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 on Thursday October 20th was mixed with some data supportive of current prices and some not so. Commercial Crude Stock fell 0.4MB (forecast was for a rise of 1.86Mb) and there would have been a rise of 4.6Mb if not for Net Imports falling 715Kb/d or 5.0Mb on the week. The biggest sub-component was Exports that rose 546Kb/d or 3.8Mb on the week. Total Motor Gasoline inventories fell 5.4Mb on the week as US Refinery Runs declined 2.0% to 84.7% from 86.7% in the prior week. This compares to the 85.2% level of pre-pandemic 2019.

Crude production fell 100Kb/d to 11.3Mb/d. But it is up 1.4Mb/d above last year.

In detail:

• Commercial Crude Oil Stocks fell by 0.4Mb to 426.5Mb. Energy bulls point to this being 61.6Mb below last year’s pandemic level, but it is close to the 433.2Mb seen at this time in 2019 when gasoline and jet fuel was higher, so we don’t see crude inventories as low for this time of year.
• Refinery Activity fell 2.0 points to 84.7% from 86.7% last week. Demand for all products rose materially last week. Total Product Demand rose 1.957Mb/d to 21,832Mb/d as Other Oils demand rose by 1.05Mb/d to 5.056Mb/d. Gasoline consumption rose 449Kb/d to 9.634Mb/d (above the 9.59Mb/d consumed in 2019 at this time) while Jet Fuel Consumption rose 80Kb/d to 1.414Mb/d (2,088Mb/d consumed in 2019 at this time). Cushing Inventories fell by 2.4Mb/d to 31.2Mb compared to 60.4Mb last year and 44.5Mb two years ago, before the pandemic.

Baker Hughes Rig Data: The data for the week ending October 15th showed the US rig count rose by 10 rigs (rose five rigs in the prior week). Of the total of 543 rigs working last week, 445 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 93% from 282 rigs working a year ago. The US oil rig count is up 117% from 205 rigs last year at this time. The natural gas rig count is up a more modest 32% from last year’s 74 rigs, now at 89 rigs. The Permian saw an increase of one rig (up by three rigs last week) to 267 rigs and is up 105% from 130 rigs last year at this time.

Canada had a rise of one rig (up two rigs in the prior week) to 168 rigs. Canadian activity is now up 110% from 80 rigs last year. There were 98 oil rigs working last week, up from 40 last year. There are 70 rigs working on natural gas projects now, up from 40 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. 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 tough for the sector.

Conclusion:

We should 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. Formal vaccine documents are to be the norm in Canada going forward. In the US the death rate is around 2,000/day and over 726K deaths have been reported so far. Worldwide the death count is now 4.91M. This pandemic has taken more lives in the US than the 1918-1919 Spanish Flu (675,000 estimated). Deaths are rising in Romania and Russia. Many US government employees such as the military, police (50% in Chicago), medical staff, front line staff and many in the service sector are rejecting required vaccination and losing their jobs. The UK is now seeing 40-50,000 new cases daily and some are the new “super-strain” Delta variant known as AY.4V which has reached 8% of their cases. It has now been seen in the US as well. The worry is about the faster transmissivity of the new variant. There is also worry about the normal winter flu season impacting Covid caseloads.

2. 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 falling sharply and is nearing levels that have forewarned of following recessions.

3. Global ports remain clogged with containers and delivery problems that could last into 2023 according to the CEO of Dubai’s DP World, the largest operators of ports. Shoppers are being advised to buy their Christmas gifts early from what is currently available in the stores. The stuff on ships may not reach shops until the New Year.

4. China’s domestic economy grew by 4.9% in Q3/31 down from the 7.9% rate in the prior quarter. Industrial production rose a very muted 3.2%. Consumption of crude is coming down as China cuts oil import quotas from independent refineries. September imports were down 15%.

5. The US has now had two quarters of negative industrial production and some economists are now talking about a recession starting in early 2022 if both stimulus bills are not passed and President Biden becomes a lame duck.

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 140,000 contracts. This bullish view is very persistent and is a contrarian signal historically.

2. Spot 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, it is now being filled and is 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$5.09/mcf – and in Canada AECO C$4.89/mcf. All have backed off from recent highs.

CONCLUSION:

WTI has risen to US$83.77/b as the Commercial Crude Oil Stocks number was lower than consensus. We see prices as having US$15/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.

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 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.

Energy Stock Market: The S&P/TSX Energy Index currently trades at 157 (same as last week). The S&P Energy Bullish Percent Index has stayed at 100% for two weeks now. This is a clear SELL signal. Energy stocks could fall 30-40% in the coming months.

Our October SER Monthly Report comes out this Thursday October 21st with details on the general stock market and its expected impact on the energy sector.

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 35,596 and could fall to below 30,000 in Q4/21 and to <25,000 during Q2/22. We have already seen three down days of more than 500 points for the Dow Jones Industrials Index and expect many more in the coming months as the bullish and greed enthusiasm swings to fear and liquidation.

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 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 always have two Q&A sessions to go over our presentation materials and subscriber questions.

If you want access to all our SER reports then you will need to become a subscriber. Go to https://bit.ly/34iKcRt to subscribe.

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