This 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 29 energy and energy service companies with regular updates. He holds quarterly subscriber webinars (next one Thursday May 28th) and provides Action BUY and SELL Alerts for paid subscribers. Learn more and subscribe. 

EIA Weekly Data: Wednesday’s (May 20th) EIA data was mixed with the headline commercial crude stocks number supportive of crude prices with a 5.0Mb decline (versus a 1.1Mb rise forecast) but the rest of the data was negative. Gasoline stocks rose 2.8Mb, Distillate inventories by 3.8Mb and Total Stocks rose by 6.9Mb. The decline in commercial stocks and rise in inventories of products was due to a ramp up in refinery runs to 69.4% from 67.9% last week.

US production of crude fell by 100Kb/d to 11.5Mb/d and is now down 1.6Mb/d from the peak in mid-March at 13.1Mb/d. Production cutbacks keep on being announced by energy companies as storage fills up with the biggest declines in production in the Bakken and the Permian basins. By summer US production is likely to be under 11.0Mb/d as the high decline shale basins see rapid production declines (voluntary and involuntary). The EIA sees the most prolific basin, the Permian, falling from 4.38Mb in May to 4.29Mb in June. Overall shale production they see falling by 197Kb/d in June. It is possible the decline in production could reach down to 10.0Mb/d by late Fall. Cushing saw a decline of 5.5Mb to 56.9Mb as refinery activity consumed more crude.

The most bearish part of the report was that overall product consumed fell by 228Kb/d to 16.6Mb/d and is down from 19.6Mb/d at this time last year. Finished motor gasoline consumption fell 608Kb/d or by over 8% to 6.79Mb/d as the joy of moving around as areas opened up, slowed down, from the initial desire to move around. Offsetting this was a rise in jet fuel demand to 634Kb/d up from a depressed level of 352Kb/d last week. However, it is down from 1.54M last year at this time. Jet Fuel demand may have the most difficulty in seeing a resurgence until a vaccine is available  and people feel safe flying again.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 35 rigs (prior week down 34 rigs) to 339 rigs and down 66% from 987 rigs working a year ago. The Permian felt the largest basin loss with a rig loss of 23 rigs (last week down 21 rigs) or down by 61% from a year earlier level of 454 rigs. The US oil rig count fell by 34 rigs to 258 rigs and down 68% from 802 rigs last year. Canada had a decline of three rigs and the count now is at 23 rigs working and down 63% from 63 rigs working a year ago. It is likely that 700Kb/d has been shut in already in Canada  and maybe a total of 1.2-1.6Mb/d may be shut in before the end of Q3/20.

Conclusion: WTI as we write this is at US$33/b for the July contract and up US$1/b on the headline inventory number. The bounce in crude prices over the last week won’t last as it is clear that more oil needs to be shut-in world wide, to balance supply and demand. We do not see supply and demand balancing until July so there will be a storage problem for the market to face in the coming weeks. A breach of US$25/b will start the next phase of worry for energy bulls and restart heavy selling of energy stocks. We expect this to occur in June.

The short covering rally of the last few weeks took the S&P Energy Bullish Percent Index from 0% on March 9^th to 100% on May 4th. Since then the market malaise and decline has pulled energy lower as well and the Index on May 20th has dropped to 67%. As the general stock market declines we expect to see the energy sector fall as well. The Energy Bullish Percent  Index is likely in this situation to fall to below 10%, providing the next low risk BUY signal. For the S&P/TSX this means a decline to the 32-36 level. The S&P Energy Index today is at 80.9 so there is lots of downside risk over the coming weeks and possibly months.

Speculative ownership of crude oil futures continues to rise, with many buying later dated  contracts after the May expiry problem. Speculators were taught a nasty roll over lesson. Last week speculators owned a net long position of 533Mb up from 525Mb the week before. Commercials are now short 552Mb up from 536Mb the week before. We expect that a market decline with intermarket margin calls will knock the speculator’s position down to below 200Mb net long at the next bottom in crude prices. It is possible that commercials will have gone to long positions in this event.

We are holding our next important SER webinar next week on Thursday May 28th so subscribers should send in questions and sign up for the webinar. We plan to go over Q1/20 results from companies that have reported and show our new SER Quality Scoring System for those that are: Successful, those that will Survive, and those that are Problematic (mainly debt levels and near term maturity problems).

The details of the Canadian Federal Government’s ‘Canadian Enterprise Emergency Funding’ LEEFF program were announced today. They may not see many energy companies taking them up on the program as it is quite egregious. Minimum loans are $60M and 20% will be senior debt and 80% will be unsecured. We have only limited data so far but the requirement of 15% of the funds borrowed in warrants is the knock. If it had been 5-10% depending on the risk of the specific loan then it might have been enticing. The interest rate of 5% in year one and 8% in year two is OK but it then goes up 2% per year. OUCH! This program may only attract the very distressed concerns and would be a negative from the markets perspective. We do see some companies taking this high cost capital, if it saves them from facing CCAA.

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