Thanks to massive government subsidies Norway is the first country to have electric cars over 50% of new vehicle sales. What climate activists fail to grasp is that represents a heck of a lot of copper, aluminum, steel, graphite and lithium mining.

Saudi’s fear of economic impact from new Africa Covid mutation causes them to unilaterally cut back crude production by 1.0Mb/d. Production increases by Libya, Russia, Kazakhstan, Iran, Iraq and Venezuela will likely offset this. Clearly OPEC+ is in disarray. The Expected spike to US$50+/b has occurred. Downside now ahead. We expect WTI to fall below US$45/b in February and below US$40/b in March before we see the next important bottom..

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. 

OPEC Supply Meeting: The two day (Jan 4-5) virtual OPEC+ meeting derailed as the Saudi’s wanted at first to have no increase in February quotas as they worried about the economic impact of more OECD lockdowns due to the new Covid mutations. The rest of OPEC wanted a second monthly 500,000 b/d increase as they looked at the demand growth in China and India. This disarray in OPEC is a weakness as last seen in February when the Saudis and Russia fought a market share war just as the pandemic got underway. In the end OPEC+ granted Russia and Kazakhstan an increase of 75,000 b/d together in each of February and March. The Saudis then unilaterally cut 1.0Mb/d for February and March to help hold back an expected increase in worldwide crude oil storage levels during Q1/21. Oil prices spiked on this surprise offer with WTI rising over US$50/b. We had been expecting a move up into the US$48-52/b level so this jump gets us into this peaking range. We see this price spike taking crude prices into the high part of the range for Q1/21. The problem we see is that some OPEC members, with and without quotas, will increase their volumes anyways as they are desperate for funds to sustain their collapsing economies. Libya, Iran, Iraq and Venezuela have been finding ways to move more oil, (some clandestinely, like Iran and Venezuela). The failure of OPEC to reach a consensus means more disruption and cheating is likely. As long as prices stay firm then cheating makes sense.

EIA Weekly Data: The EIA data on Wednesday January 6th was mixed. Commercial inventories fell 8.1Mb on the week versus the forecast of a 2.1Mb decline. The miss was due to refinery runs rising to 80.7% from 79.7% in the prior week and resulting in Distillate inventories rising by 6.4Mb and Gasoline Inventories by 4.5Mb. Overall Stocks rose by 1.7Mb on the week to 1.34Bb. Crude inventories are now 54.4Mb or 12.6% above last year’s level of 431.1Mb. US domestic crude production was unchanged at 11.0Mb/d, but is down 1.9Mb/d from last year’s 12.9Mb/d.

Consumption fell sharply last week. Total usage fell by 2.26Mb/d to 17.05Mb/d. Gasoline consumption fell 687Kb/d to 7.44Mb/d while Jet Fuel consumption fell 300Kb/d to 917Kb/d. Total product demand is now down 11.9% from last year. Gasoline Demand is down 8.5% from the 8.1Mb/d consumed last year and Jet Fuel is 43.1% below demand of 1.61Mb/d last year.

Cushing Oil Inventories rose by 800Kb to 59.2Mb compared to 35.5Mb last year at this time. If Cushing inventories exceed 60Mb then there will be concern about excess inventories in the domestic market. When this occurs crude prices should come under pressure.

Baker Hughes Rig Data: The holiday week data for last week came out on Wednesday December 30th. The Baker Hughes Rig Survey showed an increase in the US rig count. It rose by three (up eight rigs in the prior week) to 351 rigs working, but remains down 56% from 796 rigs working a year ago. The US oil rig count rose by three (up five rigs the prior week) to 267 rigs but is down 60% from 670 rigs working last year. The Permian saw an increase of two rigs to 175 rigs working but remains 57% below last year’s level of 403 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 decrease in the rig count last week, down 23 to 59 rigs working as the industry slowed down for the holiday season. The rig activity level is down 31% from a year ago when 85 rigs were working. The rig count for oil is now at 18 rigs (down 13 from last week) and down 33% from 27 rigs working last year. The natural gas rig count fell by 10 rigs last week to 41 rigs working, down 29% from 58 working at the end of last year. The Canadian rig count is now rising and we should see a strong pick up in the coming weeks as the robust Q1 winter activity occurs.

Conclusion: WTI today is at US$50.46/b (high US$50.71/b) up US$2/b over the last two weeks.

Positive issues for higher crude prices:

• Winter is here in earnest and demand is rising especially for heating oil.
• A war premium is now included in crude prices due to two recent attacks on Saudi oil facilities by Yemen militants and Iran grabbing a Korean tanker. Iran did this in retaliation for Korea responding to increased US sanctions on Iran and freezing US$7B of funds in South Korean banks.
• The Saudi surprise announcement to unilaterally cut back production by 1.0Mb/d for the next two months is expected to slow the projected inventory build.

Negatives issues for lower crude prices:

• OPEC+ cheating is rising as prices and volume demand allows countries to gain more revenues or market share. Russia is producing 100,000 b/d above quota and selling the volumes to energy hungry China. Iran added 39,000 b/d in November to reach 1.99Mb/d, Libya added 656,000 b/d to reach 1.11Mb/d and plan to get to 1.6Mb/d in early 2021 and Venezuela added 25,000 b/d to reach 407,000 b/d.
• The demand for energy is expected to wane in the coming months as the pandemic spread causes more shutdowns of economies. Lockdowns and curfews are occurring across the US, Canada and most of Europe with tightened restrictions. The UK’s speedier mutant variant is worrisome as it has now spread to other countries. The US is seeing an acceleration of cases and deaths despite having two vaccines available. The next 3-5 months could see terrible levels of deaths as many areas have ICU beds fully utilized and are now rationing care. The new Africa mutation is very worrisome as it is even more virulent than the UK mutation, and some epidemiologists worry that this strain may not respond to current vaccines. If so, more work will need to be done to create new vaccines and getting herd immunity, may take into late 2021.

The near-term support level is US$46.25/b. One will need to keep an eye on crude and product inventory levels to determine how low crude oil prices could fall during the coming months. 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. A breach of US$40/b will hit these stocks hard.

Continue to hold cash and remain patient for the next low risk BUY window which should occur during late March or April 2021. 

Energy Stock Market: The S&P/TSX Energy Index now trades at 100.8 and is reaching our target for early 2021 of 100-105. 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 issues and related policies that affect the energy sector. We hope you learn much from this new product offering. 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, Action Alerts, TOP PICK recommendations when the next BUY 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.

The UK speedier Coronavirus variant cuts oil prices by US$2/b so far this week as travel is restricted to and from the UK. A bounce back to the recent highs is likely in early 2021. This could become the high for Q1/21.

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 December 23rd was mixed. Commercial inventories fell 0.6Mb on the week to 499.5Mb but this was all due to US exports recovering by 472Kb/d, or by 3.3Mb on the week. With no change in exports there would have been a gain in inventories this week. Crude inventories are now 58.2Mb or 13.2% above last year’s level of 441.4Mb. Gasoline inventories fell by 1.1Mb while distillates fell by 2.3Mb as US Refinery Utilization and product produced declined from 79.1% to 78.0% and is much below last year’s level of 93.3%. US domestic crude production was unchanged at 11.0Mb/d, but is down 1.9Mb/d from last year’s 12.9Mb/d.

Consumption fell last week. Total usage fell by 247Kb/d to 19.1Mb/d. Offsetting this Gasoline consumption rose 47Kb/d to 8.0Mb/d while Jet Fuel demand rose 46Kb/d to 1.196Mb/d. Total Demand now is 2.26Mb or 10.6% below last year’s level of 21.35Mb/d.  Gasoline Demand is down 13.8% from the 9.3Mb/d consumed last year and Jet Fuel is 22.4% below demand of 1.54Mb/d last year.

Total Stocks are now 92.8Mb or 7.3% above the 1.26Bb in storage last year. Cushing Oil Inventories were flat on the week at 58.4Mb in storage but are high compared to 37.8Mb last year at this time. If Cushing inventories exceed 60Mb then there will be concern about excess inventories in the domestic market. In early 2021, this could occur resulting in significant crude price pressure.

Baker Hughes Rig Data: Last week Friday, the Baker Hughes Rig Survey showed an increase in the US rig count. It rose by eight (up 15 rigs in the prior week) to 346 rigs working, but remains down 57% from 813 rigs working a year ago. The US oil rig count rose by five (up 12 rigs last week) to 263 rigs but is down 62% from 685 rigs working last year. The Permian saw an increase of six rigs to 174 rigs working but remains 58% below last year’s level of 414 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.

Canada saw a big decrease in the rig count last week, down nine to 102 rigs working as the industry slows down for the holiday season. The rig activity level is down 32% from a year ago when 149 rigs were working. The data will continue to decline for the next week or two and then start up again with greater activity in the New Year. The rig count for oil is now at 41 rigs (down 11 from last week) and down 53% from 88 rigs working last year. The natural gas rig count rose by two rigs last week to 61 rigs working, unchanged from last year.

Natural gas prices have recovered significantly as colder weather hits across North America (with the NorthEast particularly hit hard). AECO is now at $2.66/mcf. NYMEX is now at  US$2.70/mcf. We expect much higher prices over the coming winter months. With cold weather across much of Asia, spot LNG prices have rocketed up to US$12/MmBtu for importers in Japan, China and South Korea to meet their electricity and heating needs. The US exported a record high of 9.4Bcf/d of LNG and operated at 93% capacity.

Conclusion: We are now back to crude price levels seen in March 2020 just before the pandemic caused lockdowns of worldwide economies. WTI today is at US$47.98/b up slightly from last week.

Positive issues for higher crude prices:

• Winter is here in earnest and demand is rising for heating oil and demand rises during the Christmas period as driving picks up.
• While OPEC has lowered the near term demand forecast for crude oil they see demand rising in 2021 to 95.89Mb/d from 89.99Mb/d in 2020. The forecast for Q4/20 is for consumption of 93.47Mb/d and by Q4/21 is forecast at 97.29Mb/d.
• A war premium is now included in crude prices due to two recent attacks on oil facilities in the Middle East.

Negatives issues for lower crude prices:

• OPEC’s agreement earlier this month was a disaster. Instead of delaying any production increases to Q3/21, they agreed to a production rise in January of 500Kb/d. They also plan to review production quotas monthly (next meeting January 4th) with plans to increase production by 500Kb/d for the next three months if they see the demand being there and prices have held up.
• The demand for energy is expected to wane in the coming months as the pandemic spread causes more shutdowns of economies. Lockdowns and curfews are occurring across the US, Canada and most of Europe with tightened restrictions for the Christmas holiday season. Italy has imposed a total lockdown over Christmas.The UK speedier mutant variant is worrisome as it has now spread to other countries. The US is seeing an acceleration of cases and deaths despite now having two vaccines available. The next 3-5 months could see terrible levels of deaths as many areas have ICU beds fully utilized and are now rationing care. There are now 18.3M cases (up from 16.8M cases last week) in the US with 324K deaths (up from 305K last week). Yesterday showed another death rate at over 3,000 (the fifth day this month over 3,000). Worldwide the caseload is 78.2M and deaths at 1.72M.

World-wide crude and product inventories are now 475Mb over the five year average. If OPEC agrees to add 500Kb/d in February and more each of the next two months, then crude should breach US$40/b. The near-term support level is US$46.25/b. One will need to keep an eye on crude and product inventory levels to determine how low crude oil prices could fall during the coming months. Energy and energy service stocks are overbought and could stay so into early 2021. We see significant downside risk but that the plunge may not occur now until we are into January 2021. 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. A breach of US$40/b will hit these stocks hard.

Continue to hold cash and remain patient for the next low risk BUY window which should occur late in Q1/21. Traders may want to harvest some of the great gains since the BUY signal triggered in March on strong up days. OPEC+ production is too high and is rising when it should have been held flat with no cheating.  

Energy Stock Market: The S&P/TSX Energy Index now trades at 91.57 down modestly from 93.32 from last week. The S&P/TSX Energy Index started the year at 146 so it is down 36% year-to-date. A bit over two weeks ago the high for the Index was 98.49 and we may see a bounce back to this level or slightly higher into early 2021. Tax loss selling has not occurred this year. We now see the decline occurring in Q1/21. We discuss this in our December 17th SER issue and go over numerous examples (for the Index and for individual stocks). The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low in late October) 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 issues and related policies that affect the energy sector. We hope you learn much from this new product offering.

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 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.

We will be taking a week off for vacation next week so our next issue of ‘Eye on Energy’ will be on Wednesday January 6, 2021.

We wish you and yours a safe, healthy and enjoyable holiday season.

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