Energy & Commodities
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 Wednesday February 10th were moderately bullish. Commercial Inventories fell by 6.6Mb on the week compared to a forecasted decline of 200Kb/d. The largest part of the difference was due to a decline in imports of 650Kb/d or 4.6Mb on the week. Motor Gasoline Inventories rose by 4.3Mb on the week as Refinery Utilization rose 0.7% to 83.0% from 82.3% in the prior week. While an increase it is below last year’s level of 88.0% as overall demand for product is still pandemic impacted. Crude Oil Stocks are now 26.5Mb or 6.0% above last year’s level of 442.5Mb. US Domestic Crude Production rose by 100Kb/d to 11.0Mb/d as the increase in drilling finally lifted production. Compared to a year ago this is down 2.0Mb/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 1.66Mb/d to 20.2Mb/d and only down 782Kb/d from last year’s 20.97Mb/d. This data can swing around quite substantially from week to week. For example, last week Total Product Supplied fell by 1.15Mb/d. Finished Motor Gasoline Consumption rose by 87Kb/d to 7.86Mb/d and is down 864Kb/d from last year’s 8.72Mb/d. Jet Fuel consumption rose by 514Kb/d to 1.26Mb/d but remains down 401Kb/d from last year’s 1.67Mb/d. Cushing Oil Inventories fell by 700Kb. Inventories at Cushing are now at 48.0Mb down from 48.7Mb last week but are up from 38.4Mb a year ago.
Baker Hughes Rig Data: The data for the week ended February 5th showed a mixed result for the US and Canadian rig counts. In the US rigs rose by eight (up six rigs in the prior week) to 392 rigs working, but remains down 50% from 790 rigs working a year ago. The US oil rig count rose by four (up six rigs the prior week) to 299 rigs but is down 56% from 676 rigs working last year. The Permian saw an increase of six rigs to 198 rigs working and remains 51% below last year’s level of 405 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 now 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. Hedging out new production may also aid companies in lifting production near term.
Canada saw a decrease of three rigs last week with 171 rigs working. The extremely cold weather is hampering activity. This is 33% lower than the 257 rigs active last year. The rig count for oil fell by three rigs to 95 rigs working and is down 43% from 167 rigs working last year. The natural gas rig count held steady at 76 rigs active but is down from 90 rigs working at this time last year.
Conclusion: WTI today is holding at US$58.35/b as very cold weather across North America due to an Arctic Vortex brings temperatures down and heavy snow in many areas. In Alberta we are seeing temperatures of minus 40 celsius (or even colder in Northern Alberta) with the wind chill. The strong US$6/b rally over the last week is due to the cold weather and 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 moves. We believe that there is US$10-15/b of downside risk for WTI as markets begin to reflect the demand situation post-winter, the rise of US production and OPEC cheating. The Reddit/RobinHood gang of over 14M retail investors, are in the case of energy, moving to pressure (short squeeze) the Commercials (refiners, petrochemical companies and energy companies etc.) who are short 1.57Bb (net short 585Mb at the end of last week). 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 next month with winter nearing its end.
WTI Crude Oil:
The specific rationale for our downside crude oil price view is:
- Saudi Arabia and Russia are fighting for market share in the only growth market so far in 2021, that of China. The Saudi cut of 1.0Mb/d started on February 1st and lasts for only two months. Russia’s increase this month now puts them ahead of the Saudis in market share in China. Other OPEC countries like Iraq are also moving to increase volumes. Russia for example does not want to see the US shale giant reawakened and may add 1.0-1.5Mb/d to supplies to drive down prices and stop the US shale recovery.
- Covid mutations from the UK and South Africa are worrying medical professionals as they are transmitted faster and may, in the case of the South African version, not be handled effectively by current vaccines. Dr. Fauci is calling on vaccine producers to manufacture versions that are specifically tailored to the emerging variants. Some concerned epidemiologists fear that producing these new versions could take into the end of 2021. While President Trump talked about vaccinating the US population by the end of Q2/21, President Biden is talking about late summer and his CDC officials are now talking about either US Thanksgiving or winter 2021-2022. If the mutations are not handled by current vaccines then this could extend this timeline. Bloomberg on February 8th, forecast that herd immunity will not be reached in China for 5.5 years, the US within 10 months and six months for the UK which is very active in vaccinating its citizens. There is also concern that case numbers will rise in the US post the Super Bowl super-spreader parties and lack of masking.
Technically the near-term support level for WTI crude is US$51/b and then major support is at US46.15/b. Energy and energy service stocks are overbought and many have rolled over. We are clearly bearish 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. Cenovus and Precision Drilling were the latest to release. Crude prices may stay range bound this month but in March crash through US$50/b.
We now have a SELL signal in place. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of which stocks and at what prices we think ideas could be harvested. The next few months could see significant downside for the energy sector.
Energy Stock Market: The S&P/TSX Energy Index now trades at 101.23. Our Q1/21 target of 100-105 was reached when the Index reached a high at 103.60 in mid-January. The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low of late October 2020) before late April. A breach of 98.66 (the low this week) should initiate the next sharp decline. The recent cold weather has lifted AECO natural gas to C$3.86/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$2.91/mcf has lifted as well, but not as much as Canadian prices.
Our SER February Interim Report (out on February 4th) focused on our January 14th SELL signal and the personal sell transactions that we did on January 22nd, after the five day notice period to subscribers. We sent out another Action Alert SELL on February 5th removing an additional four ideas from our BUY List that we see having material downside. This will be covered in our February SER Monthly to be released on Thursday February 19th. Downside from here for the sector remains substantial in the 30-50% range.
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 at 7PM MT), 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.
Our guest article by Ron Barmby in our February Monthly SER issue will be on ‘Why The Carbon Tax Question Before The Supreme Court Is Incomplete’.
To get access to our research go to https://bit.ly/3jjCPgH to subscribe
(Reuters) – Shares in cannabis companies surged on Wednesday, extending a months-long rally due to bets on decriminalization under the Biden administration, as the Reddit community behind a recent trading frenzy talked up the stocks.
One post on WallStreetBets, the Reddit forum linked to the past month’s surges in GameStop Corp, AMC Entertainment and others, told users that shares of producers Tilray Inc and Aphria Inc have more room to rise.
That post was liked by around 10,000 other users in just twelve hours and shares in the two companies jumped by 21% and 10%, respectively.
The forum has become a must-watch for traders at financial institutions since concerted action by some of its 8 million participants proved enough to overturn hedge fund “short” bets on GameStop and others in January.
Swaggystocks, which aggregates sentiment on shares talked about in the WallStreetBets forum, showed Tilray was the most upvoted stock in the group.
“I don’t think the retail punter story goes away overnight,” said Mirabaud sales trader Mark Taylor. “I am really only watching the price action and trying to make sense of it all.”
U.S.-listed shares of top pot producer Canopy Growth Corp were up 3% after results on Tuesday, while the ETFMG cannabis stocks tracker, which has more than doubled in value since November’s presidential elections, gained 7.3%.
In line with some of the conditions that spurred the GameStop rally, short interest in Tilray was on the rise. About 37% of its free float was out on loan compared to 27.3% at the end of January, according to analytics firm Ortex.
The company, being taken over by Aphria in a complicated reverse merger, has gained more than 400% in value since the deal was announced in December on the back of new agreements to supply its medical cannabis to European markets.
Aphria has gained 243% over the same period, as companies across the sector surged on a wave of legalization in major U.S. states and the Democratic party’s promise to decriminalize the plant at the federal level.
Changes promised by some in President Joe Biden’s party could help give cannabis companies access to more traditional methods of banking and open the sector to new, institutional investors.
However, some analysts argue the valuations of the companies are becoming unjustifiable, especially for Canadian companies like Tilray, Aphria and Canopy Growth, which may gain very little from U.S. changes.
Canopy reported a reduction in adjusted losses in third-quarter results on Tuesday but Stifel analysts said those fell short of justifying its current valuation.
Another brokerage, Canaccord Genuity, said the U.S. election related enthusiasm had caused a “disproportionate amount of capital flow” into Canadian producers.
Reporting by Shariq Khan in Bengaluru, Thyagaraju Adinarayan and Julien Ponthus in London; editing by Patrick Graham and Saumyadeb Chakrabarty
In today’s market, the majority of investors are simply chasing performance.
Ultimately, investing is about managing the risks that will substantially reduce your ability to “stay in the game long enough” to “win.”
Robert Hagstrom, CFA, penned a piece discussing the differences between investing and speculation:
“Philip Carret, who wrote The Art of Speculation (1930), believed “motive” was the test for determining the difference between investment and speculation. Carret connected the investor to the economics of the business and the speculator to price. ‘Speculation,’ wrote Carret, ‘may be defined as the purchase or sale of securities or commodities in expectation of profiting by fluctuations in their prices.’”
Chasing markets is the purest form of speculation. It is just a bet on prices going higher than determining if the price paid for those assets is a discount to fair value.
Historically, such sentiment excesses from around short-term market peaks, not investable bottoms.
Investors miss that while a warning doesn’t immediately translate into a negative consequence, such doesn’t mean you should ignore it.
“There remains an ongoing bullish bias that continues to support the market near-term. Bull markets built on ‘momentum’ are very hard to kill. Warning signs can last longer than logic would predict. The risk comes when investors begin to ‘discount’ the warnings and assume they are wrong.
It is usually just about then the inevitable correction occurs. Such is the inherent risk of ignoring risk.’”
Conveniently, just as we were scratching out heads over this critical question – which also answers how Bitcoin will hit $100,000 next – RBC published an initiating coverage report on AAPL (with a street-high price target of $171), in which analyst Mitch Steves explained why he believes that AAPL should focus on developing an “Apple Wallet” concept first (and leave the Apple car for later), in order to leverage its 1.5 billion installed user base and to unveil a Coinbase-like Apple Exchange later which allows bitcoin transactions and which would add about $50 billion in value.
More importantly, the RBC analyst then says that should Apple purchase just $1 billion in bitcoin, or “4 days of cash flow”, it would send even more users to “Apple Exchange”. To be sure, in the aftermath of Tesla’s announcement today, which validates the so-called “use case” and confirms that rising adoption of bitcoin among some of the most advanced companies is just a matter of time, such an outcome is even more likely.
Below we lay out some of the key highlights from Steves’ note, in which he first discusses the “low risk, high reward” Apple Wallet opportunity…
No matter where you look in the market, there are signs of exuberance. As discussed previously, stock market bubbles are about psychology. Throughout history, bubbles are a function of the extraordinary popular delusions and the madness of crowds.
Of course, that is also the name of Charles Mackay’s book, an early study in crowd psychology. The text, first published by Mackay in 1841, debunked everything from alchemy to economic bubbles. However, the three chapters on economic bubbles received praise from the likes of Michael Lewis and Andrew Tobias.
Essential is the understanding of the role psychology plays in the formation and expansion of financial manias. From the 1711 “South Sea Bubble” to the 2000 “Dot.com crash,” all bubbles formed from a similar “panic” by investors to chase ongoing speculation.
Importantly, in all cases, the speculators involved all thought “this time was different.”
What is essential to survive a bubble is first to recognize you are in one.
That may be the most challenging part of it all.
“Men, it has been well said, think in herds; they also go mad in herds, while they only recover their senses more slowly, and one by one.” – Mackay.
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