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 (SER) 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 Data: The EIA data of Wednesday November 3 was decidedly bearish. Commercial Crude Stocks rose 3.3MB (forecast was for a rise of 1.75Mb). If not for Net Imports falling 221Kb/d or by 1.5Mb on the week, overall storage would have risen by 4.8Mb on the week. Total Motor Gasoline inventories fell 1.5Mb on the week as US Refinery Runs rose 1.2% to 86.3% and from 85.1% in the prior week. This compares to the 86.0% pre-pandemic level of 2019. Distillate Fuel Inventories rose by 2.2Mb on the week. Crude Production recovered to a post-pandemic high of 11.5Mb/d or up by 200Kb/d.

In detail:

• Commercial Crude Oil Stocks rose by 3.3Mb to 434.1Mb. Energy bulls point to this being 50.3Mb below last year’s pandemic level, but it is close to the 438.9Mb seen at this time in 2019 and the 426.0Mb at the same time in 2018. So we do not concur that there is a shortage of oil in the US, the largest energy consuming nation.
• Demand for all products rose modestly last week. Total Product Demand rose 166Kb/d to 19.997Mb/d (demand was 21,597Mb/d at the same time in 2019). Other Oils demand fell by 538Kb/d to 3.389Mb/d. Gasoline consumption rose 181Kb/d to 9.504Mb/d (but is below the 9.784Mb/d consumed in 2019 at this time) while Jet Fuel Consumption rose 231Kb/d to 1.682Mb/d (1.833Mb/d consumed in 2019 at this time). Cushing Inventories fell by 0.9Mb/d to 26.4 Mb/d compared to 47.7Mb two years ago, before the pandemic. While Cushing is seeing lower storage, the Gulf Coast saw an increase of 1.9Mb to 249.3Mb and is 21.7Mb above its level of 227.6Mb in 2019 pre-pandemic. So storage at Cushing should not be worried about.

Baker Hughes Rig Data: The data for the week ending October 29th showed the US rig count rose by two rigs (fell one rig in the prior week). Of the total of 544 rigs working last week, 444 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 84% from 287 rigs working a year ago. The US oil rig count is up 101% from 221 rigs last year at this time. The natural gas rig count is up a more modest 39% from last year’s 72 rigs, now at 100 rigs.

Canada had a rise of two rigs (a decline of four rigs in the prior week) to 166 rigs. Canadian activity is now up 93% from 86 rigs last year. There were five more oil rigs working last week and the count is now 98 oil rigs working, up from 40 last year. There are 68 rigs working on natural gas projects now, up from 46 last year.

The material increase in rig activity over a year ago in both the US and Canada should continue to translate into rising liquids and gas production over the coming months, especially with the DUC count (drilled but uncompleted well count) falling sharply. The data from many companies on their plans for Q4/21 and forecasts for 2022 support this rising production profile expectation. We expect to see US crude oil production reach 12.0Mb/d this quarter.  Companies are taking advantage of attractive costs and want to lock up experienced rigs and crews as staffing issues are getting tougher for the sector.

Conclusion:

We expect to see additional weekly builds in Commercial Crude Stocks over the next few weeks before winter fuel dem

and picks up.

Bearish pressure on crude prices:

1. Covid caseloads are growing around the world. In the US the death rate is over 747K deaths (up 10,000 during the last week). Worldwide the death count is now 5.0M. Deaths are rising in Eastern Europe particularly in Bulgaria, Slovenia, Romania, Russia and Ukraine.

2. Many US corporate and government employees are not planning on getting vaccinated and are now being put on unpaid leave and may soon lose their jobs. Millions more will have a shotgun decision in early December when the cut-off kicks in. NO JAB, NO JOB is the vaccination mantra. The US military is being significantly affected as many personnel are not planning on getting the vaccine in the required timeline and are planning court battles. The new “super-strain” Delta variant, known as AY.4V, is worrisome as it may have faster transmissivity. The normal winter flu season may soon impact Covid caseloads.

3. Energy demand is under pressure as high prices for most food, rent, taxes, child care, health expenses, auto costs and other daily necessities make spending decisions tougher for consumers. This gouge in prices will surely impact consumers’ buying behaviour in the coming months. The spending pie of consumers is shrinking and some spending habits of the past will have to be dropped. Demand destruction is on the way. Consumer Confidence is weakening and is nearing levels that have forewarned of recessions. Real US GDP grew 6.7% in Q2/21 and was seen at less than 2% in Q3/21. Recent economic releases indicate that we may already be in the early stages of a recession.

4. China has seen a rising wave of new infections in 19 of its 31 provinces (11 were hit as of last week). Many industrial plants in China have been closed due to the high cost of fuel and the Government’s plan to lower emissions in the Beijing area for the upcoming 2022 winter Olympics from February 4th to the 20th. Clean air is needed for the event and China wants to show it is making progress on its climate initiatives. This will dampen China’s consumption of fossil fuels over the next four to six months. Thermal coal prices have fallen over 50% in the last few weeks. Chinese PMI has fallen below 50 for the second month in a row.

Bullish pressure on crude prices:

1. Speculative long investors (options traders, hedge and commodity funds) and a short squeeze on bearish positions in the futures and options markets on crude and natural gas have spiked up prices. Recently speculative buyers of nearby US$100/b options have increased them from under 20,000 contracts to >141,000 contracts for December 2021. In addition, large numbers of  US$200 priced options for December 2022 are being bought. This excessive bullish view is very persistent and is a contrarian signal historically.
2. Spot natural gas prices in Europe have backed off after President Putin confirmed that Russia would meet all European winter needs once they open the Nord Stream 2 Pipeline, which is now being filled and undergoing pressure tests before certification. Russian pressure seems to have worked on getting Europe to move quickly to certify the new line. This new pipeline doubles Russia’s annual export capacity to Europe. In the US, NYMEX today is US$5.63/mcf – and in Canada AECO is C$5.66/mcf as snow covers much of Alberta. All have backed off from recent highs as weekly US storage injections are now above the five year average and over 2020 .

CONCLUSION: 

WTI backed off nearly 4% or US$3.25/b today to US$80.80/b (for the December contract and below US$80/b for the January 2022 contract) as the Commercial Crude Oil Stocks build number was higher than consensus. We see prices as having US$20-25/b of speculative value which should disappear as Commercial Crude Stocks continue their seasonal build. The question for us is what is happening to world wide demand as the two largest economies in the world slow down? We may be moving from stagflation to recession in 2022 in many countries. If the data comes out supporting recession conditions, the price slide could be quick and painful for leveraged speculative longs in crude oil futures and options. 

Energy Stock Market: The S&P/TSX Energy Index currently trades at 162. The S&P Energy Bullish Percent Index backed off from the 100% level to 80.95% now. Energy stocks could fall 30-40% in the coming months with leveraged entities the hardest hit.

Our November Interim Update comes out tomorrow Thursday November 4th with details on the  general stock market and its expected impact on the energy sector as well as reviews and updates on five early Q3/21 reporting companies. Our November SER Monthly will be out on Thursday November 25th and will cover the bulk of the 30 companies that we cover.

We will be holding our 90 minute Q4/21 quarterly Black Gold Webinar on Wednesday November 10th at 7PM MT. We will discuss in detail our view on the general stock market, the energy market and our bearishness on both areas for the near term. We will also go over those companies that have reported their Q3/21 results by the time of our cutoff for the webinar. We will have two Q&A sessions to go over our presentation materials and subscriber questions. 

Over the next few months any number of events could lead to a domino effect of debt-laden companies getting into trouble and financial markets declining materially. The Dow Jones Industrials Index is now at 35,980 and could fall to below 30,000 during Q4/21 and to <25,000 during Q2/22. If you want to receive ongoing coverage of these negative market impacts, become an SER quarterly or annual subscriber. For new people, the quarterly offering is a good way to peruse our product before you determine which subscription format makes the most sense for your needs.

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