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 Thursday June 3rd was mixed. Commercial Crude Inventories fell 5.1Mb to 479.3Mb as Exports fell by 889Kb/d, or by 6.2Mb on the week. Motor Gasoline Inventories rose by 1.5Mb as Refinery Utilization rose 1.7% to 88.7% last week (last year 71.8% and two years ago 91.8% as refiners ramped up for the summer holiday driving season). Distillate Fuel oil volumes rose by 3.7Mb on the week. US Crude Production fell by 200Kb/d to 10.8Mb/d which may have been due to the Colonial Pipeline problems which normally moves 3.0Mb/d of crude from Texas to the east coast markets. Colonial is still ramping back up after the ransomware attack. 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.

Total Product Demand fell last week by 817Kb/d to 19.14Mb/d. Gasoline Demand also fell and was down by 333Kb/d to 9.15Mb/d. Jet Fuel Consumption rose as more people flew during the Memorial long weekend with a rise of 42Kb/d to 1.44Mb/d. Air travel is now back over the pre-pandemic levels of early 2020. So far this year overall demand year-to-date for products is 6.6% above last year as we recover from the pandemic plunge. Motor Gasoline demand is up by 10.0% from last year and Jet Fuel now is above last year as well with an increase of 1.9% from a year ago (year-to-date). Cushing Inventories rose last week by 700Kb to 45.5Mb compared to 51.7Mb last year.

Baker Hughes Rig Data: The data for the week ending May 28th showed the US rig count rise  by two rigs (up two rigs in the prior week). Canada had an increase of four rigs (up one rig in the prior week). Canadian activity is now up 310% from the pandemic lows of last year. There are 62 rigs working in Canada now compared to 20 rigs working last year. In the US there were 457 rigs active, up 52% from 301 rigs working a year ago. In the US they had an increase of three rigs drilling for oil to 359 rigs which is up 62% from a year ago. The state with the biggest increase in rigs this week was Texas with a four rig increase of which two were in the Permian. This drilling rig pick up should soon translate into rising production on both sides of the border.

Conclusion:

This month OPEC will increase production by 700Kb/d, after raising production by 600Kb/d in May, and then in July plan to lift production by 840Kb/d With worldwide crude demand now around 95-95.5Mb/d (OPEC forecast) we expect by year-end demand may rise by 2Mb/d to 97-97.5Mb/d, but not back to pre-pandemic levels of 100-101Mb/d forecast by energy bulls, including OPEC. Goldman Sachs and Barclays are calling for US$80/b by Q4/21 if demand rises over 100Mb/d. OPEC is now in this camp as well and expects that there will be a 2Mb/d shortage by the end of 2021. They will keep a watchful eye on demand and add production as needed but they want inventories to fall below the five-year average before they do so. OPEC’s next meeting is scheduled for July 1st.

Bearish pressure on crude prices:

1. Rising mutation caseloads in Vietnam, Malaysia, Singapore and Taiwan are new outbreak areas.  Japan’s ICU health care system is at capacity and their largest cities (Tokyo and Osaka) are facing rising case loads. There is increasing pressure to cancel the Olympic summer games. Vaccination rates in the country are extremely low at 5% inoculated so far. The US State Department has issued a travel advisor for the country. In Canada, Manitoba still has record case loads in ICU beds and is accessing other provinces for beds for their serious patients.
2. Iran is in the final stages of talks to return to the 2015 UN nuclear deal and if an accord is completed this month or in July in Vienna, they could increase production quickly by 1.0- 2.0Mb/d to 4Mb/d up from 2.39Mb/d produced in April 2021. Iran last produced over 4Mb/d in 2016. A deal would lift current sanctions on Iran’s oil, banking and shipping sectors. Iran has a new 1,000Km – 1Mb/d pipeline which started up this month that bypasses the Strait of Hormuz. It is situated at Jask, in the Gulf of Oman. It will make shipping crude cheaper to buyers in Asian countries. China and India are expected to be the biggest buyers of this new crude supply. Iran holds Presidential elections on June 18th so this may be the date for a nuclear deal to be announced.

Bullish pressure on crude prices:

1. Rising vaccination levels across the US is lifting energy consumption.
2. Weather impacts should start soon in the Gulf of Mexico which would necessitate shutting in some of the offshore production.
3. Vaccine passports (or certificates) are getting more support from countries, increasing the prospects for a 2021 summer tourism industry in Europe. The UK may lead the way with passports and may start to issue them as early as next month. Re-opening across North America will increase gasoline consumption as people re-engage with family and friends and start to travel as they had done before the pandemic. In Calgary, the Stampede is going to occur this year with some restrictions (no chuck-wagon races).

CONCLUSION: We remain skeptical of the optimism about the projected 4-5Mb/d full recovery in energy demand to 100Mb/d before year-end (OPEC forecast 99.8Mb/d). 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 and the US alone. Between some OPEC cheating and Iran adding 1-2Mb/d by August (if a deal is concluded), this additional product will be in excess of current demand and will build inventories. This would endanger the OPEC bullish scenario. Iran returning to full production is the danger to the US$80/b forecast. 

WTI crude oil prices are down modestly today to US$68.65. A breach of US$61.56/b would have negative implications. Technically, a close below US$57.63/b (the early April low) would be very bearish and set up a decline to US$48-52/b. The current enthusiasm for the sector appears to us to be like that seen in late 2018 when crude oil prices rose to US$76.90/b in September and three months later had declined to US$42.36/b or down by 45%. The price of crude now is above the pre-pandemic price of early 2020, yet demand is 5Mb/d less and production is ramping up by 2.1Mb/d from OPEC alone. This does not make sense!

Energy Stock Market: The S&P/TSX Energy Index trades currently at 137 having risen 16 points in the last two weeks as crude prices rose. A close below 111 (the mid-April low) should initiate the next sharp decline. An initial downside target after such a breach is the 100 area. The expected 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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We completed our review of 14 energy, energy service companies for our June Interim Report that will be released this Thursday June 10th. If you want to access this report and to become a subscriber go to https://bit.ly/34iKcRt to subscribe.