This week Josef explores why a large build in US Inventories was ignored by the stock market as it continues to focus on the economy reopening and why US total stocks grew by 17.0M while total demand fell by 628Kb/day to 16.0M.

Josef offers a twice monthly Black Gold newsletter covering the general energy market and 29 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: Thursday’s (May 28th) EIA data was delayed by one day due to the US Memorial Day holiday on Monday. The report was mostly bearish with total stocks up 17.0Mb on the week with the headline commercial crude stocks number a 7.9Mb rise (versus a 1.9Mb decline forecast). Gasoline stocks fell a modest 0.7Mb, however Distillate inventories rose by  5.5Mb. The rise in commercial stocks and rise in inventories of products was due to imports rising by over 2.0Mb/d or by 14.5Mb on the week, and due to refinery runs rising to 71.3% from 69.4% last week.

US production of crude fell by 100Kb/d to 11.4Mb/d and is now down 1.7Mb/d from the peak in mid-March at 13.1Mb/d. Production cutbacks keep on being announced by energy companies as storage fills up with the biggest declines in production in the Permian basin. This summer US production is likely to be under 11.0Mb/d as the high decline shale basins see rapid production declines (voluntary and involuntary). It is very likely the decline in crude oil production could reach down to 10.0Mb/d by late Fall if commodity prices fall in the next month or so. Cushing saw a decline of 3.4Mb to 53.5Mb as refinery activity consumed more crude.

The most bearish part of the report was that overall product consumed fell by 628Kb/d to 16.0Mb/d and is down 5.46Mb/d or 25% from 21.4Mb/d at this time last year as the Memorial weekend usually sees lots of travel. But not so this year due to the Covid-19 health crisis. Finished motor gasoline did rise by 463Kb/d from the prior week to 7.25Mb/d, but is still down 22% from 9.39Mb/d last year. Jet fuel demand rose by 226Kb/d from the prior week to 860Kb/d as some decided to fly to visit family and friends during the long weekend. However, it was 1.165Mb/d lower or 57% less than last year. Jet fuel demand may have the most difficulty in seeing a resurgence until a vaccine is available  and people feel safe flying again.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 21 rigs (prior week down 35 rigs) to 318 rigs and down 67% from 983 rigs working a year ago. The Permian felt the largest basin loss with a rig loss of 13 rigs (last week down 23 rigs) or down by 64% from a year earlier level of 451 rigs. The US oil rig count fell by 21 rigs to 237 rigs and down 70% from 797 rigs last year. Canada had a decline of two rigs and the count now is at 21 rigs working and down 73% from 78 rigs working a year ago. On May 27th the Alberta Energy Minister said Alberta producers had already cut production by about a quarter or by 1Mb/d. If crude prices don’t recover in Q3/20 there may end up being a total of 1.2-1.6Mb/d shut in during that quarter. The EIA report of May 15th showed Canadian exports to the US of 2.946Mb/d down 20.1% from 3.688Mb/d sent down the prior year so as of that date the US was already taking 742Kb/d less from us.

Conclusion: WTI as we write this is at US$33.50/b for the July contract and is ignoring the rise in US inventories as market participants focus on the economies reopening and the multitude of drugs being talked about as possible coronavirus cures. We see a decline below US$30/b as the line in the sand for crude oil bulls. We do not see supply and demand balancing until July so there will be a storage problem for the market to face in the coming weeks. This week’s rise is being ignored. As we see more builds in the coming weeks we see this breach occurring and fear of a lack of storage returns.  This breach should start the next phase of worry for energy bulls and restart heavy selling of energy stocks. We expect this to occur starting in early June.

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% on May 4th. It is now at 80.8% a fairly lofty level. As the general stock market declines in the coming weeks, we expect to see the energy sector fall as well. The Energy Bullish Percent Index is likely in this situation to fall to below 10%, providing the next low risk BUY signal. For the S&P/TSX this means a decline to the 32-36 level. The S&P Energy Index today is at 79.2 so there is lots of downside risk over the coming weeks and possibly months.

Speculative ownership of crude oil futures continues to rise chasing crude, with many buying later dated contracts after the May expiry problem. Speculators were taught a nasty roll over lesson on the nearby contact. Last week speculators owned a net long position of 547Mb up from 533Mb the week before. Commercials are now short 583Mb up from 552Mb the week before. We expect that a market decline with intermarket margin calls will knock the speculator’s position down to below 200Mb net long at the next bottom in crude prices. It is possible that commercials will move to net long positions in this event.

Our June SER Interim Report will come out next week Thursday and we plan to go over the remaining Q1/20 results for the companies we cover (13 companies will be reviewed in the report). We include our new SER Quality Scoring System for those that are: Successful, those that will Survive, and those that are Problematic (mainly debt levels and near term maturity problems). If you are interested in this report then please go to our website and to the subscriber page. Our final count shows three ‘A’s – Successful, thirteen ‘B’s – Survivors, and thirteen as ‘C’s – as Problematic. The deterioration of companies is due to the lower commodity prices, impairments taken, declining cash flows making debt coverage problematic and a batten down the hatches worry of another black swan event.

Subscribe to the Schachter Energy Report and receive access to our Webinar from Thursday May 28th, our Action Alerts, our TOP PICK recommendations when the next BUY signal occurs as well as our review of the 29 companies that we cover.

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

Russia is banning imports of refined oil products, including gasoline, diesel, and jet fuel, to protect its refining industry from cheap imports, according to a decree published on Russia’s government portal on Monday.

The ban will be in effect until October 1, and includes a ban on imports of gasoline, diesel, jet fuel, and gasoil, to ensure the energy security of the Russian federation and stabilize the domestic fuel market, the government says in the decree.

Russia has been considering this measure since early April, after oil prices crashed and led to much cheaper refined oil products outside Russia. In Russia, however, the price of fuels didn’t change much because of the nature of its regulations, Russian outlet RBC reported last month.

In addition, fuel demand in Russia has plummeted because of the self-isolation and lockdowns to curb the spread of the coronavirus pandemic in the country, which reported this weekend its highest daily death toll so far…CLICK for complete article

This 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 29 energy and energy service companies with regular updates. He holds quarterly subscriber webinars (next one Thursday May 28th) and provides Action BUY and SELL Alerts for paid subscribers. Learn more and subscribe. 

EIA Weekly Data: Wednesday’s (May 20th) EIA data was mixed with the headline commercial crude stocks number supportive of crude prices with a 5.0Mb decline (versus a 1.1Mb rise forecast) but the rest of the data was negative. Gasoline stocks rose 2.8Mb, Distillate inventories by 3.8Mb and Total Stocks rose by 6.9Mb. The decline in commercial stocks and rise in inventories of products was due to a ramp up in refinery runs to 69.4% from 67.9% last week.

US production of crude fell by 100Kb/d to 11.5Mb/d and is now down 1.6Mb/d from the peak in mid-March at 13.1Mb/d. Production cutbacks keep on being announced by energy companies as storage fills up with the biggest declines in production in the Bakken and the Permian basins. By summer US production is likely to be under 11.0Mb/d as the high decline shale basins see rapid production declines (voluntary and involuntary). The EIA sees the most prolific basin, the Permian, falling from 4.38Mb in May to 4.29Mb in June. Overall shale production they see falling by 197Kb/d in June. It is possible the decline in production could reach down to 10.0Mb/d by late Fall. Cushing saw a decline of 5.5Mb to 56.9Mb as refinery activity consumed more crude.

The most bearish part of the report was that overall product consumed fell by 228Kb/d to 16.6Mb/d and is down from 19.6Mb/d at this time last year. Finished motor gasoline consumption fell 608Kb/d or by over 8% to 6.79Mb/d as the joy of moving around as areas opened up, slowed down, from the initial desire to move around. Offsetting this was a rise in jet fuel demand to 634Kb/d up from a depressed level of 352Kb/d last week. However, it is down from 1.54M last year at this time. Jet Fuel demand may have the most difficulty in seeing a resurgence until a vaccine is available  and people feel safe flying again.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 35 rigs (prior week down 34 rigs) to 339 rigs and down 66% from 987 rigs working a year ago. The Permian felt the largest basin loss with a rig loss of 23 rigs (last week down 21 rigs) or down by 61% from a year earlier level of 454 rigs. The US oil rig count fell by 34 rigs to 258 rigs and down 68% from 802 rigs last year. Canada had a decline of three rigs and the count now is at 23 rigs working and down 63% from 63 rigs working a year ago. It is likely that 700Kb/d has been shut in already in Canada  and maybe a total of 1.2-1.6Mb/d may be shut in before the end of Q3/20.

Conclusion: WTI as we write this is at US$33/b for the July contract and up US$1/b on the headline inventory number. The bounce in crude prices over the last week won’t last as it is clear that more oil needs to be shut-in world wide, to balance supply and demand. We do not see supply and demand balancing until July so there will be a storage problem for the market to face in the coming weeks. A breach of US$25/b will start the next phase of worry for energy bulls and restart heavy selling of energy stocks. We expect this to occur in June.

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% on May 4th. Since then the market malaise and decline has pulled energy lower as well and the Index on May 20th has dropped to 67%. As the general stock market declines we expect to see the energy sector fall as well. The Energy Bullish Percent  Index is likely in this situation to fall to below 10%, providing the next low risk BUY signal. For the S&P/TSX this means a decline to the 32-36 level. The S&P Energy Index today is at 80.9 so there is lots of downside risk over the coming weeks and possibly months.

Speculative ownership of crude oil futures continues to rise, with many buying later dated  contracts after the May expiry problem. Speculators were taught a nasty roll over lesson. Last week speculators owned a net long position of 533Mb up from 525Mb the week before. Commercials are now short 552Mb up from 536Mb the week before. We expect that a market decline with intermarket margin calls will knock the speculator’s position down to below 200Mb net long at the next bottom in crude prices. It is possible that commercials will have gone to long positions in this event.

We are holding our next important SER webinar next week on Thursday May 28th so subscribers should send in questions and sign up for the webinar. We plan to go over Q1/20 results from companies that have reported and show our new SER Quality Scoring System for those that are: Successful, those that will Survive, and those that are Problematic (mainly debt levels and near term maturity problems).

The details of the Canadian Federal Government’s ‘Canadian Enterprise Emergency Funding’ LEEFF program were announced today. They may not see many energy companies taking them up on the program as it is quite egregious. Minimum loans are $60M and 20% will be senior debt and 80% will be unsecured. We have only limited data so far but the requirement of 15% of the funds borrowed in warrants is the knock. If it had been 5-10% depending on the risk of the specific loan then it might have been enticing. The interest rate of 5% in year one and 8% in year two is OK but it then goes up 2% per year. OUCH! This program may only attract the very distressed concerns and would be a negative from the markets perspective. We do see some companies taking this high cost capital, if it saves them from facing CCAA.

Subscribe to the Schachter Energy Report and receive access to our Webinar, our Action Alerts, our TOP PICK recommendations when the next BUY signal occurs as well as our review of companies ability to survive the present existential virus collapse impacting crude prices.

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

This 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 29 energy and energy service companies with regular updates. He holds quarterly subscriber webinars (next one Thursday May 28th) and provides Action BUY and SELL Alerts for paid subscribers. Learn more and subscribe.

EIA Weekly Data: Wednesday’s (May 13th) EIA data was quite positive. Commercial stocks fell by 700Kb/d versus the forecast of a rise of 4.1Mb. Part of the difference was due to imports falling by 300Kb/d or by 2.1Mb on the week. Overall stocks rose a modest 1.4Mb. The only material increase was in distillates which rose 3.5Mb. The decline in refinery runs to 67.9% from 70.5% last week and strong demand for gasoline lowered gasoline inventories by 3.5Mb on the week.

US production of crude fell by the largest weekly decline this year down 300Kb/d to 11.6Mb/d and now down 1.5Mb/d from the peak in mid-March at 13.1Mb/d. Production cutbacks keep on being announced by energy companies as storage fills up with the biggest declines in production in the Bakken and the Permian basins. By summer US production is likely to be under 11.0Mb/d as the high decline shale basins see rapid production declines (voluntary and involuntary). It is possible this closure of production could reach 10.0Mb/d by late Fall. Cushing saw a surprise decline of 3.0Mb to 62.4Mb.

The most positive result in the report was that overall product demand grew by 9.5% this week to 16.8Mb/d, with finished motor gasoline demand rising by 11% to 7.4Mb/d as more US States reopened and people began increased movement. Offsetting this was a fall in jet fuel demand of 32% to 352Kb/d from 515Kb/d during the week before. Jet Fuel demand may have the most difficulty in seeing a resurgence until a vaccine is available.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 34 rigs (prior week down 57 rigs) to 374 rigs and down 62% from 988 rigs working a year ago. The Permian felt the largest basin loss with a rig loss of 21 rigs (last week down 27 rigs) or down by 57% from a year earlier level of 457 rigs. The US oil rig count fell by 33 rigs to 292 rigs and down 64% from 805 rigs last year. We expect the US rig count to fall even further than our prior forecast of 400 rigs, with a new lower target of 320 rigs by the end of May. Canada had a decline of one rig and the count now is at 26 rigs working but down 59% from 63 rigs working a year ago. It is likely that 700Kb/d has been shut in already in Canada and maybe a total of 1.2-1.6Mb/d may be shut in before the end of Q3/20.

Conclusion: WTI as we write this is down 37 cents at US$25.41/b for the June contract. The bounce in crude prices over the last week won’t last as it is clear that more oil needs to be shut-in to balance supply and demand.

The short covering rally of the last few weeks took the S&P Energy Bullish Percent Index from 0% on March 9th to 100% on May 4th. Since then the market malaise and decline has pulled energy lower as well and the Index on May 13th has dropped to 70%. We expect to see the energy sector correct significantly in the coming weeks as the general market decline unfolds and that this Index will fall below 10%, providing the next low risk BUY signal. For the S&P/TSX this means a decline to the 32-36 level. The S&P Energy Index today is at 71.8 down from a high of 78.7 last week or down 8.2% so far.

Federal Reserve Chairman Powell weighed in today on his concern about a prolonged economic downturn due to the Covid-19 outbreak and concern about the pace and timing of the rebound. The shape of the recovery ‘V’ as President Trump wants and needs if he wants to be re-elected, ‘U’ as most economists forecast and bathtub shaped, as is now getting some support are depressing stock markets. Over the last two weeks the Dow Jones Industrials have fallen over 1,600 points (today down nearly 600 points as we write this) and our target for the Index is for it to plunge below 18,000 (now 23,159) and the TSX to below 9,000 (now 14,487 – down 2% over the last week). Both Canada and the US States want to start extensive testing and tracing and need significant numbers of test kits which are not yet available. The key need is tests that can be done quickly with the results obtained in minutes and not days as is now. The current plunge could be even uglier and more painful than the one from mid-February to mid-March especially if we see a significant rise in Covid-19 cases and deaths as some of the reopenings may be moving too fast. The financial support provided by governments via direct financing and via the Central Banks is being used up and more funds are needed but so far have not been made available as the political divide continues. The US is having more difficulties as it is a Presidential election year and both parties have divergent positions about what to do.

We are holding our next important SER webinar on Thursday May 28th so subscribers should send in questions and sign up for the webinar. We plan to go over Q1/20 results from companies that have reported and show our new SER Quality Scoring System for those that are: Successful, those that will Survive, and those that are Problematic (mainly debt levels and near term maturity problems).

FYI – I will be on BNN’s Market Call with Andrew Bell next Wednesday May 20th via Skype at 10AM MT.

Subscribe to the Schachter Energy Report and receive access to our Webinar, our Action Alerts, our TOP PICK recommendations when the next BUY signal occurs as well as our review of companies ability to survive the present existential virus collapse impacting crude prices.

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