A potential 2Mb/d glut pushes OPEC to talk about further cutbacks versus prior 2Mb/d increase early in 2021. The concern is if OPEC does not shut in production crude could fall to US$30-32/b area in the coming months.

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 4th showed commercial stocks falling by 8.0Mb as US production fell by 600Kb/d or by 4.2Mb on the week and as net imports fell by 634Kb/d or 4.4Mb on the week. The two of these items of 8.6Mb together cover off the decline. In addition exports fell by 1.195Mb/d or by 8.4Mb on the week as exports fell from 3.46Mb/d to 2.27Mb/d. US crude production fell as Hurricane Zeta (the 27th Atlantic Hurricane this year) hit the prior week which forced the  industry shut-in 600Kb/d of production. US domestic production fell to 10.5Mb/d from 11.1Mb/d and is down 2.1Mb/d or 17% from the 12.6Mb/d produced last year at this time. Gasoline inventories increased by 1.5Mb as demand fell last week and as Refinery Runs rose 0.7 points to 75.3% from 74.6% in the prior week. Commercial stocks are up 8.4% above last year (37.6Mb) at 446.8Mb. Total stocks (excluding the SPR) remain high at 101.8Mb above last year or 8.0% above the 1.275Bb in storage at this time last year. Cushing oil inventories rose 900Kb to 60.9Mb compared to 47.7Mb last year at this time. These excess inventory data points highlight the downside risk to crude prices.

Total product demand fell last week by 1.27Mb to 18.4Mb as Hurricane’s Zeta’s effects impacted demand. This level is 2.7Mb or 13% below last year’s consumption level of 21.1Mb/d. Gasoline demand last week fell by 209Kb/d to 8.34b/d and is down 809Kb/d or 9% from last year’s level of 9.15Mb/d of consumption. Jet fuel remains the weakest area. Consumption last week was 910Kb/d down 104Kb/d on the week. It remains 901Kb/d or 50% below last year’s level of 1.83Mb/d. Until a vaccine is readily available it is unlikely that these numbers will improve. This may not occur until Q2/21.

Baker Hughes Rig Data: Last week Friday the Baker Hughes Rig Survey showed an increase in the US land rig count. The US rig count rose by nine rigs (up six rigs in the prior week) to 296 rigs working, but remains down 64% from 822 rigs working a year ago. The Permian saw the largest increase at nine rigs (three in the prior week) to 142 rigs. The Permian rig count remains 66% below a year ago’s level of 416 rigs. The US oil rig count rose by 10 rigs (up six rigs last week) to 221 rigs, but is down 68% from 691 rigs working last year. If we are right about crude oil prices falling near term as demand wanes and there is a pick up in pandemic cases, we may start to see a reversal of this positive trend in the coming weeks.

Canada saw an increase of three rigs last week (three the prior week) to 86 rigs working. The rig increase now has activity down only 39% from a year ago when 142 rigs were working. In the breakdown the most encouraging data point was rigs working for natural gas which was at 46 rigs versus 49 rigs working last year. Natural gas stocks have held up better than oily names during the correction over the last few months as it is expected that we will see stronger AECO prices this winter as storage in Canada is below normal and drilling activity has not replaced demand. Most companies are likely to show declining production in Q3 versus the prior year and many could show declines from their Q2/20 volumes.

Natural gas prices are very profitable now with AECO at $2.93/mcf while NYMEX is at US$3.01/mcf. We expect much higher prices once the depths of winter arrive next month. With demand strengthening in Asia LNG prices have recovered recently to US$7/MMBtu. US Gulf Coast LNG exports have recovered and booked cargoes should be at record shipment levels before year end. This bodes well for winter 2020-2021 and thereafter. Natural gas is our commodity of choice at this time.

Conclusion: As we write this, WTI for December is at $US$38.51/b (last week it was at US$37.18/b) as the market liked today’s EIA report with a crude stock decline.

Positives for crude prices:

• US Gulf Coast production was shut in again due to Hurricane Zeta (the eleventh Hurricane this year to hit Gulf Coast production. The Gulf produces 17% of US crude production and 5% of natural gas production.
• 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 coming and demand usually rises worldwide by 1.5-2.0Mb/d.

Negatives for 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. Tracing is becoming tougher to do in those countries. Energy demand is falling across Europe and there are forecasts that demand has fallen in recent weeks by 1.0Mb/d.
• In over 40 US states and Washington DC the number of new cases has increased. In some they are at record levels and some 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.
• Libya is reopening its exports now that the civil war is over. Before the agreement they produced 156Kb/d in September. Last week’s production was at 800Kb/d as more ports  reopened. Additional fields should lift production >1.0Mb/d later this month. By year end LIbya is forecasting production of 1.3Mb/d. This will mean over a 1.0Mb/d increase in production in just three months.
• If Biden wins the Presidency (now still too close to call in five states) then a new nuclear deal with Iran is possible in the new year. If so Iran could agree to more intensive inspections and in return get sanction relief allowing them to again sell oil around the world. Iran produced 3.6Mb/d in 2018 before the sanctions took hold. They produced 1.96Mb/d in September according to OPEC data. An addition of over 1.5Mb/d of Iranian crude would require an offsetting cutback by other OPEC countries to keep from glutting the market and plunging crude oil prices.

WTI fell to US$33.64/b last week when five countries in Europe announced increased lockdowns and as Libya announced the large increase in production. In total there has been a swing of 2Mb/d of product. Half from lower demand and half from new production. Downside pressure is expected in the coming weeks as the pandemic caseload rises. Last week the price of crude smashed through the prior support level of US$36.63/b. The OPEC announcements have bounced crude back but we don’t see the price staying here as OPEC is unlikely to move until their next meeting scheduled for December 1st.  The critical breach level now is last week’s low of US$33.64/b. The key will be what OPEC does about their production quota in January and if they move to cut production instead of raise it. Our forecast for WTI crude oil is for it to fall to the US$28-32/b level over the next month or so.

Most energy and energy service stocks have 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 Q3/20 have started and will continue through the end of November. So far the results have been weak. The one positive is that many companies have announced financing support from BDC and EDC and that the paperwork is being completed. This will remove the stigma of survival concern for the entities able to complete the deals with these entities and their bank syndicates.

Hold cash and remain patient for the next low risk BUY window expected during tax loss selling season during Q4/20. 

Energy Stock Market: The S&P/TSX Energy Index has fallen from the June high at 96.07 to the current level today of 67.51 (last week it was at 63.87). Overall the index is now down by 30% in four months. We see much more downside over the coming months as unfavourable Q3/20 results and lower crude prices impact the stocks even more. We will be watching to see how companies discuss their debt loads and lender support. Companies with pessimistic views about their reserve base lending, cutbacks in lines of credit and potential additional impairment write-downs will face significant stock price pressure. The next support for the S&P/TSX Energy Index is at 60.38 (the low in early October). Further lows are likely in Q4/20 as tax loss selling is likely to be very nasty this year. We see potential for the final low for the index this year  could be in the 32-36 area during tax loss selling season. We expect to see a very attractive BUY signal generated during this time period and expect to recommend new ideas as well as highlight our favourite Table Pounding BUYS, which should trade at much lower levels than currently.

Please consider becoming subscribers before our November 26th webinar as we will be discussing the best ideas to invest in during the tax loss selling season. 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. 

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.

Next week Thursday we will release our November Interim report and we cover the general stock market’s erosion and downside risk. As well we review the companies that reported Q3/20 results before our research cut-off of Friday November 6th. The report will also include an update of our Insider Trading Report and our analysis.

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

Josef is concerned about there being more downside ahead with a large increase in US crude inventories it pummeled the crude price 6% on Wednesday and WTI down nearly US$5/b over the last week.

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 October 28th showed commercial stocks rising by a whopping 4.3Mb versus an estimate of a rise of 1.2Mb. There would have been an even larger inventory build (an additional 3Mb to 7.3Mb) if not for net exports rising by 424Kb/d, or by 3.0Mb on the week. US crude production recovered from Hurricane Delta as facilities were restarted in the Gulf. US oil production rose 1.2Mb/d to 11.1Mb/d as production recovered. However Hurricane Zeta (the 27th Atlantic Hurricane this year) will hit land shortly and already the industry has closed in 300Kb/d of offshore crude. Gasoline inventories fell by 0.9Mb/d as demand increased last week after a major decline the prior week due to the weather issues. Refinery runs rose 1.7 points to 74.6% from 72.9% in the prior week. US Production is now down 1.5Mb/d or 12% from 12.6Mb/d last year. Commercial stocks are up 12.2% above last year (53.60Mb) at 438.9Mb. Total stocks remain high at 120.7Mb above last year or 9.5% above the 1.27Bb in storage at this time last year. Cushing oil inventories fell by a modest 400Kb to 60.0Mb compared to 46.0Mb last year at this time. These data points highlight the downside risk to crude prices.

Total product demand rose last week by 1.52Mb to 19.6Mb as demand rose once the last Hurricane’s effects had passed and recovery began again. While a nice recovery, this level is still 2.0Mb or 9.3% below last year’s consumption level of 21.6Mb/d. Gasoline demand rose last week by 256Kb/d to 8.55b/d. However, it is down 1.24Mb/d or 12.7% from last year’s level of 9.78Mb/d of consumption. Jet fuel remains the weakest area. Consumption last week was 1.01Mb/d up a modest 39Kb/d on the week. It remains 816Kb/d or 45% below last year’s level of 1.83Mb/d.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed an increase in the US land rig count. The US rig count rose by six rigs (up 13 rigs in the prior week) to 287 rigs working, but remains down 65% from 830 rigs working a year ago. The Permian saw the largest increases at three rigs (no increase in the prior week) to 133 rigs. The Permian rig count remains 68% below a year ago’s level of 417 rigs. The US oil rig count rose by six rigs (up 12 rigs last week)  to 211 rigs, but is down 70% from 696 rigs working last year. If we are right about crude oil prices falling as demand wanes during a pick up in the pandemic, we may start to see a reversal of this positive trend and start to see a decline again in the US rig count.

Canada saw an increase of three rigs last week (none the prior week) to 83 rigs working. The rig increase now has activity down only 44% from a year ago when 147 rigs were working. In the breakdown the most encouraging data point was rigs working for natural gas which was at 41 rigs versus 45 rigs working last year. Natural gas stocks have held up better than oily names during the correction over the last few months as it is expected that we will see stronger AECO prices this winter as storage in Canada is below normal and drilling activity has not replaced demand. Most companies are likely to show declining production in Q3 versus the prior year and many could show declines from their Q2/20 volumes.

Natural gas prices are at very profitable prices now with AECO at $3.34/mcf while NYMEX is at US$3.03/mcf. We expect much higher prices once the depths of winter arrive next month.

Conclusion: As we write this, WTI for December is at US$37.18/b, down US$2.39/b on the day (and nearly US$6/b on the week) as the market did not like today’s EIA report. With such a large inventory build and the pandemic rising across Europe causing more lockdowns, the fear is that the case rise in the US may indicate that Wave Two is here with a vengeance and that caseloads, will rise rapidly, hospital beds will fill up to capacity and death rates may rise materially.

Positives for crude prices:

• US Gulf Coast production is being shut in again due to Hurricane Zeta (the eleventh Hurricane this year to hit Gulf Coast production. The Gulf produces 17% of US crude production and 5% of natural gas production.
• 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 as economies face rising Covid-19 caseloads and increasing lockdowns.
• Winter is coming and demand usually rises worldwide by 1.5-2.0Mb/d.

Negatives for crude prices:

• Germany, UK, France, Italy, Russia and Austria are reporting record increases in 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. Tracing is becoming tougher to do in those countries. Energy demand is falling across Europe.
• In 41 US states and Washington DC the number of new cases has increased. In some they are at record levels and some states have hospitals that are at max on their ICU beds.
• Libya is reopening its exports now that the civil war is over. Before the agreement they produced 156Kb/d in September. Last week’s production was at 500Kb/d as more ports  reopened. Additional fields should lift production to 800Kb/d in two weeks time and to over 1.0Mb/d in a month. This is much faster than markets had expected. Total production potential is 1.2Mb/d.

Downside pressure is expected in the coming weeks as the pandemic caseload rises lowering world energy demand and as production in Libya and then the US increases. A critical breach level is US$36.63/b and we see this occurring in the coming weeks. We have been range bound between US$41.90/b at the high end and US$36.63/b at the low end over the last few weeks. Once US offshore and Libyan production returns to 1.0Mb/d and if Wave Two caseloads and lockdowns get much worse, we should see the breach of the US$36.63/b level, We now see  revised downside for WTI crude oil to the US$28-32/b level.

Most energy and energy service stocks have 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 Q3/20 have started and will continue through the end of November. Most results will not be investor friendly.

Hold cash and remain patient for the next low risk BUY window expected during tax loss selling season during Q4/20. 

Energy Stock Market: The S&P/TSX Energy Index has fallen from the June high at 96.07 to the current level today of 63.87 (last week it was at 65.85). Overall the index is now down by 34% in under four months. We see much more downside over the coming months as unfavourable Q3/20 results impact the stocks even more. We will be watching to see how companies discuss their debt loads and lender support. Companies with pessimistic views about their reserve base lending, cutbacks in lines of credit and potential additional impairment write-downs will face significant stock price pressure. The next support for the S&P/TSX Energy Index is at 60.38 (the low four weeks ago). Further lows are likely in Q4/20 as tax loss selling is likely to be very nasty this year. We see the likelihood that the final low for the index could be in the 32-36 area during tax loss selling season. We expect to see a very attractive BUY signal generated during Q4/20 and will recommend new ideas as well as highlight our favourite Table Pounding BUYS which should trade at much lower levels than now.

Please become subscribers before the November 26th webinar as we will be discussing the best ideas to invest in during the tax loss selling season. 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. 

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.

Tomorrow we will release our October Monthly SER and we cover the general stock market’s erosion and downside risk. As well we review the only company that reported Q3/20 results before our research cut-off of Friday November 20th. The company was an energy service company that reported EBITDA ahead of our forecast and showed an improvement in their balance sheet during these tough times for the energy service sector.  

To get access to our research go to  https://bit.ly/3jjCPgH to subscribe.

A plunge in US energy consumption last week of 1.4Mb/d to 18.1Mb/d weakened US crude prices by over US$1.50/b. And a breach of US$40/b is imminent. Josef feels the next target is US$36/b in the coming weeks.

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 October 21st showed commercial stocks falling by 1.0Mb versus an estimate of a decline of 1.3Mb. There would have been a large inventory build (over 6Mb) if not for net imports falling by 1.07Mb/d or by 7.5Mb on the week as exports fell by 901Kb/d or by 6.3Mb. We may see exports continue to decline as overseas buyers have sufficient crude in storage and demand is waning as the virus lockdowns pick up. US production fell by 600Kb/d to 9.9Mb/d as Hurricane Delta shut in offshore US oil production. As this weather event is now over we should see US production pick up in the coming weeks. Gasoline inventories rose by 1.9Mb as demand fell last week. The expectation was for a decline of 1.5Mb. Refinery runs fell 2.2 points to 72.9% from 75.1% in the prior week. US Production is now down 2.7Mb/d or 21% from 12.6Mb/d last year. Commercial stocks are up 12.7% above last year at 55.0Mb. Total stocks remain high at 122.0Mb above last year or 9.6% above the 1.27Bb in storage at this time last year. Cushing oil inventories rose by 1.0Mb to 60.4Mb compared to 44.5Mb last year at this time. These data points highlight the downside risk to crude prices.

Total product demand fell last week by 1.36Mb to 18.1Mb as demand fell due to more lockdowns in areas with rising coronavirus case loads and due to the impact of the hurricane and other negative weather events such as the forest fires on the west coast. This level is 3.06Mb or 14% below last year’s consumption level of 21.17Mb/d. Gasoline demand fell last week by 287Kb/d to 8.29b/d. It is down 1.3Mb/d or 14% from last year’s level of 9.59Mb/d of consumption. Jet fuel remains the weakest area. Consumption last week was 975Kb/d or down by 197Kb/d. It remains 1.1Mb/d or 53% below last year’s level of 2.09Mb/d.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed an increase in the US land rig count. The US rig count rose by 13 rigs (up three rigs in the prior week) to 282 rigs working, but remains down 67% from 851 rigs working a year ago. Texas saw the largest increases at seven rigs of which the Eagle Ford is seeing an increase of three rigs. The US oil rig count rose by 12 rigs to 205 rigs but is down 71% from 713 rigs working last year. If we are right about crude prices falling we may start to see a decline in the US rig count in  the near term.

Canada saw no change in the rig count last week at 80 rigs working. The rig increase in prior weeks now has activity down only 44% from a year ago when 143 rigs were working. In the breakdown the most encouraging data point was rigs working for natural gas which was at 40 rigs versus 45 rigs working last year. Natural gas stocks have held up better than oily names during the correction over the last few months as it is expected that we will see strong AECO prices this winter as storage in Canada is below normal.

Natural gas prices are at very decent prices with AECO at $2.63/mcf while NYMEX is at US$3.02/mcf. We expect much higher prices once the depths of winter arrive next month.

Conclusion: As we write this, WTI for December is at US$40.11/b, down US$1.59/b on the day as the market did not like today’s EIA report. As production in the Gulf returns and Norway’s workers strike ends, we expect crude prices to decline meaningfully.

Positives for crude prices:

• US Gulf Coast production was shut in due to Hurricane Delta. Crude production of 1.67Mb/d or 92% of gulf production. In addition, 62% of the region’s natural gas production was shut in or 1.675Bcf/d. The Gulf produces 15% of US crude production and 5% of natural gas production.
• 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 as economies face rising Covid-19 caseloads and increasing lockdowns.
• Winter is coming and demand usually rises worldwide by 1.5-2.0Mb/d.

Negatives for crude prices:

• Germany, UK, France, Italy, Russia and Austria are reporting record increases in case loads. Tracing is becoming tougher to do in those countries. Energy demand is falling across Europe.
• In 38 US states and Washington DC the number of new cases has increased. In some they are at record levels and some states have hospitals that are at max on their ICU beds.
• Libya is reopening its exports and produced 156Kb/d in September. Last week production was at 355Kb/d as more ports were opened. When the large Sharara field comes on fully, this will raise the country’s production by 300Kb/d. As of this week this field is now at 150Kb/d for total country production in excess of 500Kb/d. One additional smaller field with 70Kb/d of production is expected to restart on October 24th. Of note, before the civil war Libya was producing over 1.1Mb/d.

Downside pressure is expected in the coming weeks as the pandemic caseload rises lowering demand and as production increases. A critical breach level is US$36.63/b and we see this occurring in the coming weeks. We have been range bound between US$41.72/b at the high end and US$36.63/b at the low end over the last few weeks. Once US and Libyan production returns and if Wave Two caseloads and lockdowns get much worse, we should see the breach of the US$36.63/b level.

Most energy and energy service stocks have 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 Q3/20 should start later this week and continue through the end of November. Most results will not be investor friendly.

Hold cash and remain patient for the next low risk BUY window expected during tax loss selling season during Q4/20. 

Energy Stock Market: The S&P/TSX Energy Index has fallen from the June high at 96.07 to the current level today of 65.85 (last week it was at 67.75). Overall the index is now down by 31% in under four months. We see much more downside over the coming months as unfavourable Q3/20 results impact the stocks even more. We will be watching to see how companies discuss their debt loads and lender support. Companies with pessimistic views about their reserve base lending, cutbacks in lines of credit and potential additional impairment write-downs will face significant stock price pressure. The next support for the S&P/TSX Energy Index is at 60.38 (the low three weeks ago). Further lows are likely in Q4/20 as tax loss selling is likely to be very nasty this year. We see the likelihood that the final low for the index could be in the 32-36 area during tax loss selling season. We expect to see a very attractive BUY signal generated during Q4/20 and will recommend new ideas as well as highlight our favourite Table Pounding BUYS which should trade at much lower levels than now.

Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all archived Webinars (our next webinar will be held at 7PM on Thursday November 26th), 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.

Please become subscribers before the November 26th webinar as we will be discussing the best ideas to invest in during the tax loss selling season. In addition during the 90 minute webinar we will discuss the third quarter results of many of the companies we cover versus our expectations.

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

Josef is concerned about new Coronavirus Outbreaks and lockdowns in Europe and how they diminish energy demand. As well as how a new OPEC price war is now more than likely. Key support now US$36.63/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 and subscribe. 

EIA Weekly Data:. The EIA data on Thursday October 15th showed commercial stocks falling by 3.8Mb and US production fell by 500Kb/d to 10.5Mb/d or by 3.5Mb on the week as Hurricane Delta shut in offshore US production of both crude oil and natural gas. The estimate had been for a decline of 2.8Mb on the week. Gasoline inventories fell by 1.6Mb and total inventories excluding the SPR fell 16.8Mb on the week. Refinery runs fell 2 points to 75.1% from 77.1% in the prior week. US Production is now down 2.1Mb/d from 12.6Mb/d last year. Commercial stocks are 54.3Mb above last year or up by 12.5%. Cushing oil inventories rose by 2.9Mb to 59.4Mb compared to 43.0Mb last year at this time.

Total product demand rose last week by 1.13Mb/d to 19.48Mb/d but remains 1.46Mb/d or 7% lower than last year’s 20.9Mb/d. Gasoline demand fell last week due to the bad weather in the South falling 320Kb/d to 8.58b/d. It is down 778Kb/d or 8.0% from last year’s level of 9.35Mb/d of consumption. Jet fuel remains the weakest area. Consumption last week was 1.17Mb/d, but remains 441Kb/d or 278% below last year’s level of 1.61Mb/d. Overall product inventories remain high at 1.92Bb or 117.7Mb (6.1%) above the previous year’s level. Excluding the SPR, the commercial stocks are 120.2Mb or 9.4% above the prior year’s 1.28Bb. This high stock level of total product storage should put pressure on WTI crude prices.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed an increase in the US land rig count. The US rig count rose by three rigs (up five rigs last week) to 269 rigs working, but remains down 69% from 856 rigs working a year ago. The Permian basin saw an increase of one rig (up four rigs last week) to 130 rigs working but this is still down by 69% from a year earlier level of 421 rigs. The US oil rig count rose by four rigs to 193 rigs but is down 73% from 712 rigs working last year.

Canada saw a rise of five rigs (up four rigs last week) to 80 rigs working. The rig increase in recent weeks now has activity down only 45% from a year ago when 146 rigs were working. In the breakdown the most encouraging data point was rigs working for natural gas which was at 41 rigs (up three on the week) versus 44 rigs working last year. Natural gas stocks have held up better than oily names during the correction over the last few months as it is expected that we will see strong AECO prices this winter as storage in Canada is below normal.

OPEC Monthly Report: The OPEC report with September data came out on Tuesday and they have lowered expected demand in Q3 and Q4 of this year due to the expanded lockdowns or partial closures across Europe and the US. To them oil demand now appears to be fragile. For 2020 they see demand at 90.3Mb/d and for 2021 at 96.8Mb/d. Only in 2022 do they see demand returning to pre-pandemic levels. In September OPEC produced 24.1Mb/d with a net decline in

the month of 47Kb/d. The UAE had the largest decline at 239Kb/d while Libya saw a rise of 53Kb/d and Saudi Arabia of 35Kb/d. Surprisingly Venezuela was able to sneak more oil sales around the tough sanctions it is facing and their volumes rose 32Kb/d to 383Kb/d. Overall OECD inventories at 3.211Bb and are nearly 300Mb above normal. Days of forward consumption are at 110 days versus 94 days in Q3/19. With OPEC producing 24.1Mb/d in September and the call on them at 22.4Mb/d it is clear that OPEC needs to cut production not increase production by 1.9Mb/d as they are currently planning for January 2021.

Conclusion: As we write this, WTI for November is at US$40.50/b. The price is up on the week by nearly US$1/b as the tug of war of the following have occured. As production in the gulf returns in the coming weeks and Norway’s workers strike ends, we expect crude prices will continue to decline.

Positives for crude prices:

• US Gulf Coast production was shut in due to Hurricane Delta. Crude production of 1.67Mb/d or 92% of gulf production. In addition, 62% of the region’s natural gas production was shut in or 1.675Bcf/d. The gulf produces 15% of US crude production and 5% of natural gas production.
• Norway’s strike by energy workers shut in six offshore fields with production of nearly 966Kb/d. Both sides have now agreed to arbitration so this production should be brought back on.
• Colder weather has arrived and demand normally picks up.

Negatives for crude prices:

• Germany, Italy and Austria are reporting record increases in case loads. Tracing is becoming tougher to do in those countries.
• Amsterdam has gone to a four week partial lockdown (restaurants and bars) as it has the highest per capita infection rate in the world.
• Tougher socializing measures (curfews) are being applied to hot spots in London and Paris.
• In 38 US states and Washington DC the number of new cases have increased. In some they are at record levels and some states have hospitals that are at max on their ICU beds.
• Russia plans on increasing its production shortly as it appears to be breaking with OPEC+.
• Libya is reopening its exports and produced 156Kb/d in September. Earlier this week it rose to 355Kb/d as more ports were opened. When the large Sharara field comes on shortly they will raise production by 300Kb/d to 655Kb/d. Of note, before the civil war Libya was producing over 1.1Mb/d.

Downside pressure is expected in the coming weeks as the pandemic caseload rises and production increases around the world. The next breach level to watch is US$36.63/b and we see this occurring later this month. We have been range bound between US$41.47/b at the high end and US$36.63/b at the low end as the weather and shut-ins dominate the price of crude. Once production returns and if the pandemic expands as Wave Two takes hold, we should depressed crude prices and a breach of the US$36.63/b key level.

Most energy and energy service stocks have 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 Q3/20 should start next week and continue through November. Most results will not be investor friendly.

Hold cash and remain patient for the next low risk BUY window expected during tax loss selling season during Q4/20. 

The S&P/TSX Energy Index has fallen from the June high at 96.07 to the current level today of 67.75. Overall the index is now down by 30% in under four months. We see much more downside over the coming months as unfavourable Q3/20 results impact the stocks even more. We will be watching to see how companies discuss their debt loads and lender support. Companies with pessimistic views about their reserve base lending, cutbacks in lines of credit and potential additional impairment write-downs will face significant stock price pressure. The next support for the S&P/TSX Energy Index is at 60.38 (the low two weeks ago). Further lows are likely in Q4/20 as tax loss selling is likely to be very nasty this year. We see the likelihood that the final low for the index could be in the 32-36 area during tax loss selling season. We expect to see a very attractive BUY signal generated during Q4/20 and will recommend new ideas as well as highlight our favourite Table Pounding BUYS which should trade at much lower levels than now.

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