Each 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.

EIA Weekly Data: Wednesday’s (April 29nd) EIA data was quite positive with inventories growing less than expected and consumption resurgent. Commercial stocks increased by 9.0Mb (versus a forecast of 10Mb). The build would have been higher by 2.9Mb had exports not risen by 412Kb/d to 3.3Mb/d last week. Overall stocks rose 11.6Mb on the week with the strategic reserve (SPR) taking in 1.2Mb. One bright spot was Gasoline inventories which fell 3.7Mb on the week as consumption lifted strongly. Refinery runs rose two points from 67.6% to 69.6%. US production of crude fell 100Kb/d to 12.1Mb/d and is now down 1.0Mb/d from the peak in mid-March. Production cutbacks keep on being announced by energy companies as storage fills up. On April 24th for example, Continental Resources (CLR-N) announced it would stop all drilling in the Bakken shale field and shut in nearly 150,000 b/d. Fellow North Dakota Bakken producer, Whiting Petroleum (WLL-N) filed for bankruptcy. By summer US production is likely to be under 11.0Mb/d. Cushing saw a rise in storage of 3.7Mb to 63.4Mb and may have less than a month left until full (effective capacity 76-77Mb).

On the positive side this week’s product consumed, lifted 12% or by 1.66Mb/d to 15.8Mb/d the first large increase since the start of the slide as the Covid-19 virus closed the US economy down. Finished motor gasoline demand lifted by 10% to 5.86Mb/d and jet fuel demand rose a whopping 31% to 800Kb/d from 612Kb/d in the prior week. This is very encouraging as the beginning of the reopening of the US economy expands. Hopefully we do not see a pick up in Covid-19 cases as the country emerges from the shutdown resulting in mitigation requirements stiffening again.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 64 rigs (prior week down 73 rigs) to 465 rigs and down 53% from 991 rigs working a year ago. The Permian felt the largest basin loss with a rig loss of 37 rigs (last week down 33 rigs) or down by 47% from a year earlier. We expect the US rig count to fall to 400 or less during May. With high depletion for new wells this supports the view that the US production could fall to <11.0Mb/d during Q3/20, if crude prices remain low. Canada had a decline of four rigs, and the count now is at 26 rigs working down 59% from 63 a year ago. It is likely that 700Kb/d has been shut in already in Canada during Q2/20 and maybe a total of 1.2-1.6Mb/d before the end of Q3/20, if prices for WCS remain below operating and transportation costs and little real liquidity support comes to the industry.

Conclusion: WTI as we write this is at US$15.70/b for the June contract, up over US$3/b on the day. This was due to the very positive demand part of the EIA report and news that the recent trials of Gilead Sciences remdesivir trials are showing improvements for half the patients taking it. There is now more hope by investors that the US economy may be able to open quicker than prior forecasts. The daily crude oil price changes are moving fast. The farther you go out the higher the contango value. Into 2021, WTI prices are over US$30/b.

With storage just weeks away from being full (around the world) we expect more production to be shut in and that we may see miniscule pricing for the June contract before expiry on May 19th. The current price recovery won’t last as it is clear that there is inadequate storage and more oil needs to be shut in. Our target is for crude to fall below US$10/b into late May or late June before reduced supply and reduced demand balance out in Q3/20. One positive is that the US oil ETF the USO has now rolled out from its focus on the nearby June contract and has increased its position in more of the outlier months (30% July, 15% August, 15% September, 15% October, 15% December and 10% June 2021 contracts). This should remove the fear of negative pricing at contract expiry, as occurred in March and that this ETF could go out of business. The CME (which owns the oil-futures exchange) made a big mistake in not setting up a policy of $0 settlement and now the door is open for paper traders to have to pay to take away physical commodities whenever there is demand shortage or storage issues. One more negative is that speculators have added to their crude futures contracts and at April 21st were long 580Mb up from 501Mb in the prior week. Commercials had a growing bearish position of 590Mb short up from 552Mb in the prior week. This reflects to us what you see at tops versus at crude price bottoms.

The S&P/TSX Energy Index has strengthened to 76 as this oil recovery has occurred and optimism has risen about the economic reopening on both sides of the border. The recent bear market, short covering rally over the last six weeks, of nearly 100% from the low at 38.81, is now spent in our book and optimism is too buoyant. There is too much hope that the Canadian government will do something material to help the industry. We are pessimistic that it will be too little and too late for this leftist environmental minority government which has to get support from the NDP and Greens, that are anti-oil. The short covering rally took the S&P Energy Bullish Percent Index from 0% on March 9th to 96% currently. In lengthy bull markets this would be a SELL signal but in this instance we see this as a near term overbought indicator. We recommend investors hold off additional buying until we see a meaningful correction. We expect to see the energy sector correct significantly and that this Index will fall again below 5%, as the overall stock markets reverse and the S&P/TSX Energy Index should fall to the 32-36 level in the coming weeks..

The overall stock market decline will be likely due to poor Q1/20 earnings, negative outlooks by companies, and the too slow arrival of stimulus funds. The longer the delay in getting adequate testing kits so that the economy can be reopened, the lower the markets may go. Our targets are for the Dow Jones Industrials Index to plunge below 18,000 (now 24,730) and the TSX to below 9,000 (now 15,185). Both Canada and the US States want to start extensive testing and tracing and need test kits which are not available. We know these downsides are not the consensus and that is why we are highlighting the risk in the market at this time. The coming decline could be even uglier and more painful than the one from mid-February to mid-March.

With Q1/20 results now coming out for Canadian energy companies we are adding a rating system to our research to reflect those we see as strong, those that should survive and those that have problems and may need help to survive. In our upcoming May Interim Report out on Thursday May 7th we will highlight this rating regime and for those that have problems note the issues and what they need to survive. As companies report over the month or so, we will do this review for all the companies we cover.

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