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 and subscribe. 

EIA Weekly Data: The EIA data on Wednesday December 2nd showed commercial stocks falling by 700K to 488.0Mb as exports rose by 625Kb/d, or 4.4Mb on the week. If not for this export increase we would have seen a rise in stocks due to weaker demand. The forecast was way off from the expected decline of 2.4Mb. Inventories remain high at 40.9Mb or 9.2% above last year’s level of 447.1Mb. Gasoline inventories rose by 3.5Mb while distillates rose by 3.2Mb. US crude production continues to recover, rising 100Kb/d to 11.1Mb/d as US production returned after the last hurricane closed down offshore production in the Gulf of Mexico and Permian production recovers as drilling activity picks up.  Consumption fell last week with Total Demand down 688Kb/d to 18.47Mb/d, Gasoline usage fell 156Kb/d to 7.97Mb/d while Jet Fuel saw consumption fall by 35Kb/d to 1.13Mb/d. We had expected consumption to rise due to the US Thanksgiving holiday season but this did not occur. Total Demand remains 12.5% below last year’s level of 21.1Mb/d, Gasoline Demand is down 11.7% from the 9.0Mb/d consumed last year and Jet Fuel remains 42% below demand of 1.96Mb/d last year.

Refinery Runs fell 0.5 points to 78.2% from 78.7% in the prior week and down from 91.9% last year. Total stocks (excluding the SPR) remained high at 95.5Mb above last year or 7.6% above the 1.26Bb in storage last year. Cushing oil inventories fell by 300Kb to 59.6Mb and compared to 43.8Mb last year at this time.

Baker Hughes Rig Data: Last week Friday, the Baker Hughes Rig Survey showed an increase in the US rig count. The US rig count rose by 10 (down two rigs in the prior week) to 320 rigs working, but remains down 60% from 802 rigs working a year ago. The US oil rig count rose by 10 (down five rigs last week) to 241 rigs and is down 64% from 668 rigs working last year. The Permian saw an increase of five rigs to 161 rigs working but remains 60% below last year’s level of 405 rigs working.

Canada saw a rise of one rig this week (12 in the prior week) to 102 rigs working. The rig increase now has activity down only 19% from a year ago when 126 rigs were working. In the breakdown the most encouraging data point was rigs drilling for natural gas has risen by five rigs to 64 rigs active, up 31% from 49 rigs working last year. Natural gas stocks in Canada have performed better than oily names during the last few months. The liquids rich Montney area is getting the most drilling activity. The rig count for oil is now at 38 rigs (down four on the week) and is down 51% from 77 rigs working last year.

Natural gas prices are quite profitable for producers now with AECO at $2.66/mcf and with NYMEX at US$2.87/mcf. We expect much higher prices once the depths of winter arrive later this month. Natural gas is our commodity of choice at this time. 

Conclusion: As we write this, WTI for January is at US$45.32/b flat versus last week. We are now back to crude price levels seen in March just before the pandemic caused lockdowns of the economies. The positive view of vaccines coming in 2021 has ignited investor interest in the sector.

Positive issues for higher crude prices:

• The first vaccine deliveries and vaccinations are expected to occur later this month in the US. Anyone who wants one should have it by Q3/21 according to the CDC. The UK has become the first western country to approve a vaccine (the Pfizer vaccine) and will start vaccinations in hospitals and in nursing homes shortly. Canada should start seeing vaccines in January and the Prime Minister expects over 50% of all Canadians can be vaccinated by September.
• While OPEC has lowered the near term demand for crude oil they see demand rising in 2021 to 96.26Mb/d from 90.01Mb/d in 2020. The forecast for Q4/20 is for consumption of 93.67Mb/d. The level for Q4/21 is forecast at 97.09Mb/d.

Negatives issues for lower crude prices:

• The US, Canada, Germany, UK, France, Italy, Russia and Austria are reporting record increases in Covid case loads. Red Zones are occuring all across Canada and total lockdowns are likely in some of these extremely stressed areas. Alberta has initiated a second state of public emergency as case-load goes to record highs. Pandemic lockdowns mean less activity and lower energy consumption. There are now 13.8M cases in the US with 272K deaths. Worldwide the caseload is 64.1M and deaths near 1.49M.

• In most US states and Canadian provinces the number of new cases has increased to record levels. Many places have hospitals that are maxed out on their ICU beds. The worry is what will they do when all the beds are all occupied? A larger problem is staffing as many health care workers have come down with the virus and others are just burned out. In the US they have brought in national guard and military units to help.

• Libya is getting its production up sharply now that their civil war is over. They are now producing 1.3Mb/d, up from the October level of 454K/d and they expect to be producing 1.6Mb/d during early 2021. This will mean over a 1.4Mb/d increase in production in just four months as they produced only 155Kb/d in September.

• The UAE (Abu Dhabi particularly) is chomping at the bit to raise production as it has found 24Bb of new conventional oil reserves (total now 107Bb) and wants to raise production from its current 2.44Mb/d to 4-5Mb/d by the end of this decade. It is considering leaving OPEC as it is frustrated with  the Saudi controlled quota allocation. If they withdraw this could trigger an all out market share war that could turn into another price war.

OPEC has been unsuccessful in its meeting on November 30th and December 1st to get an extension of the production cut by three to six months. They now plan on another meeting tomorrow. We had expected them to delay the planned 2.0Mb/d increase in production in January for two quarters, which they hoped would lower the excess stock levels. World-wide OECD crude and product inventories are now 237Mb, above the five year average of 2.94Bb. The problem is that Gabon (49Kb/d over their quota), Iraq (270Kb/d over their quota), Nigeria (70Kb/d over quota), Kazakhstan (381Kb/d over quota) and Russia (430Kb/d over quota) are all non-compliant, with production above their current allocations. Iran and Venezuela both found ways to get around US sanctions and plan to increase production shipments to China going forward. The dance is two fold. First, what will global crude oil demand be in Q1/21 as consumption remains weak now and the speed of vaccination and return to more normal demand is unknown? Second, with many OPEC producers desperate for revenues, will the agreed to allocations be followed? If not, would the Saudi’s start another market share price war? Market expectations are for a successful deal but we are not so confident that it will be attained or if announced then complied with.

If no deal is arrived at tomorrow or an extension deal is done only for one quarter, then we expect crude prices to retreat with a first downside target of US$43/b. As we see the OPEC+ compliance level going forward and see data on consumption (i.e. weekly EIA data), as more inventory data is known, price determination can be realized.  We expect to see OPEC+ members cheating and inventories world-wide to rise. As a result we expect to see crude fall later this month to below US$40/b and in Q1/21 to decline into the US$32-36/b range.  We remind readers that WTI fell to US$33.64/b just a month ago. Russia wants to see production increases of 500Kb/d each month starting in January which is opposed by the Saudi’s. Some face saving compromise will be announced but is unlikely to be complied with almost immediately.

Energy and energy service stocks and now very overbought. We see significant near term downside risk. 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. 

Continue to hold cash and remain patient for the next low risk BUY window expected either during tax loss selling season during Q4/20 or during Q1/21 when it is clear that the vaccine roll out may not be as fast as desired, OPEC+ production is too high and that a timely additional stimulus package in the US is unlikely. Tax loss season for 2020 should start shortly and go into week three of December. 

Energy Stock Market: The S&P/TSX Energy Index now trades at 88.52 (down from last week’s high of 93.48). The S&P/TSX Energy Index started the year at 146 so it is down 40% year-to-date and there should be significant tax loss activity this month. The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low in late October) during December. A breach of 80 should start this downward trend.

Our November 26th webinar was a great success with record live attendance and more viewings via the archive thereafter. We discussed the best energy and energy service ideas to invest in during the upcoming tax loss selling season and how tax loss seasons have unfolded in prior years. We covered our favourite 10 ideas for investors to consider (three oil names, four natural gas ideas and three energy service ideas). For information on these ideas and to listen to the archive of the webinar one needs to become a subscriber. 

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