A plunge in US energy consumption last week of 1.4Mb/d to 18.1Mb/d weakened US crude prices by over US$1.50/b. And a breach of US$40/b is imminent. Josef feels the next target is US$36/b in the coming weeks.

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EIA Weekly Data:. The EIA data on Wednesday October 21st showed commercial stocks falling by 1.0Mb versus an estimate of a decline of 1.3Mb. There would have been a large inventory build (over 6Mb) if not for net imports falling by 1.07Mb/d or by 7.5Mb on the week as exports fell by 901Kb/d or by 6.3Mb. We may see exports continue to decline as overseas buyers have sufficient crude in storage and demand is waning as the virus lockdowns pick up. US production fell by 600Kb/d to 9.9Mb/d as Hurricane Delta shut in offshore US oil production. As this weather event is now over we should see US production pick up in the coming weeks. Gasoline inventories rose by 1.9Mb as demand fell last week. The expectation was for a decline of 1.5Mb. Refinery runs fell 2.2 points to 72.9% from 75.1% in the prior week. US Production is now down 2.7Mb/d or 21% from 12.6Mb/d last year. Commercial stocks are up 12.7% above last year at 55.0Mb. Total stocks remain high at 122.0Mb above last year or 9.6% above the 1.27Bb in storage at this time last year. Cushing oil inventories rose by 1.0Mb to 60.4Mb compared to 44.5Mb last year at this time. These data points highlight the downside risk to crude prices.

Total product demand fell last week by 1.36Mb to 18.1Mb as demand fell due to more lockdowns in areas with rising coronavirus case loads and due to the impact of the hurricane and other negative weather events such as the forest fires on the west coast. This level is 3.06Mb or 14% below last year’s consumption level of 21.17Mb/d. Gasoline demand fell last week by 287Kb/d to 8.29b/d. It is down 1.3Mb/d or 14% from last year’s level of 9.59Mb/d of consumption. Jet fuel remains the weakest area. Consumption last week was 975Kb/d or down by 197Kb/d. It remains 1.1Mb/d or 53% below last year’s level of 2.09Mb/d.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed an increase in the US land rig count. The US rig count rose by 13 rigs (up three rigs in the prior week) to 282 rigs working, but remains down 67% from 851 rigs working a year ago. Texas saw the largest increases at seven rigs of which the Eagle Ford is seeing an increase of three rigs. The US oil rig count rose by 12 rigs to 205 rigs but is down 71% from 713 rigs working last year. If we are right about crude prices falling we may start to see a decline in the US rig count in  the near term.

Canada saw no change in the rig count last week at 80 rigs working. The rig increase in prior weeks now has activity down only 44% from a year ago when 143 rigs were working. In the breakdown the most encouraging data point was rigs working for natural gas which was at 40 rigs versus 45 rigs working last year. Natural gas stocks have held up better than oily names during the correction over the last few months as it is expected that we will see strong AECO prices this winter as storage in Canada is below normal.

Natural gas prices are at very decent prices with AECO at $2.63/mcf while NYMEX is at US$3.02/mcf. We expect much higher prices once the depths of winter arrive next month.

Conclusion: As we write this, WTI for December is at US$40.11/b, down US$1.59/b on the day as the market did not like today’s EIA report. As production in the Gulf returns and Norway’s workers strike ends, we expect crude prices to decline meaningfully.

Positives for crude prices:

• US Gulf Coast production was shut in due to Hurricane Delta. Crude production of 1.67Mb/d or 92% of gulf production. In addition, 62% of the region’s natural gas production was shut in or 1.675Bcf/d. The Gulf produces 15% of US crude production and 5% of natural gas production.
• OPEC is talking about not bringing back on 2Mb/d of shut-in production in January as they are wary of weakening crude oil demand as economies face rising Covid-19 caseloads and increasing lockdowns.
• Winter is coming and demand usually rises worldwide by 1.5-2.0Mb/d.

Negatives for crude prices:

• Germany, UK, France, Italy, Russia and Austria are reporting record increases in case loads. Tracing is becoming tougher to do in those countries. Energy demand is falling across Europe.
• In 38 US states and Washington DC the number of new cases has increased. In some they are at record levels and some states have hospitals that are at max on their ICU beds.
• Libya is reopening its exports and produced 156Kb/d in September. Last week production was at 355Kb/d as more ports were opened. When the large Sharara field comes on fully, this will raise the country’s production by 300Kb/d. As of this week this field is now at 150Kb/d for total country production in excess of 500Kb/d. One additional smaller field with 70Kb/d of production is expected to restart on October 24th. Of note, before the civil war Libya was producing over 1.1Mb/d.

Downside pressure is expected in the coming weeks as the pandemic caseload rises lowering demand and as production increases. A critical breach level is US$36.63/b and we see this occurring in the coming weeks. We have been range bound between US$41.72/b at the high end and US$36.63/b at the low end over the last few weeks. Once US and Libyan production returns and if Wave Two caseloads and lockdowns get much worse, we should see the breach of the US$36.63/b level.

Most energy and energy service stocks have significant 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. Results for Q3/20 should start later this week and continue through the end of November. Most results will not be investor friendly.

Hold cash and remain patient for the next low risk BUY window expected during tax loss selling season during Q4/20. 

Energy Stock Market: The S&P/TSX Energy Index has fallen from the June high at 96.07 to the current level today of 65.85 (last week it was at 67.75). Overall the index is now down by 31% in under four months. We see much more downside over the coming months as unfavourable Q3/20 results impact the stocks even more. We will be watching to see how companies discuss their debt loads and lender support. Companies with pessimistic views about their reserve base lending, cutbacks in lines of credit and potential additional impairment write-downs will face significant stock price pressure. The next support for the S&P/TSX Energy Index is at 60.38 (the low three weeks ago). Further lows are likely in Q4/20 as tax loss selling is likely to be very nasty this year. We see the likelihood that the final low for the index could be in the 32-36 area during tax loss selling season. We expect to see a very attractive BUY signal generated during Q4/20 and will recommend new ideas as well as highlight our favourite Table Pounding BUYS which should trade at much lower levels than now.

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