Each week Josef Schachter gives 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 30 energy, energy service and pipeline & infrastructure companies with regular updates. We also hold quarterly webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more.

EIA Weekly Oil Data: The EIA data of Wednesday January 12th was seen by the market as bullish for energy prices as US Commercial Crude Stocks fell 4.6Mb (a larger decline than the forecast of down 1.9Mb). Refinery Utilization was at 89.4%, above the 82.0% level of a year ago but below the 92.2% of two years ago. Offsetting this positive news for energy bulls was that Total Motor Gasoline Inventories rose a massive 8.0Mb on the week while Distillate volumes rose 2.5Mb as demand weakened and refineries processed more product. US Crude Production fell 100Kb/d to 11.7Mb last week. Total Demand rose 1.164Mb/d to 20.829Mb/d as other oil consumption rose by 1.529Mb/d. Motor Gasoline demand fell 265Kb/d or to 7.906Mb/d (in early 2020 demand was 8.133Mb/d). Jet Fuel Consumption rose 138 Kb/d to 1.606Mb/d compared to 1.611Mb/d in early January 2020 before the pandemic hit. Cushing Inventories fell 2.5Mb to 34.8Mb/d. Overall we would rate this week’s data as modestly negative for energy prices.

EIA Weekly Natural Gas Data: Weekly withdrawals started seven weeks ago as winter demand initiated the withdrawal season. Last week Thursday’s data showed a moderate withdrawal of 31 Bcf, lowering storage to 3.195 Tcf. The biggest US draws were in the Midwest (25 Bcf), and the Pacific (16 Bcf). The five-year average for last week was a withdrawal of 100 Bcf and in 2021 was 134 Bcf. Storage is now 3.1% above the five-year average, so the US is not facing a natural gas shortage as is seen in Europe and Asia. NYMEX today is US$4.79/mcf, due to the frigid Arctic weather forecast for the upcoming week. AECO spot today is trading at $4.21/mcf. Last week’s natural gas data (out today) is likely to show a large draw of over 100 Bcf last week due to the cold weather and high heating needs. With the two key winter months for natural gas demand now here (January and February) we should expect large price moves to the upside on very cold days. Spikes over $6/mcf are likely to occur when weekly withdrawals of over 200 Bcf are seen. After winter is over natural gas prices should retreat and if the general stock market decline unfolds as we expect, a great buying window could develop at much lower levels for natural gas stocks in Q2/22.

Baker Hughes Rig Data: The data for the week ending January 7th showed the US rig count rose two rigs (unchanged the prior week) to 588 rigs last week. Of the total working last week, 481 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 63% from 360 rigs working a year ago. The US oil rig count is up 75% from 275 rigs last year at this time. The natural gas rig count is up a more modest 27% from last year’s 84 rigs, now at 106 rigs.

Canada had an increase of 51 rigs as activity recovered from the holiday season to 141 rigs. Canadian activity is up 21% from 117 rigs last year. There were 39 more oil rigs working last week and the count is now 78 oil rigs working, up from 53 last year. There are 63 rigs working on natural gas projects now, down one rig from 64 last year.

The overall increase in rig activity from a year ago in both the US and Canada should continue to translate into rising liquids and natural gas volumes over the coming months. The data from many companies’ plans for 2022 support this rising production profile expectation (note CNQ’s announcement this week). We expect to see US crude oil production reaching 12.0Mb/d in the coming months. Companies are taking advantage of attractive drilling and completion costs and want to lock up experienced rigs, frack units and their crews as staffing issues are getting tougher for the sector. We expect US production to reach 12.5Mb/d by mid-2022.

Conclusion:

Bearish pressure on crude prices:

1. The US Federal Reserve is ending its US$120B/month bond and mortgage purchases in March 2022, which will remove 6%+ of monetary stimulus from the economy. Forecasters now expect three to four increases in Federal Funds rates in 2022. In addition the Fed is likely to stop repurchasing maturing bonds and mortgage holdings which would remove an additional US$100B per month of monetary stimulus. Overall this would remove 11+% of monetary heroin by the end of 2022 from GDP and should cause a weakening US economy and slow down rising inflationary pressures.
2. Omicron Covid-19 caseloads are growing around the world with record infection rates. The US hit over 1M new Covid cases per day. Hospital systems are near or at capacity and medical staff shortages are rising due to infections, burnout and quitting. Medical authorities are now focusing on ICU admissions for their measurement data of the severity of the pandemic. Deaths in the US have reached 842K (up 14K over the last week) and worldwide 5.5M. China has tightened travel restrictions that may last for at least six months and slow their economy down. Three cities with over 20M people have now been shut down.
3. China is buying more oil from sanctioned Iran which leaves less oil to be purchased from Saudi Arabia and other OPEC members. The main reason is price, which Iran is offering at >US$4/b less than the ICE Brent price. In addition Venezuela (also helped by China buying their even more discounted oil) is lifting its production with the help of Iran which is selling them diluent so that they can sell more exportable grades. According to Bloomberg, in December they reached 1Mb in one day and exported 619 Kb/d in the month. To compete, Saudi Arabia has now lowered its price for Asian buyers to regain market share. China imports may fall by 400+Kb/d as the Omicron variant spreads and more lockdowns are occurring across the country.
4. Kazakhstan has returned its oil production to full capacity of 1.9Mb/d with their largest export customer – China, happy that disruptions only lasted a few days (Chevron the operator confirmed this on Tuesday). Kazakhstan is planning to raise production to over 2.0Mb/d by the end of this year with China the key buyer.
5. Iraq plans on adding 250Kb/d to its production in Q2/22 from its Basrah after rehabilitating aging pipelines connecting to the port in recent months. Total export capacity should then reach 3.45Mb/d.
6. CNOOC sees increasing its production capacity by 7% in 2022 on top of an increase in production of 5% last year. Growth will come from both onshore and offshore fields. Their biggest success has been with the Bohai offshore cluster field that produced over 602 Kb/d in 2021. In 2022 they plan on drilling 227 offshore exploration wells and 132 onshore exploration wells (Reuters January 12th).

Bullish pressure on crude prices:

1. OPEC met on January 4th and agreed to lift February production by their 400,000 b/d long-term plan. In December they may have increased production only by 310 Kb/d according to a recent Platt’s report and not the promised 400Kb/d. The official report comes out next Tuesday January 18th. OPEC sees crude demand increasing this year and that the pandemic will not impact demand this year. They expect global demand to rise by 4.2Mb/d this year. OPEC+ holds their next meeting on February 2nd. Many OPEC members (led by Oman) want to see US$100/b for Brent in 2H/22.
2. The Iran deal is not seeing progress as the Iranians continue to want removal of sanctions to sell oil, but do not want to slow down their nuclear weapons program or allow intrusive UN inspections. For energy bulls this means that 1-2Mb/d of incremental Iranian oil is now unlikely to come onstream in 2022.
3. Libya and Nigeria continue to have production difficulties and have not been able to use their increased quota’s.
4. Once the ground is frozen for tank battles, Russia could invade Ukraine which will result in additional sanctions being added to pressure Russia to desist. Russia may face OECD sanctions on sales of crude oil to western Europe. This could add a war premium to crude prices. Natural gas is a different story and should not face production sanctions as Russia is the main provider to Europe and there are no alternatives in the short term.

CONCLUSION:

WTI rose sharply over the last week by US$6/b to US$82.64/b due to strong winter demand for heating oil in Europe and Asia (cheaper than natural gas) and the war drums by Russia regarding Ukraine. The bulls are watching the high international natural gas prices versus crude and OPEC’s positive crude oil demand outlook, to push prices higher. We remain focused on the health and strength of the US and China economies (the largest two in the world). We see crude oil prices having US$25-30/b of speculative value. This past week speculative shorts have felt the pain of margin squeezes, and this caused significant short covering, as the speculative bulls took them on and took them to their ‘give-up’ pain threshold. This is like the MEME moves against hedge fund shorts in AMC and Gamestop seen in 1H/21. Remember the offset of this when UK speculators drove the price of crude down to negative territory in April 2020 when the May contract was expiring. Crude fell from over US$25/b to negative US$20/b in under two weeks.

As the winter weather subsides, the price of WTI crude should retreat towards US$62-65/b. More downside is likely if the US and China economies stagnate and/or fall into recession in the coming months. We see the current price strength as similar to what occurred in Q2/08 when crude ran from US85/b in January to over US$147/b in July. There was little excess capacity anywhere in the world and crude demand was strong that summer. Price moves of US$3-5/d occurred during the run up into July. Then investors and speculators were extolling the sector, just like now. For investors and speculators it was to chase what was hot and make sure you owned it.

We remain bearish on crude prices due to the supply surplus that should start to be seen in Q2/22. Economic activity in the two largest economies in the world is slowing and recession is possible. The US Federal Reserve is going from supplying monetary heroin to forcing monetary withdrawal (tapering and not reinvesting maturities) in order to knock down the high inflation. US interest rates will rise materially in 2022. In 1H/08 the scenario was positive and the market viewed energy as ‘Happy Days Are Here’ and this all changed when the financial crisis hit. WTI fell in six months from US$147/b to US$33.55/b. We don’t see as abrupt a price decline but still see a material decline as the various asset bubbles burst as the monetary heroin is withdrawn. A financial and monetary crisis is likely this time as the bubble in most assets is more extreme than in 2008.

Energy Stock Market: The S&P/TSX Energy Index currently trades at 186 (up 13 points over the last week) as bullish energy investors elevated their favourite names and generalist money managers were forced into the sector. Generalist investors watch the weighting in the TSX and try to mirror the market average. This upward move is gaining extrapolation followers.

This is just the opposite of late 2008 – early 2009 or like Q1/20, when running for the exits was occurring. The S&P Energy Bullish Percent Index is at 95.24% or in SELL territory. Caveat Emptor! For a sector that was so hated in recent years, the current lovefest is disturbing.

We are working towards returning to Mount Royal University (MRU) (after a two year pandemic halt) for our ‘Catch the Energy’ conference on October 22, 2022. We will be discussing the protocols on attendance, food service, masking and QR code verification with MRU in Q1/22. We look forward to adding more companies and focus the event on attendees having safe and maximum, face to face time with company management. More on this to come. Please save the date in your calendars.

Our January Interim Report will come out on Thursday January 13th and will include our concerns about the general market (MEME stocks are being massacred) and the underpinnings of the general market are weakening. We also include a section on the Russian/Ukraine confrontation and why this could end up badly (an invasion of eastern Ukraine).

Our next quarterly webinar will be held on Thursday February 24th at 7PM MT.

If you would like to access our January Interim Report or any of our previous reports or the webinar archives, go to https://bit.ly/34iKcRt to subscribe.

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