Energy & Commodities

Schachter’s Eye on Energy – June 30th

Posted by Josef Schachter

on Wednesday, 30 June 2021 11:42

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 30 energy, energy service and pipeline & infrastructure companies with regular updates. We hold quarterly subscriber webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more. 

EIA Weekly Data: The EIA data on Wednesday June 30th was supportive of crude oil prices. The headline Commercial Crude Inventories data was bullish for crude as it fell 6.7Mb on the week (forecast was for a draw of 4.7Mb) to 452.3Mb. The reason for the miss was that Net Imports fell by 602Kb/d or by 4.2Mb on the week. Refinery Utilization rose 0.7% to 92.9% last week (last year was 75.5% and in 2019 was 94.2%). With the increase in refinery activity Gasoline Inventories rose by 1.5Mb.

US Crude Production was steady at 11.1Mb/d last week. Over the coming months we see US crude production lifting to 11.5-12.0Mb/d as the increase in drilling activity and higher energy company cash flows are reinvested to stabilize production volumes which are still declining for many producers. Many companies are now talking about lifting their production guidance for the second half of this year.

Total Product Demand rose by 152Kb/d to 20.9Mb/d. Demand now exceeds that of late June 2019 when consumption was 20.76Mb/d. Gasoline Demand dropped by 267Kb/d to 9.17Mb/d (9.49Mb/d consumed in late June 2019). Jet Fuel Consumption also fell with a decline of 149Kb/d to 1.43Mb/d (1.86Mb/d in late June 2019). Cushing Inventories fell last week by 1.4Mb to 40.3Mb compared to 45.6Mb last year.

Baker Hughes Rig Data: The data for the week ending June 25th showed the US rig count flat at 470 rigs (up nine rigs in the prior week). Of the 470 US rigs active, 372 were drilling for oil and 98 were focused on natural gas activity. This overall rig count is up 77% from 265 rigs working a year ago.

Canada had a nine rig increase (up by 24 rigs in the prior week) to 126 rigs. Canadian activity is now up 9.7x from the low of 13 rigs last year. Of the Canadian increase there were eight more oil rigs working last week, for a total of 82 oil rigs working, up from just four last year. There are 44 rigs working on gas projects now, up from only nine last year.

The increase in rig activity in both the US and Canada should continue to translate into rising production. Energy service stocks have recovered significantly from this activity recovery.

Conclusion:

In July, OPEC plans to lift production by 840Kb/d. OPEC’s meeting tomorrow will determine the increase planned for August. An agreement for an increase of 500Kb/d is expected but Russia is pushing for an increase of up to 1.0Mb/d. The final number to be decided will depend upon the timeline for a nuclear deal with Iran, with sanctions ending against their energy industry, and when they can bring back shut in production. It is now expected that a deal will be completed in July and Iran could increase production sometime in August. Iran has over 200Mb in storage waiting to be sold. Of this 80Mb is in floating storage offshore their probable customers. They want to quickly lift production to 4.0Mb/d from the 2.46Mb/d they produced in May 2021.

Bearish pressure on crude prices:

  1. The new Covid variant ‘Delta” is spreading around the world and is replacing the prior B.1.1.7 variant. Now more than 50% of new cases are of this variant. It is also hitting more young people under 12 years of age. New lockdowns or restrictions have been imposed in the UK, Australia (nearly half of the country), Israel and Portugal. Spain  and Portugal have imposed travel restrictions on unvaccinated Britons on Monday which will hurt their recovering tourist industry.
  2. This Delta version has been found in over 60 countries including the US (49 of the 50 States) and Canada. Over 3.93M people have died from the pandemic of which the US has exceeded 604K deaths. The biggest single case load increases are occurring in Bangladesh, Brazil, Colombia, Oman and Zambia.
  3. Iran is in the final stage of talks to return to the 2015 UN nuclear deal and an accord is likely to be completed in July (the seventh and likely final round). Significant progress has been made and 1,040 sanctions on issues such as insurance, oil and shipping have been agreed to. China and India are expected to be the biggest buyers of this new crude supply. The US has signalled that things are progressing as they lifted sanctions on more than a dozen Iranian officials and energy firms.
  4. Rising crude and product prices may dampen worldwide demand. Overall the US is seeing an average of over US$3/gal with some places seeing price spikes to US$5/gal. Other gasoline stations have no supply availability and have closed.

Bullish pressure on crude prices:

  1. Rising vaccination levels of the adult population in the US to herd immunity level of 70% during July, is expected to provide a return to normal summer holidaying and energy consumption, as well as in Canada and the EU. Demand should rise by 1.5-2.0Mb/d during the summer travel months.
  2. Weather impacts (hurricane season) have started in the Gulf of Mexico which may necessitate shutting in some of the offshore production.
  3. High temperatures, crippling droughts and heatwaves across the US and Canada are cranking up demand for air conditioning and natural gas is a beneficiary of this increase in electricity demand. NYMEX natural gas prices have lifted to US$3.62/mcf. AECO prices are a marvelous C$4.10/mcf.
  4. There has been a lift in crude prices in the last few weeks as some commentators have said that the Iran deal may come much later than the August forecast as talks drag on.

CONCLUSION: We remain skeptical of the optimism about the projected 4-5Mb/d full recovery in energy demand to 100Mb/d before year-end. The tug of war between the normal summer holiday travel demand pick-up and the 3-4Mb/d increase in crude oil supplies this year remains the key determinant of future energy consumption and crude oil prices. We see demand picking up by around 2Mb/d before year-end which is less than the amount of production that will be brought on by OPEC (ex-Iran) alone. Between some OPEC cheating and Iran adding 1Mb/d+ beginning in August (if a deal is concluded), the additional product will be in excess of current demand and will build inventories. This would endanger the OPEC bullish scenario for crude prices.

WTI crude oil prices rose recently to US$74.45/b (highest since October 2018 – today US$73.22/b) and are now quite overbought. A decline below US$67/b should start the corrective phase we have been forecasting. The current enthusiasm by hedge fund futures traders and now MEME speculators for the sector, appears to be like that seen in late 2018. That’s when crude oil prices rose to US$76.90/b in September and three months later, had declined to US$42.36/b, down by 45%. The price of crude now is above the pre-pandemic price of early 2020, yet demand is 4-5Mb/d less and OPEC is ramping up production while still having over 8Mb/d of spare capacity. The current price level for crude does not make sense! It should be trading in the US$50/b area.

Energy Stock Market: The S&P/TSX Energy Index trades currently at 139 (down from 143 last week). A close below 132 should initiate the next sharp decline. An initial downside target after such a breach is down to the 100 area. General stock market weakness would be the catalyst for the energy sector to lose its current momentum and back off meaningfully.

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Hackers are infecting gamers’ PCs with malware to make millions from crypto

Posted by Sam Shead, cnbc.com

on Wednesday, 30 June 2021 7:22

Cyber criminals are targeting gamers with “mining malware” as they look to get crypto-rich, according to research published by security firm Avast.

The so-called “Crackonosh” malware is being hidden in free versions of games like NBA 2K19, Grand Theft Auto V, Far Cry 5, The Sims 4 and Jurassic World Evolution, which are available to download on torrent sites, Avast said on Thursday.

Once installed, Crackonosh quietly uses the computer’s processing power to mine cryptocurrencies for the hackers. The malware has been used to generate $2 million worth of a cryptocurrency known as monero since at least June 2018, according to Avast.

Avast researcher Daniel Benes told CNBC that infected users may notice that their computers slow down or deteriorate through overuse, while their electricity bill may also be higher than normal.

“It takes all the resources that the computer has so the computer is unresponsive,” he said.

Some 220,000 users have been infected worldwide and 800 devices are being infected every day, according to Benes. However, Avast only detects malicious software on devices that have its antivirus software installed so the actual number could be significantly higher. Brazil, India and the Philippines are among the worst affected countries, while the U.S. has also seen many cases…read more.

Gold ticks up as U.S. pending home sales surge in May

Posted by Anna Golubova, kitco.com

on Wednesday, 30 June 2021 7:05

Gold attempted to recover some of its early-morning losses as the U.S. pending home sales surprised on the upside in May.

The U.S. pending home sales were up 8% in May, rebounding after April’s 4.4% drop, the National Association of Realtors (NAR) said on Wednesday. Consensus forecasts were calling for a decrease of 0.8%.

The pending home sales index came in at 114.7 in May, marking the highest May reading since 2005.

Also, pending home sales were up 13.1% from a year ago as low mortgage rates drove demand.

“May’s strong increase in transactions – following April’s decline, as well as a sudden erosion in home affordability – was indeed a surprise,” said Lawrence Yun, NAR’s chief economist. “The housing market is attracting buyers due to the decline in mortgage rates, which fell below 3%, and from an uptick in listings.”

Even all-time high housing prices and record-low inventories are not stopping the buyers from lining up, added Yun.

“While these hurdles have contributed to pricing out some would-be buyers, the record-high aggregate wealth in the country from the elevated stock market and rising home prices are evidently providing funds for home purchases,” Yun said. “More market listings will appear in the second half of 2021, in part from the winding down of the federal mortgage forbearance program and from more home building…read more.

The Lumber Bubble Is Bursting

Posted by Fred Dunkley, safehaven.com

on Wednesday, 30 June 2021 6:50

Lumber prices have skyrocketed in the past 12 months, causing the average price of both new and existing single-family homes to increase. Until now. That bubble appears to have burst, finally.

Mandated lockdowns caused lumber sawmills to halt production while at the same time many Americans, trapped inside due to the stay-at-home orders, rushed to the stores to buy lumber for projects to kill the time.

Those two related things caused lumber inventory to plummet.

As a result, lumber prices have skyrocketed more than 300% since April last year, leading the National Association of Homebuilders to report that the lumber shortage has added at least $36,000 to the cost of a new home.

They estimated that the cost of lumber for building a home hit $70,000, nearly double the cost of building the exact same home last March.

Also, the median sale price of existing homes surged by a record 17% to $329,100 — the highest since the National Association of Realtors began tracking prices in 1999.

However, many experts have been forecasting the end of lumber’s time at the top of the commodity’s price list, though, and they have now been vindicated.

After reaching an all-time high of $1,711 per thousand board feet in early May, the cost of wood is now experiencing a fast descent.

Last week, the price fell some by $700, representing a drop of 41%. Still, even though lumber prices are in free fall, they’re still far above the futures prices of lumber from last March when it was $303.

Two factors initiated the price drop. First, with restrictions easing across the country, sawmills resumed their normal operations while lumber-hoarding DIYers shifted their money and time to travel and entertainment. However, it could still take several weeks for price reductions to take effect in retail home centers…read more.

Who are the Dividend Aristocrats in 2021?

Posted by Aran Ali, Visual Capitalist

on Tuesday, 29 June 2021 9:40

Legendary investor George Soros once said, “Good investing should be boring”. But an increase in volatile themes today suggests this maxim has gone ignored by at least some market participants.

From a high level, we can view investments on a spectrum. Volatile assets like cryptocurrencies and SPACs are more on the exciting side of things. The boring side is likely where Dividend Aristocrat stocks lie.

The data above, from Sure Dividend, looks at all 65 Dividend Aristocrats, ranking them by their yield, sector, and years of growth.

What are Dividend Aristocrats?
The U.S. Dividend Aristocrats are a basket of 65 stocks in the S&P 500 index. These companies have been growing their dividend per share consecutively, for a minimum of 25 years.

This is easier said than done, since companies often distribute dividends quarterly. To pay and grow a dividend in the long run implies a business model that can withstand varying economic environments, including setbacks like market crashes.

Though dividend stocks may not carry the same excitement as other investments, studies show that dividends represent over 50% of total S&P 500 market returns.

Numerous companies on this list have brand value that stretches all over the globe—including the likes of McDonald’s, Coca-Cola, and Walmart.

Vast global recognition and branding power is in part why these companies can generate cash flows to pay dividends for decades on end. For instance, 94% of the world population recognizes Coca-Cola’s logo. Click here to read full article.