Energy & Commodities
An Arctic Polar Vortex has brought near century lows in temperatures to most of North America (and even reached into northern Mexico) bringing frigid temperatures that have knocked out the electricity grids. Texas has been hardest hit with water, heat, refineries and power out due to the freezing temperatures. It may take three to four weeks to get remediation done on the 4Mb/d of oil production shut in. The price of crude spiked up US$4/b over the last few days to US$62/b. Electricity rates have also spiked to record prices (wholesale prices to US$10,000/MWh yesterday up from US$50/MWh before the cold blast hit Texas). The next few weeks should see big divergences from the norm as these issues plague the industry. Parts of Texas are now colder than parts of Alaska.
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.
EIA Weekly Data: The EIA data on Thursday February 18th was moderately bullish. Commercial Inventories fell by 7.3Mb on the week compared to a forecasted decline of 2.43Mb/d. The difference was due to a rise in exports of 1.245Mb/d or 8.7Mb on the week. If not for this export increase storage would have risen. Motor Gasoline Inventories rose by 0.7Mb in the week as Refinery Utilization rose 0.1% to 83.1% from 83.0% in the prior week. While an increase it is below last year’s level of 89.4% as overall demand for product is pandemic and now weather impacted. US Domestic Crude Production fell by 200Kb/d to 10.8Mb/d as the freezing weather started to shut in production late last week . Compared to a year ago this is down 2.2Mb/d from last year’s 13.0Mb/d.
The bullish part of the report this week was on the consumption side. Total Product Consumption rose 484Kb/d to 20.67Mb/d. Finished Motor Gasoline Consumption rose by 549Kb/d to 8.41Mb/d but is down 511Kb/d from last year’s 8.92Mb/d. Jet Fuel consumption fell by 88Kb/d to 1.18Mb/d and remains down 207Kb/d from last year’s 1.38Mb/d. Cushing Oil Inventories fell by 3.0Mb. Inventories at Cushing are now at 45.0Mb down from 48.0Mb last week but are up from 38.2Mb a year ago.
Baker Hughes Rig Data: All of the following data is before the Arctic Polar Vortex hit the US and knocked out the electricity grid and the oil production of Texas. More than 4.2M people remain without power as of today. More than 4Mb/d or around 40% of US production is now shut in. The Permian (the largest producing field) has wells that produce large amounts of water with the oil and now have frozen surface valves. It may be two to three weeks for this to be resolved. On the natural gas side 17Bcf/d or 18% of US production is also shut in.
The data for the week ended February 12th showed a rise for the US and Canadian rig counts. In the US rigs rose by five (up eight rigs in the prior week) to 397 rigs working, but remains down 50% from 790 rigs working a year ago. The US oil rig count rose by seven (up four rigs the prior week) to 306 rigs but is down 55% from 678 rigs working last year. The Permian saw an increase of five rigs to 203 rigs working and remains 50% below last year’s level of 408 rigs working. Over US$45/b for WTI seems to be a price point where producers see economic returns from drilling. The increase in drilling activity has seen a rise in US domestic production of 100Kb/d to 11.0Mb/d. If prices remain at current levels then OPEC will face competition again from the easy to drill and bring on shale plays in the US. With a large infrastructure available and cheap drilling costs those firms with low cost land and decent balance sheets may show meaningful growth at current prices.
Canada saw an increase of five rigs last week with 176 rigs working. This is 31% lower than the 255 rigs active last year. The rig count for oil rose by six rigs to 101 rigs working but is down 41% from 172 rigs working last year. The natural gas rig count fell by one rig to 75 rigs active and is down 10% from 83 rigs working at this time last year.
Conclusion: WTI crude oil is up almost US$10/b to US$61.20/b since the start of February as very cold weather across North America brings temperatures down, electricity outages and heavy snow in many areas. Of this rally US$8/b is due to the infusion of speculative money from the Robinhood and Reddit novice retail horde. These horde investors seem finished with GameStop and other stock shorts, are done now with silver and have moved to crude oil and cannabis stocks to get their focused herd following price momentum moves. The Reddit/Robinhood gang of over 14M retail investors, are in the case of energy, trying to squeeze the Commercials (refiners, petrochemical companies and energy companies etc.) shorts who are short 1.64Bb (net short 617Mb at the end of last week). This plus the recent cold spell has lifted crude prices to levels that OPEC and Saudi Arabia are now concerned about. If oil prices remain at his level after the cold spell it would provide incentive to the US shale industry to ramp up production and deprive OPEC of more market share. Last week the US exported 3.86Mb/d or 27Mb on the week. This deprives OPEC of clients and market share. The Saudis are now talking about raising their and OPEC’s quota at their next meeting in March.
We believe that there is US$14-16/b of downside risk for WTI as markets begin to reflect the demand situation post-winter, the recovery in US production and OPEC cheating and/or raising approved production levels. When these hot money traders get bored with energy (as they did with GameStop, AMC and Blackberry etc.) we see WTI crude breaching US$50/b and moving into the mid-US$40s as rational behavior returns when winter nears its end.
Technically the near-term support level for WTI crude is US$54/b and then major support is at US46.15/b. Energy and energy service stocks are very overbought and some have rolled over with meaningful declines. We are clearly in the bear camp now. 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 Q4/20 are now being released and are so far not good. The bulk of the companies release over the next few weeks.
We now have a SELL signal in place since January 14, 2021. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of 14 stocks and at what prices we think the ideas be harvested. We sent out a second sell signal on February 5th and removed four additional ideas for harvesting. The next few months could see significant downside for the energy sector.
Energy Stock Market: The S&P/TSX Energy Index now trades at 107 and is part of a broadening topping process. The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low of late October 2020) in the coming months. A breach of 103.60 should initiate the next sharp decline. The recent cold weather has lifted AECO natural gas to C$5.31/mcf (yesterday), the price spike we expected during the worst of winter. Natural gas stocks have been some of the best winners recently. The NYMEX US price at US$3.12/mcf has lifted as well, but not as much as Canadian prices.
Our SER February Monthly SER (to come out on February 19th) focused on our February 5th SELL signals and the rationale for selling the four additional ideas. Downside from here for the sector remains substantial in the 40-50% range.
Our Q1/21 webinar takes place next week Thursday February 25th at 7PM MT. There will be two investment presentation sections. The first will cover the downside parameters we see for the general market depending upon which of the many mania bubbles burst. The second section will discuss how to build an energy portfolio for the new Energy Bull Market that we foresee lasting into 2025. The different approaches that conservative, growth and entrepreneurial investors should consider will be discussed. Individual ideas for each investor approach will be covered.
If you want to join our webinar next week, you need to become a subscriber in the next week and register for the event.
Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all archived Webinars (and be able to join us for our next webinar Thursday February 25th), Action Alerts, TOP PICK recommendations when the next BUY or SELL 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’ financial results in our reports. If you are interested in the energy industry this should be of interest to you.
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SYDNEY (Reuters) – Facebook faced a worldwide backlash from publishers and politicians on Thursday after blocking news feeds in Australia in a surprise escalation of a dispute with the government over a law to require it to share revenue from news.
Facebook wiped out pages from Australian state governments and charities as well as from domestic and international news organisations, three days before the launch of a nationwide COVID-19 vaccination programme.
Though the measure was limited to Australia, denunciations came from far afield, with politicians elsewhere describing it as an attempt to put pressure on governments that are considering similar measures around the world.
“Facebook’s actions to unfriend Australia today, cutting off essential information services on health and emergency services, were as arrogant as they were disappointing,” Australian Prime Minister Scott Morrison wrote on his own Facebook page.
Frankly, we’ve had it with the constant stream of lies from Robinhood and neverending bullshit from the company’s CEO, Vlad Tenev.
With Tenev scheduled to testify on Thursday, alongside the CEOs of Citadel, Melvin Capital and Reddit, the apriori mea culpas have started to emerge – if a little too late – the former HFT trader spoke late on Friday on the All-In Podcast hosted by Chamath Palihapitiya, who had strongly criticized Robinhood over the trading restrictions, and Jason Calacanis, a Robinhood investor, and said that “no doubt we could have communicated this a little bit better to customers.”
What he is referring to, of course, is Robinhood’s outrageous decision to restrict the buying of 13 heavily shorted stocks on Jan 28 that had been driven to record highs, including GameStop, whose shares had surged more than 1,600%.
And then he decided to pull the oldest trick and deflect attention from his own mistakes by blaming “conspiracy theories.”
We are confident that this week’s Congressional hearings will quickly get to the bottom of this critical question of just how profitable this orderflow – which it paid Robinhood $362 million to procure – is for Citadel, because anything less will confirm that this latest hearing is nothing but a kangaroo court meant to appease retail investors that someone in Washington is doing something… when in reality everyone knows that what Citadel wants, Citadel gets and there is no sign that Citadel will ever tire of making billions out of the same orderflow for which it paid subpennies on the dollar to Robinhood.
As for Robinhood’s trite virtue signaling of taking from the rich and giving to the poor, all it took was 30 billion subpenny rebates from Citadel for the firm to remember who really calls the shots.
The “Roaring 20s” continued to roar yesterday, pushing us deeper towards 1929 even if it is unclear exactly where we sit in the parallel to that unhappy decade. I have repeatedly said the 1920s are a ridiculous analogy for our 20s if that is meant as anything positive. We’ve all had fun dressing up as The Great Gatsby at an office party; and lots of people are having fun dressing up as The Great Gatsby in real life today; but very few dress up as hungry British workers during the General Strike (1926); or Soviet workers carrying out the first 5-year Plan (1928); or recall that The Great Gatsby was published in the same year as Mein Kampf (1925); or that Mussolini’s fascists had taken over Italy two years earlier (1923), and he won a thumping 2/3 general election victory in 1924. Kind of takes away the taste of the champagne a little, doesn’t it?
Regardless, up everything goes, including oil. The bitter freeze in Texas has seen several oil firms declare force majeure. And both freezing and exclamations towards the heavens are evident in the Middle East after a major diplomatic shift that sees the US “recalibrate” its relations with long-time ally Saudi Arabia through King Salman bin Abdulaziz rather than his powerful son, Crown Prince Mohammed bin Salman. The White House says it will maintain defence ties with Riyadh, “even as we make clear areas where we have disagreements and where we have concerns.” As this happened, Iranian-backed Houthi rebels, now not terrorists in US eyes, made military gains in the north of Yemen and are close to seizing the oil-rich city of Marib. The White House wants to see an end to the destructive Yemen war the Saudis have been conducting: will it be one with pro-Iranian forces having a strong foothold closer to Saudi oil fields?
It’s no surprise that as oil prices surge, 10-year Treasury yields in the US jump higher in tandem. 10s were up 10bp yesterday to 1.31% and technically Piotr Matys argues that we are not far from a test back to 1.41%, which if we break through then opens a channel all the way back to 2%. On one level we can look at this and scream “Great Reflation!” Or we can look at a chart going back a year and realize that before Covid struck we were trading at nearly 2% – and that was a time when the market prevailing concerns were still about “secular stagnation” and the “new normal” and the lack of power of labor vs. capital. So even with an oil price squeeze and a sugar-high US fiscal stimulus of close to 10% of GDP, we are just getting back to where we were in the already-gloomy pre-virus norm.
Yes, general inflation almost certainly lies ahead of us now that commodities are the new dot com: but call me when general wage inflation is too. (I will be in my usual Gloomy Place.)
Yes, the political environment is changing rapidly too, as it did in the 1920s: but is it changing in a direction that markets will actually like? Do they seriously think any emergent populism is for *them*? If so, they greatly misunderstand political reality. The neoliberal status quo prevailing since the late 1970s has always been for markets: real populism of the fiscal-meets-monetary kind –if we ever get it– will surely be for the many, not the many asset-holders. Indeed, Markets would arguably NOT want to see the kind of policies that could make The Great Gatsby into The Great Reflation.
For example, one thing that will flatten their champagne is the Democrats unveiling a bill to end the “carried interest loophole” tax break, forcing Wall Street titans to pay income tax and not capital gains tax on what they earn. The American Investment Council, which represents the private-equity industry, of course argues it would be bad for the economy to enact such a bill during a pandemic (or after a pandemic; or before any possible future pandemic – that’s politics, folks). They state: “As workers and local economies continue to struggle…, this would be the worst time for Washington to reverse this responsible policy and punish long term investment that creates jobs and builds businesses in communities across America.” Let’s see if the bill passes or not:
If it does, then politics really is changing in the 20s; theoretically if that tax provides the government with funds to channel money back to consumers most likely to spend or, better, to invest in productive R&D, or in jobs and infrastructure for the long term, then logically perhaps The Great Reflation has legs – though Wall Street will hate it;
If it doesn’t, then Wall Street will keep pretending to be Leonardo DiCaprio, while the sell-off in US Treasuries will ultimately have a ceiling where we were before Covid began, and once the sugar high of this US fiscal package is fully priced in, they will start to drift down again. (For this and other reasons.)
Meanwhile, for now politics is still the same in some key ways: in Myanmar, the financial press report “Myanmar coup removes central bank chief, alarming global financiers”; the same press lauds the installation of former central-bank chief Draghi as Prime Minister of Italy. (Yes, of course one move was illegal and the other both legal and under democratic norms – but you get the underlying point.)
Yet politics *is* changing: and again not necessarily in a 1920’s direction Wall Street will ultimately enjoy. The Political Action Committee “Save America” backed by former President Trump has just released a very Trumpian statement which savages Republican Senate Minority Leader McConnell, including that his: “dedication to business as usual, status quo policies, together with his lack of political insight, wisdom, skill, and personality, has rapidly driven him from Majority Leader to Minority Leader, and it will only get worse….We know our America First agenda is a winner, not McConnell’s Beltway First agenda or Biden’s America Last….Mitch is a dour, sullen, and unsmiling political hack, and if Republican Senators are going to stay with him, they will not win again….Where necessary and appropriate, I will back primary rivals who espouse Making America Great Again and our policy of America First.”
Begun, The Republican Civil Wars have.
More champagne, anyone?
One of my favorite investing legends is Oaktree Management’s Howard Marks. His investing wisdom and in-depth knowledge of investor psychology and market dynamics are unparalleled. Given the “speculative mania” we continue to watch in the market, I thought a review of some of his previous thoughts is appropriate.
Over the weekend, I re-read some previous research and ran across an interview between Goldman Sach’s Hugo-Scott Gall and Howard Marks. The talk ranged from investment decisions to behavioral dynamics. While the interview occurred in 2013, it is just as relevant as if he said it yesterday.
I have annotated some of the points for clarity.
Investor Psychology
Hugo Scott-Gall: How can we understand investor psychology and use it to make investment decisions?
Howard Marks: It’s the swings of psychology that get people into the biggest trouble, especially since investors’ emotions invariably swing in the wrong direction at the wrong time. When things are going well people become greedy and enthusiastic, and when times are troubled, people become fearful and reticent. That’s just the wrong thing to do. It’s important to control fear and greed.
Another mistake that people often make is to compare themselves with others who are making more money than they are. They mistakenly conclude they should emulate the others’ actions after they’ve worked. This is the source of the herd behavior that so often gets them into trouble. We’re all human and so we’re subject to these influences, but we mustn’t succumb. This is why the best investors are quite cold-blooded in their professional activities. Continue Reading
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