Our team at Lomiko Metals has been monitoring actions by the government of Canada and the US that are focused on reducing dependence on Chinese supply of graphite, lithium and other electric vehicle battery materials. Canada and the US have worked closely and confirmed supply agreements between themselves.

President Donald Trump recently signed an Executive Order entitled Executive Order on Addressing the Threat to the Domestic Supply Chain from Reliance on Critical Minerals from Foreign Adversaries, which is focused on creating North American suppliers of Battery Materials.

Excerpts from Executive Order:

“…the United States is 100 percent reliant on imports for graphite, which is used to make advanced batteries for cellphones, laptops, and hybrid and electric cars. China produces over 60 percent of the world’s graphite and almost all of the world’s production of high-purity graphite needed for rechargeable batteries.”
“(i) the United States develops secure critical minerals supply chains that do not depend on resources or processing from foreign adversaries;
(ii) the United States establishes, expands, and strengthens commercially viable critical minerals mining and minerals processing capabilities; and
(iii) the United States develops globally competitive, substantial, and resilient domestic commercial supply chain capabilities for critical minerals mining and processing.”

In September, Congressmen Lance Gooden (R-TX) and Vicente Gonzalez (D-TX) recently introduced a bill that seeks to decrease the U.S.’s dependence on China for critical metals.  The bill, dubbed the Reclaiming American Rare Earths (RARE) Act, aims to establish tax incentives for domestic production of rare earths.

The Congressmen statement sounds the alarm regarding critical metals production: “The United States is more dependent than ever on the importation of the resources that drive our economy, enable us to build advanced technology, and ensure our national security,” Gooden’s office said in a release. “Thirty-five of these rare earth minerals are designated by the Department of Interior as ‘critical’, and we source fourteen of them entirely from foreign suppliers.  China is a leading supplier for twenty-two of the thirty-five. The RARE Act is specifically designed to change that.”

Earlier this year, Sen. Ted Cruz introduced similar legislation, dubbed the Onshoring Rare Earths Act of 2020, or ORE Act.  Further, on December 18, 2019 Canada announced that it had joined the U.S.-led multilateral Energy Resource Governance Initiative (ERGI). ERGI aims to support secure and resilient supply chains for critical minerals by identifying options to diversify supply chains and facilitate trade and industry connections.

Canada, and especially Quebec, are perfectly situated to supply the U.S. with many of the critical minerals it is seeking to secure due to an extensive selection of mineral projects.  Also, strong political and economic ties, a stable political, economic and regulatory environment and a robust metals and mining sector. Of the 35 critical metals identified by the U.S., Canada is a sizable supplier of 13 of such minerals including graphite, lithium and manganese to the U.S. and the second-largest supplier of niobium, tungsten and magnesium. Canada also supplies approximately one quarter of the U.S. uranium needs.

The only operating graphite mine in North America, the Imerys Graphite & Carbon at Lac-des-Îles, is only 30 miles northwest of Lomiko’s La Loutre property. These announcements bode well for our plans to develop a new producing graphite mine as demand is expected to increase exponentially for the mined natural graphite material, as more is used in the production of spherical graphite for graphite in the anode portion of Electric Vehicle Lithium-ion batteries.

If Joe Biden becomes the next president of the United States, the energy industry will feel the pinch, with onshore gas and offshore oil being the most vulnerable industry segments, Moody’s has said, as quoted by Natural Gas Intelligence.

The Democrat candidate has already made public a clean energy plan that will cost $1.7 trillion and that will focus on research and development of new clean energy solutions to the climate crisis.

This in itself would be negative for the oil and gas industry, if successful, as it will dampen demand for their products. But Biden has also promised his voters to stop offering new offshore oil and gas leases and to ban new drilling on federal land, even though he stopped short of promising a ban on fracking.

But federal leases for oil and gas production accounted for more than a fifth of the United States’ annual oil and gas production last year. Oil from offshore fields in the Gulf of Mexico accounted for 64 percent of oil output from federal lands, Moody’s senior oil and gas analyst John Thieroff said in a note this week…CLICK for complete article

Josef comments on how US Commercial crude inventories surprise with a build of 500Kb/d last week. Crude oil prices may hold up for a few days as a new hurricane could shut-in some of the US offshore production. He sees a breach of US$36/b happening this month.

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 7th showed commercial stocks rising by 0.5Mb as net imports rose 1.46Mb/d or by 10.2MMb on the week. The estimate had been for a decline of 0.8Mb on the week so a bit of a negative. Gasoline inventories fell by 1.4Mb (a positive as demand rose) and  total stocks excluding the SPR fell 2.0Mb on the week. US production rose 300Kb/d to 11.0Mb/d as US offshore production returned after the recent hurricanes. Overall US Production is now down 1.6Mb/d from 12.6Mb/d last year. Commercial stocks are 67.4Mb above last year or up by 15.8%. This high stock level of storage  has been putting pressure on WTI crude prices. Cushing oil inventories rose by 400Kb to 56.5Mb compared to 41.7Mb last year at this time.

Total product demand rose last week by 898Kb/d to 18.345Mb/d but remains 3.07Mb/d lower than last year’s 21.41Mb/d. Gasoline demand rose 367Kb/d to 8.896Mb/d but is still down 565Kb/d or 6.0% from last year’s level of 9.46Mb/d of consumption. Jet fuel remains the weakest area. Consumption last week was 907Kb/d, up 49Kb/d on the week but remains 863Kb/d or 48.8% below last year’s level of 1.77Mb/d. Refinery runs rose by 1.3 point to 77.1% up from 75.8% in the prior week. Overall product inventories remain high at 1.93Bb or 132.5Mb (6.9%) above the previous year level. Excluding the SPR, the commercial stocks are 135.2Mb or 10.5% above the prior year’s 1.28Bb. This high stock level of total product storage will likely continue to put pressure on WTI crude prices.

With coronavirus cases picking up again as schools and more businesses reopen, the US caseload has risen to 7.5M cases (7.2M cases last week) with a new high of >212K deaths (207K fatalities the week prior). The next few weeks will be critical as the colder weather and normal seasonal flu season starts. If the Wave Two situation being seen in France, the UK, Spain and South Korea occurs in the US, then high caseload areas may see additional lockdowns which will hit energy demand and depress crude prices. Large cities like Madrid, New York and Paris are seeing localized large flare-ups. In Canada the caseload is rising in Quebec and Ontario and in Alberta an increase in cases at schools is disturbing.

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 five rigs (up six rigs last week) to 266 rigs working, but remains down 69% from 855 rigs working a year ago. The Permian basin saw an increase of four rigs (up two rigs last week) to 129 rigs working but this is still down by 69% from a year earlier level of 415 rigs. The US oil rig count rose by six rigs to 189 rigs but is down 73% from 710 rigs working last year.

Canada saw a rise of four rigs (up seven rigs last week) to 75 rigs working. The rig increase in recent weeks now has activity down only 48% from a year ago when 144 rigs were working.

Conclusion: As we write this, WTI for November is at US$39.34/b. Further downside pressure is expected in the coming weeks as the pandemic caseload rises. The next breach level to watch is US$36.13/b and we see this occurring during October. The key level for WTI thereafter is US$34.36/b. If this is breached then the sector will face enormous selling pressure. We continue to see a likelihood of WTI falling below US$30/b if OPEC excess production is not reigned in and US economic activity weakens without a major second stimulus program approved. If there is no deal then we could see the US economy contract in Q4/20 as millions of jobs (especially in the service sector) are lost. Crude prices have held up over the past week as there is a strike in Norway which has removed 8% of production or 330K boe/d and there is a watch on for more hurricane activity that may hit the Gulf of Mexico in the coming days. If a disruption of production in the area occurs, crude  prices may hold up for a bit longer.

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 by month end 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 Q4/20. 

The S&P/TSX Energy Index has fallen from the June high at 96.07 (when we recommended profit taking) to the current level today of 65.57 (unchanged from last week). Overall the index is now down by 32% 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 last week). 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.

Our October Interim Report comes out tomorrow, October 8th, and includes our extensive review of our overview Stock Market Decline Checklist. The data covers market related issues, monetary policy issues, fiscal policy issues, weakening market internals data and energy market indices pricing parameters. An extensive chart presentation is included. Many of the key indicators highlighted have deteriorated over the past few weeks.

Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all archived Webinars (our next one 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.

To get access to our research go to  http://bit.ly/2OvRCbP to subscribe.

This week Josef comments on how US crude oil demand fell nearly 1.0Mb/d last week as the pandemic lifted the case load to 7.2M cases in the USA with more than 207,000 fatalities. With Wave Two expected to arrive in the near term it is probable that WTI crude could fall below US$30/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. 

Election Impact on Energy: Last night’s first Presidential debate was a low point for such events. The President interrupted Biden’s allocated two minutes to respond to the moderators’ questions almost every time and Chris Wallace, a well respected moderator, could not gain control of the agreed program. It was as if Chris was trying to referee a knife fight as the issues of covid-19, taxes paid, black lives matter and law & order were covered. Repeated lies, interruptions and attacks with no ability to fact check (right away) left viewers underwhelmed and infuriated. The President used his bully pulpit to do his thing while Biden took each attack mostly with decorum. Our view of a very nasty election period with a late decision on the winner looks very likely. That would increase uncertainty and stock markets hate uncertainty. The Dow Jones Industrials Index is now at 27,870 and a decline below 26,500 could start a severe decline. No new fiscal deal today between Congress and the White House, poor Q3/20 earnings to start shortly, a rise in pandemic numbers especially if Wave Two hits hard, and continued ugly politics could drive the US markets below the March 2020 lows.

EIA Weekly Data:. The EIA data on Wednesday September 30th showed commercial stocks falling by 2.0Mb as net imports fell 535Kb/d or 3.7Mb on the week. The estimate had been for a decline of 1.6Mb on the week which would have occurred except for the rise in exports. Gasoline inventories rose by 0.7Mb and  total stocks excluding the SPR fell 0.5Mb on the week. Lower 48 production remained at 10.7Mb/d with no further recovery from the back to back Hurricanes. Production is now down 1.7Mb/d from 12.4Mb/d last year. Overall commercial stocks are 69.8Mb above last year or up by 16.5%. This high stock level of storage at a time of falling demand is putting pressure on WTI crude prices.

Total product demand fell 992Kb/d to 17.4Mb/d and is down 3.32Mb/d from last year’s 20.8Mb/d of consumption. Demand for gasoline rose a modest 14Kb/d to 8.53Mb/d but is still down 608Kb/d or 6.7% from last year’s level of 9.14Mb/d of consumption. Jet fuel remains the weakest area with demand down 77Kb/d last week to 858Kb/d and remains 905Kb/d or 51.2% below last year’s consumption level of 1.76Mb/d. Refinery runs rose by 1 point to 75.8% from 74.8% in the prior week. Overall product inventories remain high at 1.94Bb or 127.0Mb (6.6%) above the previous year level.

With coronavirus cases picking up again as schools and more businesses reopen, the US caseload has risen to 7.2M cases (6.9M cases last week) with a new high of >207K deaths (200K fatalities  last week). Over 1.0M people have now died worldwide. The next few weeks will be critical as the colder weather and normal seasonal flu season starts. If the Wave Two situation being seen in France, the UK, Spain and South Korea occurs, then more high caseload areas may see additional lockdowns which will hit energy demand even further and depress 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 six rigs to 261 rigs working, but remains down 70% from 860 rigs working a year ago. The Permian basin saw an increase of two rigs to 125 rigs working but this is still down by 70% from a year earlier level of 414 rigs. The US oil rig count rose by four rigs to 183 rigs but is down 74% from 713 rigs working last year. The biggest recovery was in the Eagle Ford basin that saw a rise of 3 rigs to 12 rigs. However, it is still down 50 rigs or 81% from 62 rigs working a year ago.

Canada saw a sharp rise of seven rigs to 71 rigs working (up 12 rigs in the prior week). The much better pricing environment for natural gas has lifted activity in the liquids rich Montney basin. The rig increase in recent weeks now has activity down only 444% from a year ago when 127 rigs were working. Canadian natural gas stocks have been the best performers in recent weeks.

Conclusion: As we write this, WTI for November (the next contract) is at US$39.44/b with the day’s low at US$38.68/b. Further downside pressure is expected in the coming weeks as the pandemic caseload rises and the President’s indifference weights on the economy and individual behavior. The next breach level is USS$36.13/b and we see this occurring during October. The next key level for WTI thereafter is US$34.36/b. If this is breached then the  sector will face enormous selling pressure. We continue to see a risk of WTI falling below US$30/b if OPEC excess production is not reigned in.

Most energy 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 shortly and continue through November and many reports will not be investor friendly. Another US producer fell by the wayside today – Bakken producer Oasis Petroleum filed for Chapter 11 with debts of US1.8B.

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

The S&P/TSX Energy Index has fallen from the June high at 96 (when we recommended profit taking) to the current level today of 65.76. Overall the index is now down by 32% in under four months. We see much more downside over the coming months as lousy Q3/20 results shaft 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 65.07 and then 58.05. Further lows are likely in Q4/20 as tax loss selling could be very nasty this year. We see the likelihood that the final low for the index will occur 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 all archived Webinars (our next one 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 two monthly reports. If you are interested in the energy industry this should be of interest to you.

To get access to our research go to  http://bit.ly/2OvRCbP to subscribe.

This company presents a good opportunity for investors with a minimum of risk, with exceptions as noted. Enerplus, (NYSE:ERF) is a Canadian driller with a good balance sheet and cash flow, that may benefit from the thesis we presented in our introductory article on several Canadian drillers last month. Readers should refer back to it for a detailed analysis of why the Canadian drillers are of interest.

The thesis for buying Canadian drillers, that I presented in the Omnibus article works mostly for ERF, as regards their Canadian water-flood activity. The drawback to ERF is that most of their daily production is in the U.S. in areas that may come under challenge from logistical, market pressure, and political ramifications of events outside their direct control.

In this article we will take a brief look at their primary assets, but focus on a couple of key areas-cash flow generation and debt maturities. What we don’t want to do is sink money into a company that doesn’t have staying power. ERF doesn’t fall into this category and could find a catalyst for growth in two areas. We’ll focus on the possible catalysts in my concluding remarks in the “Your Takeaway” section…CLICK for complete article