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 13th) EIA data was quite positive. Commercial stocks fell by 700Kb/d versus the forecast of a rise of 4.1Mb. Part of the difference was due to imports falling by 300Kb/d or by 2.1Mb on the week. Overall stocks rose a modest 1.4Mb. The only material increase was in distillates which rose 3.5Mb. The decline in refinery runs to 67.9% from 70.5% last week and strong demand for gasoline lowered gasoline inventories by 3.5Mb on the week.

US production of crude fell by the largest weekly decline this year down 300Kb/d to 11.6Mb/d and now down 1.5Mb/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). It is possible this closure of production could reach 10.0Mb/d by late Fall. Cushing saw a surprise decline of 3.0Mb to 62.4Mb.

The most positive result in the report was that overall product demand grew by 9.5% this week to 16.8Mb/d, with finished motor gasoline demand rising by 11% to 7.4Mb/d as more US States reopened and people began increased movement. Offsetting this was a fall in jet fuel demand of 32% to 352Kb/d from 515Kb/d during the week before. Jet Fuel demand may have the most difficulty in seeing a resurgence until a vaccine is available.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 34 rigs (prior week down 57 rigs) to 374 rigs and down 62% from 988 rigs working a year ago. The Permian felt the largest basin loss with a rig loss of 21 rigs (last week down 27 rigs) or down by 57% from a year earlier level of 457 rigs. The US oil rig count fell by 33 rigs to 292 rigs and down 64% from 805 rigs last year. We expect the US rig count to fall even further than our prior forecast of 400 rigs, with a new lower target of 320 rigs by the end of May. Canada had a decline of one rig and the count now is at 26 rigs working but down 59% 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 down 37 cents at US$25.41/b for the June contract. The bounce in crude prices over the last week won’t last as it is clear that more oil needs to be shut-in to balance supply and demand.

The short covering rally of the last few weeks took the S&P Energy Bullish Percent Index from 0% on March 9th to 100% on May 4th. Since then the market malaise and decline has pulled energy lower as well and the Index on May 13th has dropped to 70%. We expect to see the energy sector correct significantly in the coming weeks as the general market decline unfolds and that this Index will fall 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 71.8 down from a high of 78.7 last week or down 8.2% so far.

Federal Reserve Chairman Powell weighed in today on his concern about a prolonged economic downturn due to the Covid-19 outbreak and concern about the pace and timing of the rebound. The shape of the recovery ‘V’ as President Trump wants and needs if he wants to be re-elected, ‘U’ as most economists forecast and bathtub shaped, as is now getting some support are depressing stock markets. Over the last two weeks the Dow Jones Industrials have fallen over 1,600 points (today down nearly 600 points as we write this) and our target for the Index is for it to plunge below 18,000 (now 23,159) and the TSX to below 9,000 (now 14,487 – down 2% over the last week). Both Canada and the US States want to start extensive testing and tracing and need significant numbers of test kits which are not yet available. The key need is tests that can be done quickly with the results obtained in minutes and not days as is now. The current plunge could be even uglier and more painful than the one from mid-February to mid-March especially if we see a significant rise in Covid-19 cases and deaths as some of the reopenings may be moving too fast. The financial support provided by governments via direct financing and via the Central Banks is being used up and more funds are needed but so far have not been made available as the political divide continues. The US is having more difficulties as it is a Presidential election year and both parties have divergent positions about what to do.

We are holding our next important SER webinar 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).

FYI – I will be on BNN’s Market Call with Andrew Bell next Wednesday May 20th via Skype at 10AM MT.

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