This week Josef talks about how a significant decline in net imports, 1.98Mb/day or 13.9Mb on the week caused commercial stocks to fall 7.5Mb on the week. Also how crude prices remain in the US $40/b area as OPEC plans to add back 2Mb/day of their 9.7Mb cut. He remains cautious on the sector, expecting lower crude oil prices in the fall.

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: Wednesday July 15th’s EIA weekly data was at first appearance very bullish. The headline number for commercial crude stocks showed a decline of 7.5Mb versus the forecast of a drop of 2.1Mb. This miss was due to net imports falling by 1.98Mb/d or by 13.9Mb on the week. Imports alone fell by 1.83Mb/d or by 12.8Mb on the week. If not for this net import change commercial stocks would have risen by 6.4Mb. Motor Gasoline inventories fell by 3.1Mb on the week even though demand weakened. Overall stocks fell by 9.2Mb. Refinery runs rose 0.6 points to 78.1% from 77.5% in the prior week. Cushing saw its second weekly increase with a rise of 0.9Mb to 48.7Mb. US production of crude was flat last week at 11.0Mb/d and is down 1.0Mb/d from last year.

Product supplied rose by 361Kb/d to 18.48Mb/d but is still down 1.78Mb/d or 9% from last year’s level of 20.3Mb/d. Finished motor gasoline demand fell by 118Kb/d to 8.65Mb/d, but is still down 6% from 9.21Mb/d last year. Jet fuel rose 345Kb/d to 1.27Mb/d as more planes were flying but is still down 607Kb/d or 32% less than last year’s 1.88Mb/d.

Covid-19 Update: The rise in Covid-19 cases to record levels worldwide and to 67,000 new cases per day in the US has necessitated reversals in opening phases. There are now nearly 135,000 fatalities in the US from this pandemic. With the US having 4% of the world’s population and 25% of the fatalities this remains a deplorable outcome. President Trump is now pushing for schools to reopen fully in the fall but states are reluctant to do so on a full time basis. Partial in school and partial at home with lower class sizes, may provide distancing needed to avoid a large increase in the case load among young people. This will now be a political football as the election cycle battles heats up.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 5 rigs (prior week down 2 rigs) to 258 rigs and down 73% from 958 rigs working a year ago. The Permian had a rig loss of 1 rig and down by 71% from a year earlier level of 437 rigs. The US oil rig count fell by 4 to 181 rigs (down 3 rigs last week) and down 77% from 784 rigs working last year. Canada’s rig count rose by 8 rigs (up by 5 rigs last week) to 26 rigs working but is still down by 78% from 117 rigs working at this time last year. Many US companies have announced that they will restart production this month given current better economic prices. With a current world-wide crude glut, any significant oil production returns at this time would be very detrimental to the current level of crude prices. So far we have not seen an increase in the US domestic production level. We are in the bottoming process for the service industry but we may not see decent growth until winter 2020-2021 when demand hopefully gets closer to normal.

OPEC Issues: Saudi Arabia and the OPEC+ group have proposed adding 2Mb/d back in production starting August 1st. This will take their cutbacks to 7.7Mb/d from 9.7Mb/d in July. We think this will exacerbate the rebalancing of supply and demand of crude oil for the following reasons:

1. If oil prices stay firm over US$40/b for WTI US energy companies may be able to add >1.0Mb/d over the next few months.
2. Adding 2.0Mb/d just before we end the summer driving season and as we go into the fall shoulder season when demand falls by 1.5-2.0Mb/d from the peak winter and summer demand season, will increase and not decrease world-wide crude inventories.
3. If wave 2 of the Covid-19 requires reinstating restrictions in movement then energy demand will back off from the current recovery level.
4. Libya wants to increase production as it resolves its internal fighting. Libya sold only 93Kb/d in June but has capacity in peacetime of 1.2Mb/d (last time Q4/19).
5. Iraq and Nigeria have not abided by their prior quota commitments due to their desperate need for funds. If OPEC adds back 2.0Mb/d it is very likely that these countries will bump up production as quickly as they can find buyers.
6. China was a big buyer of crude in recent months to fill their strategic storage reserve. From reports China has now filled their storage facililtes and they may now be buyers of crude oil only for commercial purposes which will lower demand by >1.0Mb/d.

Conclusion: As we write this, WTI is at US$40.73/b for the August contract unchanged from last week. For crude we see a decline below US$30/b as the line in the sand for crude oil bulls (US$34.36/b next breakdown level). The breach of US$30/b should start the next phase of worry for energy bulls and restart aggressive selling of energy and energy service stocks. Much lower levels are expected once we get into the fall and the wage support programs by the governments end at the end of this month. Layoffs should pick up in August and we expect to see more corporate bankruptcies as Q3 unfolds.

The energy and energy service companies with the most downside are those with high debt loads, high operating costs, declining production, have current balance sheet debt maturities of some materiality over the next 12 months and those that produce heavier crude barrels. Results for Q2 start to come out next week for the large cap energy companies. The bulk of reports should come out in August.

Hold cash and remain patient for the next low risk BUY window. If over-invested hopefully you have already taken appropriate defensive action.  

The S&P Energy Bullish Percent Index peaked at 100% in early June. This is the only such reading ever. It has fallen over the last week to 23.1% from 30.8% last week as energy and energy service stocks fell. The Energy Bullish Percent Index is likely in this situation to fall to below 10%, providing the next low risk BUY signal. The S&P/TSX Energy Index is at 78 today unchanged from last week. The Index is now down 19% from the early June high of 96.07. The next downside target for this index is the 50 level. The near term breakdown point to watch out for is 71.76. For the S&P/TSX we see a decline to the 32-36 level at the next important low, or a two for one sale over the coming months. Downside for the Dow Jones Industrials in the near term is 22,800 with much lower levels thereafter in Q3/Q4, 2020.

Our July SER Monthly Interim Update will come out on July 23rd. We go over our reasons for being bearish on the general stock market. The underpinnings of the current market strength are the handful of tech-heavy NASDAQ “at home” beneficiaries. The rest of the market is showing internal deterioration. We expect lower levels and a market breakdown over the next month or so.

Once the general market plunges and we get closer to the climactic bottom we will profile our Table Pounding best energy and energy service BUY ideas to consider owning by subscribers.

We are finalizing a report on a new international investment idea and will launch coverage of this exciting small cap natural gas growth story in our July 23rd SER Monthly.

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