This week Josef expands on how a three week vaccine rally nears its end and why WTI crude has lifted US$5+/b over this time and is extremely overbought.

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 and subscribe. 

EIA Weekly Data:. The EIA data on Wednesday November 25th showed commercial stocks falling by 800K to 488.7Mb as exports rose by 83Kb/d, or 581kb on the week. If not for this export increase we would have had only a minor decline in stocks. Inventories remain high at 36.8Mb or 8.1% above last year’s level of 452.0Mb. Gasoline inventories rose by 2.2Mb while distillates fell by 1.4Mb as cold weather hit parts of the US. US crude production continues to recover, rising 100Kb/d to 11.0Mb/d as US production returned after the last hurricane closed down offshore production in the Gulf of Mexico.  Consumption fell last week with Total Demand  down 408Kb/d to 19.16Mb/d, Gasoline usage fell 128Kb/d to 8.13Mb/d while Jet Fuel saw consumption rise by 183Kb/d to 1.17Mb/d as the Thanksgiving travel season commenced. Total demand remains 9% below last year’s level of 21.1Mb/d, Gasoline demand is down 12% from the 9.2Mb/d consumed last year and Jet Fuel remains 38% below demand of 1.88Mb/d last year. Consumption should rise in the next two weeks as people travel at the highest level since the pandemic commenced. Coronavirus fatigue has set in and driving or flying to family and friends for the holidays is occurring despite CDC guidance to avoid doing so. There are forecasts of record case loads and hospitalizations in the coming weeks. As of today there have been 260,000 fatalities and 12.6M cases. Some of the forecasts expect deaths over 350,000 by inauguration day and case load over 20M if masking, social distancing and testing are not abided by. The current level of travel indicates this is likely.

Refinery Runs rose 1.3 points to 78.7% from 77.4% in the prior week. This remains well below last year’s level of 89.3% as consumption remains sluggish. Total stocks (excluding the SPR) remained high at 90.3Mb above last year or 7.1% above the 1.26Bb in storage last year. Cushing oil inventories fell by 1.7Mb to 59.9Mb compared to 44.1Mb last year at this time.

Baker Hughes Rig Data: Last week Friday the Baker Hughes Rig Survey showed a decrease in the US rig count. The US rig count fell by two (up 12 rigs in the prior week) to 310 rigs working, but remains down 61% from 803 rigs working a year ago. The US oil rig count fell by five (up 10 rigs last week) to 231 rigs, and is down 66% from 671 rigs working last year.

Canada saw a rise of 12 rigs this week (three in the prior week) to 101 rigs working. The rig increase now has activity down only 26% from a year ago when 137 rigs were working. In the breakdown the most encouraging data point was rigs drilling for natural gas has risen to 59 rigs up 16% from 51 rigs working last year. Natural gas stocks in Canada have performed better than oily names during the last few months. The liquids rich Montney area is getting the most drilling activity. The first increase in the oil rig count also occurred last week with three rigs being added. The rig count for oil is now 42 rigs but remains down 51% from 86 rigs working last year.

Natural gas prices are quite profitable for producers now with AECO at $2.57/mcf, and with NYMEX at US$2.74/mcf. We expect much higher prices once the depths of winter arrive next month. Natural gas is our commodity of choice at this time. 

Conclusion: As we write this, WTI for December is at US$45.27/b up from $41.43/b last week. We are now back to crude price levels seen in March just before the pandemic caused lockdowns of the economies. The positive view of vaccines coming in 2021 has ignited investor interest in the sector.

Positive issues for higher crude prices:

• The announcement this Monday by Astrazeneca and Oxford University about their vaccine being successful, is the third such weekly announcement. This vaccine does not need special cold-handling and will be very cheap at around US$4/dose. It is likely that they could have 3 billion doses available in 2021 and will be distributed around the world.
• OPEC is talking about not bringing back on 2Mb/d of shut-in production in January as they are wary of weakening crude oil demand while economies face rising Covid-19 caseloads and increasing lockdowns.
• The active US Thanksgiving travel season has lifted air travel to the best levels since March and gasoline demand should rise over the next few weeks as over 75% of travellers plan to travel by car this year due to the pandemic.
• While OPEC has lowered the near term demand for crude oil they see demand rising in 2021 to 96.26Mb/d from 90.01Mb/d in 2020. The forecast for Q4/20 is for consumption of 93.67Mb/d. The level for Q4/21 is forecast at 97.09Mb/d.
• A missile attack by Houthi forces on Tuesday November 24th against Aramco’s North Jeddah Bulk Plant struck a storage tank with a capacity of 500Kb causing major damage to its roof. The total storage capacity at the plant is 5.2Mb. This added a war premium during the current rally.
• Hedge funds added significantly to their oil futures holdings last week. The addition of 69Mb took holdings of speculators to 506Mb.

Negatives issues for lower crude prices:

• The US, Canada, Germany, UK, France, Italy, Russia and Austria are reporting record increases in Covid case loads. Red Zones are occuring all across Canada and total lockdowns are likely in some of these extremely stressed areas. Alberta has initiated a second state of public emergency as case-load goes to record highs. Pandemic lockdowns mean less activity and lower energy consumption. Total world cases now exceed 60M up from 55.7M cases last week.
• In most US states and Canadian provinces the number of new cases has increased to record levels. Many places have hospitals that are maxed out on their ICU beds. The worry is what will they do when all the beds are all occupied? A larger problem is staffing as many health care workers have come down with the virus and others are just burned out. In the US they have brought in national guard and military units to help.
• Libya is getting its production up sharply now that the civil war is over. They are now producing 1.3Mb/d up from the October level of 454K/d they expect to be producing 1.6Mb/d in early 2021. This will mean over a 1.4Mb/d increase in production in just four months as they produced only 155Kb/d in September.
• Commercials (industrial users) became more bearish and now have short positions of 529Mb.

OPEC has its next meeting scheduled for November 30th and December 1st. We expect them to delay the next planned 2.0Mb/d increase in production for one to two quarters which they hope will lower the excess stock levels. With case loads rising, demand for energy is falling and the increase by Libya of 1.4Mb/d  is adding to a glut situation.

We expect crude prices to retreat below US$40/b as it becomes clear that the vaccines will not be readily available until Q2/21 at the earliest for all who want to take it and that the virus continues to negatively impact many economies. Some US forecasters are expecting Q1/21 real GDP to be negative and heading back into recession. Near term we see the crude price ranging between US$36-48/b.  We remind readers that WTI fell to US$33.64/b just four weeks ago.

Energy and energy service stocks have had a fabulous four week rally and now are overbought. We see significant near term 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. 

Continue to hold cash and remain patient for the next low risk BUY window expected either during tax loss selling season during Q4/20 or during Q1/21 when it is clear that the vaccine roll out may not be so fast as desired and that an additional stimulus package in the US is unlikely. Tax loss season for 2020 should start in the next week or so and go into week three of December. 

Energy Stock Market: The S&P/TSX Energy Index has rallied from 61.21 at the end of October to 91.27 today or up by 49% in under a month. It has recovered due to the euphoria of the vaccines starting to be available in the US in December and from significant short covering. Prime Minister Trudeau yesterday outlined that Canada would start receiving vaccines for distribution in January/February. While the recent four week rally is encouraging for the long term of the sector, we expect energy and energy service stocks to roll over shortly and recommence their descent as tax loss selling and lower crude prices in the coming weeks hammers stocks. Remember the S&P/TSX Energy Index started the year at 146 so it is still down 37% year-to-date.

The S&P/TSX Energy Index is likely to fall below the low at 61.21 (the low in late October) during December.

Please consider becoming subscribers before tomorrow’s November 26th webinar as we will be discussing the best energy and energy service ideas to invest in during the upcoming tax loss selling season and how tax loss seasons have unfolded in prior years. In addition during the 90 minute webinar we will discuss the third quarter results (those that did well and those that did not perform) of the 27 companies we cover and Insider Trading activity this year. On that same day we will release our November SER Report which will include a review of the 16 companies that have reported their Q3/20 results since our Interim Report on November 13th.

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 vaccine rally has lifted the energy sector over the last two weeks. Just ahead is tax loss selling season and Josef expects it to be nasty but should provide some great BUYS for investors.

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 and subscribe. 

EIA Weekly Data:. The EIA data on Wednesday November 18th showed commercial stocks rising by 800K to 489.5Mb or up by 39.1Mb or 8.7% above last year’s level of 450.4Mb. Gasoline inventories rose by 2.6Mb while distillates fell by 5.2Mb as cold weather hit parts of the US. US crude production recovered, rising 400Kb/d to 10.9Mb/d as US production returned after the last hurricane closed down production in the Gulf of Mexico.  Consumption fell last week with Total Demand down 616Kb/d to 19.56Mb/d, Gasoline usage fell 504Kb/d to 8.26Mb/d and Jet Fuel saw consumption fall 343Kb/d to 987Kb/d. The Boeing 737Max was given flight approval today but until we have a vaccine widely available and people vaccinated, flight activity will remain weak. Total demand remains 8% below last year’s level of 21.3Mb/d, Gasoline demand is down 10% from 9.19Mb/d consumed last year and Jet Fuel remains 40% below demand of 1.66Mb/d last year.

Refinery Runs rose 2.9 points to 77.4% from 74.5% in the prior week. This remains well below last year’s level of 89.5% as consumption is still weak. Total stocks (excluding the SPR) remained high at 92.1Mb above last year or 7.2% above the 1.26Bb in storage last year. Cushing oil inventories rose by 1.2Mb to 61.6Mb compared to 44.2Mb last year at this time.

Baker Hughes Rig Data: Last week Friday the Baker Hughes Rig Survey showed an increase in the US rig count. The US rig count rose by 12 (up four rigs in the prior week) to 312 rigs working, but remains down 61% from 806 rigs working a year ago. The Permian saw the largest increase at seven rigs (five in the prior week) to 154 rigs. The Permian rig count remains 62% below a year ago’s level of 408 rigs. The US oil rig count rose by 10 (up five rigs last week) to 236 rigs, but is down 65% from 674 rigs working last year. Current crude prices for low cost producers makes drilling economic.

Canada saw a rise of three rigs this week (none in the prior week) to 89 rigs working. The rig increase now has activity down only 34% from a year ago when 134 rigs were working. In the breakdown the most encouraging data point was rigs working for natural gas has risen to 50 rigs up from 46 rigs working last year. Natural gas stocks in Canada have performed better than oily names during the last few months. The liquids rich Montney area is getting the most drilling activity.

Natural gas prices are very profitable for producers now with AECO at $2.65/mcf, with NYMEX at US$2.73/mcf. We expect much higher prices once the depths of winter arrive next month. Natural gas is our commodity of choice at this time. 

Conclusion: As we write this, WTI for December is at US$41.43/b down slightly from $41.68/b last week.

Positive issues for higher crude prices:

• The announcement this Monday by Moderna of a vaccine with 94.5% effectiveness has joined the Pfizer product with 95% effectiveness to lift investor spirits as there now is a road into 2H/21 to get back to a normal active existence. This is expected to lift energy demand in 2H/21, once most people who want a vaccine have it.
• OPEC is talking about not bringing back on 2Mb/d of shut-in production in January as they are wary of weakening crude oil demand while economies face rising Covid-19 caseloads and increasing lockdowns.
• Winter is now here and demand usually rises by 1.5-2.0Mb/d.
• While OPEC has lowered the near term demand for crude oil they see demand rising in 2021 to 96.26Mb/d from 90.01Mb/d in 2020. The forecast for Q4/20 is for consumption of 93.67Mb/d. The level for Q4/21 is forecast at 97.09Mb/d.

Negatives issues for lower crude prices:

• Germany, UK, France, Italy, Russia and Austria are reporting record increases in Covid case loads. The Czech Republic has the worst outbreak in Europe and is in lockdown once again. Ireland has initiated a six week lockdown across the country to halt the disease. Red Zones are occuring all across Canada and total lockdowns are likely in some of these extremely stressed areas. Pandemic lockdowns mean less activity and lower energy consumption. Total world cases now exceed 55.7M.
• In most US states the number of new cases has increased to a record over 170K per day and now there have been over 11.45M total cases. Many states have hospitals that are maxed out on their ICU beds. Patients are being taken to other in-state hospitals or to hospitals in nearby states. Almost 250K deaths have occured in the US out of 1.34M around the world. If people don’t take adequate protection during the upcoming Thanksgiving holiday season the US case-load and death rate may explode in the coming months. There are forecasts that the death toll may exceed 350,000 before inauguration day if masking and distancing are not observed more fully.
• Libya is getting its production up sharply now that the civil war is over. In October OPEC had them producing 454K/d and they are now at over 1.0Mb/d. By year end they expect to be producing around 1.3Mb/d. This will mean over a 1.0Mb/d increase in production in just three months as they produced only 155Kb/d in September.

OPEC has its next meeting scheduled for November 30th and December 1st. We expect them to delay the next planned increase in production for one to two quarters which should help to lower the excess stock levels. We expect crude prices to retreat below US$40/b as it becomes clear that the vaccines will not be readily available until Q2/21 at the earliest for all who want to take it and that the virus continues to negatively impact the economy. Near term we see the crude price ranging between US$36-44/b. However if lockdowns pick up in the US and Canada and Europe extends theirs in high case load areas, we see crude falling further. Our downside forecast for WTI crude oil remains for it to fall into the US$28-32/b range over the next few months. We remind readers that WTI fell to US$33.64/b just two and a half weeks ago.

Most energy and energy service stocks have significant near term 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 Q3/20 are now mostly all in and results have been generally weak, especially for the oily names. The one positive is that some companies have announced financing support from BDC and EDC and for many the paperwork has been completed and funds released for drilling activity which should help 2020 exit levels and production in Q1/21.

Hold cash and remain patient for the next low risk BUY window expected during tax loss selling season during Q4/20. Tax loss season should start in the next week or so and go into week three of December. 

Energy Stock Market: The S&P/TSX Energy Index has fallen from the June high at 96.07 to the current level today of 82.69 (last week it was at 77.41). It has recovered due to the euphoria of the vaccines starting in small quantities to being available in December. However the index is  down by 14% since the June high when we recommended profit taking. While the recent bounce is encouraging we expect energy and energy service stocks to roll over shortly and recommence their descent as tax loss selling hammers stocks. Remember the S&P/TSX Energy Index started the year at 146 so it is down 43% year-to-date. Many oily debt-laden companies are down much more than this average. The best performing stocks this year have been natural gas stocks.

The S&P/TSX Energy Index should fall below the low at 60.38 (the low in early October) in the coming weeks as tax loss selling commences. We expect to see a very attractive BUY signal generated during December’s tax loss season and expect to recommend new ideas as well as highlight our favourite Table Pounding BUYS, which should trade at much lower levels than currently. Our initial downside target is for the S&P/TSX Energy Index to fall below 50 in the coming weeks. Lower lows are possible if we see crude oil move to the low US$30’s.

Please consider becoming subscribers before our November 26th webinar as we will be discussing the best ideas to invest in during the upcoming tax loss selling season and how tax loss seasons have unfolded in prior years. In addition during the 90 minute webinar we will discuss the third quarter results (those that did well and those that did not perform) of the 27 companies we cover and Insider Trading activity this year. On that same day we will release our November SER Report which will include a review of the 16 companies that have reported their Q3/20 results since our Interim Report on November 13th.

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/3jjCPgH to subscribe.