stock Market: The S&P/TSX Energy Index now trades at 117 and is part of a lengthy and extended broadening topping process. While we had expected this bubble to burst already, market manias can extend even longer and with crazier valuations than rational expectations would forecast. The S&P/TSX Energy Index is expected to fall substantially in the coming months. A breach of 103.60 should initiate the sharp decline.