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 January 27th was at first glance quite bullish. Commercial Inventories fell by 9.9Mb on the week versus the forecast of a 0.4Mb rise. The variance was fully due to exports rising by 1.1Mb/d, or by 7.7Mb on the week and imports falling by 981Kb/d or by 6.9Mb on the week. Overall this implies a stock change of 14.6Mb versus the 9.9Mb decline in crude. Otherwise, we would have seen a 4.7Mb increase in inventories during the week. Refinery runs fell modestly from 82.5% to 81.7%. Motor Gasoline Inventories rose 2.5Mb while  Distillate Fuel Inventories fell 0.8Mb. Crude Oil Stocks are now 45.0Mb or 10.4% above last year’s level of 431.7Mb. US Domestic Crude Production fell 100Kb/d to 10.9Mb after hovering at 11.0Mb/d for quite a few months. Compared to last year this is down 2.1Mb/d from last year’s 13.0Mb/d.

Consumption rose a bit last week. Total usage rose by 95Kb/d to 19.68Mb/d. Finished Motor Gasoline Consumption fell by 279Kb/d to 7.83Mb/d while Jet Fuel consumption rose by 152Kb/d to 1.24Mb/d. Cushing Oil Inventories fell by 2.3Mb. Inventories at Cushing are now at 50.2Mb down from 52.5Mb last week but are up from 35.6Mb a year ago.

Baker Hughes Rig Data: The data for the week ended January 22nd showed increases in the US and Canadian rig counts. In the US rigs rose by five (up 13 rigs in the prior week) to 378 rigs working, but remains down 52% from 794 rigs working a year ago. The US oil rig count rose by two (up 12 rigs the prior week) to 289 rigs but is down 57% from 673 rigs working last year. The Permian saw a decrease of one rig (up 10 rigs in the prior week) to 188 rigs working and remains 54% below last year’s level of 405 rigs working. Over US$45/b for WTI seems to be a price point where producers see economic returns from drilling. Yet, so far this increase in drilling activity has not seen a corresponding increase in US domestic production.

Canada saw a big increase in the rig count last week as activity continues to pick up in the New Year. The rig count rose by 11 rigs to 172 rigs working. However, it is 30% lower than the 244 rigs active last year. The rig count for oil has risen to 96 rigs (up 6 rigs last week) but is down 38% from 154 rigs working last year. The natural gas rig count rose by 5 rigs to 76 rigs active but is down from 90 rigs working at this time last year.

Conclusion: WTI today is at US$52.78/b up 17 cents on the headline decline in crude inventories. We believe that the top crude prices for Q1/21 may be in place. In the next few weeks we expect to see WTI crude breaching US$50/b and moving into the mid-US$40’s.

The reason for our downside crude oil price view is:

1. Saudi Arabia and Russia are fighting for market share in the only growth market so far in 2021, that of China. With a new outbreak of the virus in China, travel restrictions and strict visa travel testing requirements are being implemented. The Chinese government is urging people to not travel during the upcoming Lunar New Year holiday (starting January 28th and lasting up to 40 days) which normally sees tens of millions of people typically head back to the villages where their extended family live. If China implements firm lockdown measures, energy demand will fall off materially. China is well stocked at this time so their imports going forward may slow down materially.
2. Iran is increasing production and is moving crude oil and products via intermediaries as it sees the US and Iran moving towards a new nuclear accord deal that will remove or reduce sanctions. In the meantime buyers in China have been buying relabled ‘doped’ crude (crude that has chemicals added to make it like a non-sanctioned crude oil). Overall compliance by OPEC in January is being reported at only 85% so cheating by members has picked up. One of them, Kazakhstan, is ramping up production at their giant Tengiz field.
3. Mutation variations from the UK and South Africa are worrying medical professionals as they are transmitted faster and may in the case of the African version not be handled effectively by current vaccines. Moderna said this week that a booster to their present vaccine could handle this African mutation. The Brazil mutation issues are still unknown. The UK strain is becoming more deadly in England and Wales. It has a faster transmissible rate causing a rise in cases. Fatalities rose 20% a week ago and now have breached 100,000 for the country.
4. Death rates in the US are picking up and now exceed 425K (408K last week) with the total caseload over 25.3M. Current government forecasts are for 600-660K deaths before herd immunity is achieved, possibly by September. President Biden’s request for a new US$1.9T stimulus package to fund the increase in vaccinations is now before Congress and is facing filibuster intransigence by Republicans. Getting to 60 Senators in favour of moving the bill forward may be difficult and a smaller package may be likely. Biden’s 100 day, 100-150 million people being vaccinated may be a challenge if funds and vaccines are not available. The US vaccine rollout has been hindered by crashing websites to book appointments, long waits for shots, and low income areas are not getting the vaccines as quickly as wealthy areas. To date 44.4M doses have been distributed of which 23.5M have been administered. Merck has abandoned its development of two candidates as initial trials resulted in inadequate immune responses. Clearly a disappointment!
5. Vaccine availability is now an issue as Pfizer is having production problems at their main European manufacturing facility. Shortages may last six to eight weeks. AztraZeneca is facing travails in Europe as Germany and other EU countries want the vaccines for themselves before exports are to be allowed.

Technically the near-term support level for WTI crude is US$46.15/b. Energy and energy service stocks are overbought and are now rolling over. We are bearish for the near term. 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 should start being released in early February and they will for the most part not be good. Depending upon the pressure from the above issues we may see crude prices range bound in February in the US$42-48/b area for WTI and in March crash through US$40/b if demand remains weak and world wide crude inventories build once winter is over.

We now have a SELL signal in place. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of which stocks and at what prices we think ideas could be harvested. The next few months could see significant downside for the energy sector.

Energy Stock Market: The S&P/TSX Energy Index now trades at 91.63 down nearly 12% from the recent high.  Our Q1/21 target of 100-105 was reached last week when the Index reached a high at 103.60. The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low in late October 2020) during March/April. A breach of 87.55 should initiate the next sharp decline.

Our SER Interim Report focused on our SELL signal. Many of the 14 ideas we said to remove had reached our 2021 year-end targets, providing excellent returns. Others had more downside risk from current levels versus the remaining upside potential. When we get the next low risk BUY signal many of these stocks should be excellent investments for the upcoming energy BULL market. The major decline we have been forecasting is clearly underway and may last into late March or April. Downside from here remains substantial.

Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all archived Webinars (next webinar Thursday February 25th), 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 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.

Winter temperatures below seasonal norms in the northern hemisphere have created a rally in natural gas prices from Asia to Europe.    The spot liquefied natural gas (LNG) prices in north Asia jumped to record highs last week, while the key price marker in Europe, the Dutch Title Transfer Facility (TTF), rallied to the highest in more than two years.

The natural gas markets at the start of 2021 look completely different from the beginning of last year, when milder weather and the pandemic hit to demand had dragged natural gas prices down to historic lows.

This winter season, a rebound in Asian natural gas demand, supply issues at major LNG exporters, logistics issues at the Panama Channel, soaring tanker rates, and last but not least, the cold snap from Madrid to Tokyo, are pushing gas prices higher…CLICK for complete article

This week Josef discusses how the slow rollout of Covid vaccines is likely to shaft crude oil prices in the coming months and how the downside could be US$10/b.

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 January 13th was mixed. Commercial inventories fell 3.2Mb on the week versus the forecast of a 1.9Mb decline. The miss was due to refinery runs rising to 82.0% from 80.7% in the prior week, resulting in Distillate inventories rising by 4.8Mb and Gasoline Inventories by 4.4Mb. So the decline in crude inventories was more than offset by the increase in these product categories. Crude inventories are now 53.7Mb or 12.5% above last year’s level of 428.5Mb. US domestic crude production was unchanged at 11.0Mb/d, but is down 2.0Mb/d from last year’s 13.0Mb/d.

Consumption rose sharply last week. Total usage rose by 2.55M/d to 19.6Mb/d offsetting last week’s decline of 2.26Mb/d. Gasoline consumption rose by 91Kb/d to 7.53Mb/d while Jet Fuel consumption rose by 551Kb/d to 1.47Mb/d. Total product demand was up 560Kb/d from last year.

Cushing Oil Inventories fell by 2.0Mb as consumption rose. Inventories at Cushing are now at 57.2Mb down from 59.2Mb last week.

Baker Hughes Rig Data: The data for last week showed an increase in the US and Canadian rig counts. In the US rigs rose by nine (up three rigs in the prior week) to 360 rigs working, but remains down 54% from 781 rigs working a year ago. The US oil rig count rose by eight (up three rigs the prior week) to 275 rigs but is down 58% from 659 rigs working last year. The Permian saw an increase of four rigs to 179 rigs working but remains 55% below last year’s level of 397 rigs working. Over US$45/b for WTI seems to be a price point where producers see economic returns from drilling. Yet, so far there has been no corresponding increase in US domestic production now at 11.0Mb/d.

Canada saw a big increase in the rig count last week as activity normally picks up in the New Year. The rig count rose by 58 rigs to 117 rigs working. While a significant increase, it is 50% lower than the 118 rigs added in the first week of last year when 203 rigs were active. The current rig activity level is down 42% from a year ago. The rig count for oil has risen to 53 rigs (18 last week) but is down 56% from 120 rigs working last year. The natural gas rig count rose by 23 rigs to 64 rigs active but is still down from 83 rigs working at this time last year.

Conclusion: WTI today is at US$53.36/b (high today of US$53.93/b) and we see a significant Q1/21 topping range in the US$52-55/b area occurring shortly.

The reason for our bearishness is twofold.

One, is that some OPEC+ members continue to produce over their quotas (Russia, Kazakhstan and Iraq) and non-quota members (Iran, and Venezuela) are trying to sell at discounts whatever they can sell at discounts through intermediaries. Russia is leading the group increasing supplies to take advantage of the current robust prices while the Saudis want to cut back production so that a meaningful glut does not happen later this quarter. Cold weather is helping demand but winter ends in about two months and then the slower demand shoulder season occurs.

The second, is that the mutation variants of the coronavirus are causing increased lockdowns and curfews, especially in OECD countries. Ireland, the Czech Republic, Germany, Slovenia and the UK, are now on tighter restrictions. Death rates are rising. In Alberta we had the highest death rate yet yesterday. The US is now nearing 380,000 dead and forecasts for the end of January see this at over 450,000. The US daily death toll is now exceeding 4,000 individuals on many days with all age groups being affected. President-elect Biden wants to vaccinate 1.0M people per day in his first 100 days and getting sufficient vaccines out and people vaccinated at this rate is a challenge. Bloomberg reports that if the goal is 75% of Americans vaccinated to get to herd immunity, then 2.0M people need to be vaccinated daily to get to this herd level by August. This is a big challenge and one that is also extending the timeline of Q2/21 that had been promised by the current administration’s ‘Warp Speed’ program.

The World Health Organization (WHO) yesterday were quite pessimistic about when the world would have herd immunity with a forecast that it was more like in early 2022 than during 2021, especially due to the mutations that may not be controlled by currently available vaccines.

The near-term support level is US$46.15/b. Energy and energy service stocks are overbought and could stay so for a little while longer. We see significant downside risk. 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 should start being released in early February and they will for the most part not be good.

We are getting concerned about valuations and we may get a SELL signal at some point in the near term. Subscribers of our regular service will be notified when this occurs and what stocks and at what prices gains should be harvested. 

Energy Stock Market: The S&P/TSX Energy Index now trades at 100.2 and is reaching our near term target of 105. The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low in late October 2020) during Q1/21. A breach of 87.55 should start this downward trend.

In our December SER we introduced a new feature, monthly articles from a guest contributor, Professional Engineer and oil industry veteran, Ron Barmby. He will provide articles on climate change and related policies that affect the energy sector. In our January SER Monthly edition (to be published on Thursday January 21) he will cover the Federal Clean Fuel Tax Issue.

Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all archived Webinars (next webinar Thursday February 25th), 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 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.