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 October 27th was decidedly bearish. Commercial Crude Stocks rose 4.3MB (forecast was for a rise of 1.53Mb). Total Motor Gasoline inventories fell 2.0Mb on the week as US Refinery Runs rose 0.4% to 85.1% from 84.7% in the prior week. This compares to the 87.7% pre-pandemic level of 2019. Crude Production remained at 11.3Mb/d.

In detail:

• Commercial Crude Oil Stocks rose by 4.3Mb to 430.8Mb. Energy bulls point to this being 61.6Mb 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 largest consuming nation.

• Demand for all products fell materially last week. Total Product Demand fell 2.0Mb/d to 19,832Mb/d (demand was 21,597Mb/d at the same time in 2019) as Other Oils demand fell by 1.13Mb/d to 3.927Mb/d. Gasoline consumption fell 311Kb/d to 9.323Mb/d (below the 9.784Mb/d consumed in 2019 at this time) while Jet Fuel Consumption rose 37Kb/d to 1.452Mb/d (1,833Mb/d consumed in 2019 at this time). Cushing Inventories fell by 3.9Mb/d to 27.3 Mb/d compared to 46.0Mb two years ago, before the pandemic.

Baker Hughes Rig Data: The data for the week ending October 22nd showed the US rig count fell by one rig (rose 10 rigs in the prior week). Of the total of 542 rigs working last week, 443 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 89% from 287 rigs working a year ago. The US oil rig count is up 110% from 211 rigs last year at this time. The natural gas rig count is up a more modest 36% from last year’s 73 rigs, now at 99 rigs. The Permian saw an increase of one rig to 268 rigs and is up 102% from 133 rigs last year at this time.

Canada had a decline of four rigs (up one rig in the prior week) to 164 rigs. Canadian activity is now up 98% from 83 rigs last year. There were five less oil rigs working last week and the count is now 93 oil rigs working, up from 42 last year. There are 71 rigs working on natural gas projects now, up from 41 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. 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 more weekly builds in Commercial Crude Stocks over the next few weeks before winter fuel demand picks up.

Bearish pressure on crude prices:

1. Covid caseloads are growing around the world. In the US the death rate is over 737K deaths (up 11,000 over the last week). Worldwide the death count is now 4.95M. Deaths are rising in Eastern Europe particularly in Belarus, Bulgaria, Latvia, Romania, Russia and Ukraine.

2. Many US corporate and government employees are not planning on getting vaccinated and will 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 may be affected as many personnel do not plan on getting the vaccine in the required timeline. 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 weak and is nearing levels that have forewarned of recessions.

4. China’s domestic economy grew by 4.9% in Q3/21 down from the 7.9% rate in the prior quarter. There are forecasts that the real GDP growth in Q4/21 may be miniscule. Consumption of crude is coming down as China cuts oil import quotas from independent refineries. September imports were down 15% from a year earlier. China has seen a wave of new infections in 11 of its provinces. 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.

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. It could go higher but as these positions are reversed, the parabolic price spike could reverse sharply on any negative news. 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. The new lines can double Russia’s annual export capacity to Europe. In the US and Canada, NYMEX today is US$5.97/mcf – and in Canada AECO is C$4.65/mcf. All have backed off from recent highs as weekly US storage injections are now above the five year average and over 2020 .

CONCLUSION:

WTI has backed off US$1.34 to US$83.31/b 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 longs of futures and options.

Energy Stock Market: The S&P/TSX Energy Index currently trades at 158 (only one point above last week). The S&P Energy Bullish Percent Index backed off from the 100% level to 85.71% now. Energy stocks could fall 30-40% in the coming months with leveraged entities the hardest hit.

Our November Interim Report comes out next Thursday November 4th with details on the general stock market and its expected impact on the energy sector and review and updates on the 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.

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 35,630 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. 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. If you want access to all our SER reports or want to join our webinar then you will need to become a subscriber. Go to https://bit.ly/34iKcRt to subscribe. If you enjoy reading our weekly ‘Eye on Energy’ feel free to forward it off to friends and colleagues. We always welcome new subscribers to our complimentary macro energy newsletter.