This week Josef discusses how crude inventories rose to an increase in net imports and a decline in exports as well as how energy stocks continue to weaken and are down 5% on the week as concern rises about pipeline construction.

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: Wednesday July 8th’s EIA data was overall bearish. The headline number of commercial crude stocks showed a rise of 5.7Mb versus the forecast of a 3.1Mb decline. This miss was due to net imports rising by 2.13Mb/d or by 14.9Mb on the week. If not for imports rising (1.43Mb/d) and exports falling (705Kb/d) there would have been a significant decline during the week in crude storage. Motor Gasoline inventories fell by 4.8Mb on the week. Overall stocks rose this week by 10.5Mb (compared to a rise of 2.8Mb last week). Total stocks are now up 173.9Mb or 8.9% over last year. Refinery runs rose 2 points to 77.5% from 75.5% in the prior week. Cushing saw its first increase in quite a while with a rise of 2.2Mb to 47.8Mb (forecast 263K decline). US production of crude was flat last week at 11.0Mb/d and is down 1.3Mb/d from last year.

The most bullish part of the report was that total product supplied rose by 766Kb/d to 18.12Mb/d but is still down 3.14Mb/d or 15% from last year’s level of 21.3Mb/d. Finished motor gasoline demand rose by 205Kb/d to 8.77Mb/d, but is still down 10% from 9.75Mb/d last year. Jet fuel rose 336Kb/d to 924Kb/d as more planes were flying but is still down 880Kb/d lower or 49% less than last year’s 1.8Mb/d. Airline capacity is now at 40% of July 2019’s level and up from 30% in June as more airlines add flights as passengers slowly return. United Airlines today said they would furlough 36,000 staff after the US  government funding support requirement to the end of September, ends on October 1st.

The rise in Covid-19 cases to record levels worldwide and to 60,000 new cases per day (a high of 40,000 cases reached just two weeks ago) in the US has necessitated reversals in opening phases. There are now nearly 132,000 fatalities in the US from this pandemic. With the US having 4% of the world’s population and 25% of the fatalities this is a deplorable outcome. President Trump is now pushing for schools to reopen fully in the fall but states are reluctant to do it on a full time basis. Partial in school and partial at home with lower attendance levels in classes may provide distancing needed to keep a large increase in the case load among young people. This will now be a political football.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 2 rigs (prior week down 1 rigs) to 263 rigs and down 73% from 963 rigs working a year ago. The Permian had a rig loss of 5 rigs (last week down 1 rig) or down by 72% from a year earlier level of 443 rigs. The US oil rig count fell by 3 to 185 rigs (down 1 rig last week) and down 77% from 788 rigs working last year. Canada’s rig count rose by 5 rigs (down by 4 rigs last week) to 18 rigs working but is still down by 85% from 120 rigs working at this time last year. Many US companies have announced that they will restart production this month given current economic prices. With a current world-wide crude glut, any significant oil production returns at this time would be very detrimental to the current level of crude prices.

OPEC Issues: Saudi Arabia’s Energy Minister has threatened OPEC cheaters with another price war if they do not comply with their mandated quotas. His targets on his July 1st rant were Nigeria and Angola. These countries sell their light crude oil mainly to China and the Saudi threat is to discount their similar crudes and take their Chinese customers away. These countries and others like Iran and Iraq need all the revenues they can get to provide basic necessities for their large populations. Angola sold 1.28Mb/d in May and has 33M people which compares to Saudi Arabia with 35M people and ARAMCO sold 8.5Mb/d in May. Nigeria has 206M people and sold 1.6Mb/d in May. Asking countries with large populations to cut back versus the Saudi’s cutting back more is a non-starter for these poor and desperate countries.

Conclusion: As we write this, WTI is at US$40.61/b for the August contract unchanged on the day. The Dow Jones Industrials which was initially up over 200 points is now up a modest 20 points to 25,909 after the United Airlines announcement. A decline below 24,800 will start the next serious plunge in the stock markets. We expect to see lower lows (below March) before this rout is over. For crude we see a decline below US$30/b as the line in the sand for crude oil bulls (US$34.36/b next breakdown level). The breach of US$30/b should start the next phase of worry for energy bulls and restart aggressive selling of energy and energy service stocks. Much lower levels are expected once we get into the fall and the wage support programs by the governments end at the end of this month. Layoffs should pick up in August and we expect to see more corporate bankruptcies (Brooks Brothers and David’s Tea today). In addition, this fall will likely be the window for the second Covid-19 wave.

The energy and energy service companies with the most downside are those with high debt loads, high operating costs, declining production, have current balance sheet debt maturities of some materiality over the next 12 months and those that produce heavier crude barrels. Results for Q2 start to come out at the end of July.

Hold cash and remain patient for the next low risk BUY window. If over-invested hopefully you have already taken appropriate defensive action.  

The S&P Energy Bullish Percent Index peaked at 100% in early June. This is the only such reading ever. It has fallen over the last four weeks to 30.8% today as energy and energy service stocks fell. The Energy Bullish Percent Index is likely in this situation to fall to below 10%, providing the next low risk BUY signal. The S&P/TSX Energy Index was at 78 a week ago and is now at 74 or down 5% over the last week. The Index is now down 23% from the early June high of 96.07. The next downside target for this index is the 50 level. For the S&P/TSX we see a decline to the 32-36 level at the next important low, or a two for one sale over the coming months. Downside for the Dow Jones Industrials in the near term is 22,800 with much lower levels thereafter in Q3/Q4, 2020.

Our July Interim Update will come out tomorrow. We go over why and how deep this stock market plunge is likely to go and what to look for at the potential end of this stock market rout. As we get closer to the bottom we will profile our Table Pounding best energy and energy service BUY ideas to consider owning by subscribers. The next worry for the stock market will be Q2/20 financial results which will start shortly.

We update our Insider Trading Report in this issue (last run in April). There are some notable and significant insider buying that we highlight. We are working on a new international investment idea and expect to launch coverage of this exciting small cap growth story in our July 23rd SER Monthly.

Subscribe to the Schachter Energy Report and receive access to our previous Webinars (next webinar Thursday August 13th), our Action Alerts, our TOP PICK recommendations when the next BUY signal occurs as well as our Quality Scoring System review of the 27 companies that we cover.

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

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Encouraged by higher oil prices, Canadian oil companies are bringing back some of the crude oil production they had curtailed, the top executives of some of the largest firms said at an energy conference.

Husky Energy, Cenovus Energy, ARC Resources Ltd, Baytex Energy Corp, and Imperial Oil are restoring part of the production they had curtailed when prices plunged in March and April. Out of the 1 million barrels per day (bpd) curtailed production in Canada, at least 20 percent is being brought online again, according to Bloomberg estimates.

“We’re seeing a strong price signal to bring production back,” Alex Pourbaix, president and chief executive officer at Cenovus, said on the TD Securities energy conference on Tuesday.

“Nobody should be surprised to see our production moving back to full production capacity. We are significantly cash-flow positive at the levels we’re at now,” Pourbaix said, as quoted by Bloomberg.

Cenovus curtailed around 60,000 bpd production and stopped crude-by-rail shipments when prices plunged. The company has already restored half of the shut-in production, Pourbaix said, as carried by The Canadian Press…CLICK for complete article

Yesterday offered another object lesson in this market’s inability to find direction, as a curious little ramping in EURUSD intraday toward the 1.1300 handle and a tempting break to a new 1-week high was quickly batted back lower, leaving EURUSD showing five consecutive days of near “doji” indecisiveness- classic! And given today’s holiday in the US, we may make it six days of extending the USD limbo. At present, the only currency with a proper “known unknown” on the immediate horizon is sterling, where it looks as if the Brexit talks are proceeding reasonably well, especially as the EU’s stance on the jurisdiction of the European court of Justice seems to be softening. The purest expression of GBP prospects are in EURGBP where we continue to eye the 0.9000 as a pivotal one as per Wednesday’s FX Update (also referenced below).

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This week Josef talks about how the sharp rise in Covid-19 cases in the US has pummeled the stock markets. And this sharp decline has hit oil prices hard and the associated energy stocks. There is significant downside ahead but great buying opportunity, similar to the one we experienced this past mid-March, should occur in the second half of the 2nd quarter.

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: Wednesday June 24th’s EIA data was mostly bearish. The headline number of commercial crude stocks showed a rise of 1.4Mb versus the estimated 300K build. The Strategic Petroleum Reserve added 2.0Mb and now stands at 654.4Mb or nearly 36 days of current demand. The rise in commercial crude stocks would have been higher except net crude imports fell 797Kb/d or 5.6Mb on the week. Of this, exports fell by 695Kb/d or by 4.9Mb on the week. Motor gasoline stocks fell 1.7Mb while Distillates rose by 200Kb. Overall stocks rose this week by 5.9Mb (compared to a rise of 8.8Mb last week). Total stocks are now up 159.6Mb over last year. Refinery runs rose 0.8% to 74.6% from 73.8% in the prior week. Cushing saw a decline of 1.0Mb to 45.8Mb as refinery run activity consumed more crude. US production of crude recovered from last week’s large 600Kb/d decline to 10.5Mb/d, rising by 500Kb/d to 11.0Mb/d. Was last week an accounting error or is this the restart of shut-in production? We surmise it is the former.

The most positive part of the report was that product supplied, rose as more parts of the US reopened. Total product usage rose by 1.06Mb/d to 18.35Mb/d but is still down 12% from 20.88Mb/d consumed last year at this time. Finished motor gasoline demand rose by 738Kb/d to 8.61Mb/d, but is  down 9% from 9.47Mb/d last year. Jet fuel demand continues to rise modestly as more flights start up and consumption rose last week by 17Kb/d to 805Kb/d.  However, it is still 1.11Mb/d lower or 58% less than last year’s 1.67b/d.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 13 rigs (prior week down 5 rigs) to 266 rigs and down 72% from 967 rigs working a year ago. The Permian had a rig loss of 5 rigs (last week down 4 rigs) or down by 70% from a year earlier level of 439 rigs. The US oil rig count fell by 10 to 189 rigs (down 7 rigs last week) and down 76% from 789 rigs working last year. Canada’s rig count fell 4 rigs (flat last week) to 17 rigs working and is down 86% from 119 rigs working at this time last year.

Conclusion: As we write this, WTI is at US$38.10/b for the July contract (down almost 6% on the day or by US$2.27/b on the day) due to the overall inventory build and the US stock market getting pummeled. The Dow Jones Industrials are down 784 points to 25,372. We see a decline below US$30/b as the line in the sand for crude oil bulls (US$34.36/b next breakdown level). The breach of US$30/b should start the next phase of worry for energy bulls and restart aggressive selling of energy and energy service stocks. Much lower levels are expected once we get into the fall and the wage support programs by the governments end. Layoffs should pick up and we expect to see more bankruptcies. In addition this is also the window for the second Covid-19 wave. The energy and energy service companies with the most downside are those with high debt loads, high operating costs, have current balance sheet debt maturities of some materiality over the next 12 months and those that produce heavier crude barrels. Hold cash and remain patient for the next low risk BUY window as we saw in mid-March. If over-invested hopefully you took appropriate defensive action from our previous warnings.  

The short covering rally of the last few weeks took the S&P Energy Bullish Percent Index from 0% on March 9^th to 100% in early June. It has fallen to 69.2% as a result of the recent energy stock correction. Last week this index was at 84.6% so it has had a decent decline over the week following the declining stock prices. The Energy Bullish Percent Index is likely in this situation to fall to below 10%, providing the next low risk BUY signal. Today the S&P/TSX Energy Index is down 3.37 to 75.67 (down 4.3% on the day) and is down over 21% from the early June high of 96.07. The support level we noted last week of 76.54 was breached today. The next target for this index is the 50 level. For the S&P/TSX we see a decline to the 32-36, or a two for one sale over the coming months. Downside for the Dow Jones Industrials in the near term is 22,800 with much lower levels in July/August. We expect the market may see lower lows below the mid-March lows before this market carnage ends.

Our July Interim Report will come out on July 9th. We go over the why and how deep this stock market plunge is likely to go and what to look for at the potential end of this stock market rout. As we get closer to the bottom we will profile our best pick energy and energy service BUY  ideas for subscribers to consider. So far the key black swan event is the pick up in Covid-19 cases in the US (Florida, Texas and Arizona facing the largest increases) with 121,000 fatalities so far. Is this the start of the second wave or an extension of the first wave due to lack of using masks and safe distancing? The lack of White House Covid Task Force Briefings is adding to the nervousness. Is ignoring the issue by President Trump going to make the pandemic go away?

Second quarter 2020 financial reports start coming out in July and we expect most results will be worse than expected with guidance mostly depressing. We will update our Insider Trading Report in this issue.

Subscribe to the Schachter Energy Report and receive access to our previous Webinars, our Action Alerts, our TOP PICK recommendations when the next BUY signal occurs as well as our Quality Scoring System review of the 27 companies that we cover.

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

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