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 34 energy and energy service companies with regular updates. He holds quarterly subscriber webinars and provides Action BUY and SELL Alerts for paid subscribers. Learn more and subscribe.
Crude oil inventories had another big decline last week coming down by 8.5Mb for commercial stocks and are now only 6.8% or 27.8Mb above last year. The expectation was for a decline of only 2.1Mb so this decline helped to lift crude oil prices early last week. US domestic production recovered from the hurricane and the lower 48 rose 1Mb/day to 11.8Mb/day. Demand which should normally be strong at this time of year due to the summer driving season showed a bit of softness as total demand fell by 287Kb/day to 21.3Mb/day. Motor gasoline demand fell by 115K to 9.6Mb/day.
The Iran takeover of a UK oil tanker remains the reason for oil prices staying firm. More countries are sending warships to the area and the new Prime Minister of the UK, Boris Johnson, has sent a significant deployment of British warships to the area. If Iran escalates by going after other tankers and there is a significant presence of warships by consuming nations then an altercation could occur. We think rational behavior will endure and conditions will deescalate. If there is an altercation then prices could go up to US$60-65/b but if there is no escalation and we get into the shoulder season in September (after the summer driving season) then prices will retreat and our target below US$50/b should occur.
Initial Q2 results are coming in somewhat better than the pessimistic forecasts and we cover nine companies in our upcoming SER interim report. To learn more about subscribing, click HERE
Last Thursday Trump imposed a 10% tariff on $300 billion of Chinese goods entering the US after September 1st. Prior tariffs had been focused on the manufacturing sector and now the tariffs are on consumer goods. US retailers like Best Buy were hammered over 10% last Thursday as they are big importers from China. China has been the biggest growth engine for energy consumption and with the concern of a wider trade war now and the concern that China will be consuming less crude oil now that the price of crude oil fell the largest amount this year. WTI fell $4.15 or over 7% to US$54.43/b that day. We remain in the camp of WTI crude oil to fall below US $50/b later this month and this escalation in the trade war makes this likely to occur earlier rather than later in the month. Trump will send out tweets to get China to buy more grain from the US and in exchange not put these tariffs in. I expect China will retaliate with their own new round of tariffs which will be detrimental to stock prices and energy prices should fall further. One concern is that hedge funds may face disorderly liquidation which could cause other large down spike days.
Conclusion: The escalating trade war with China is impacting economic activity and financial markets are getting worried. A significant stock market correction would have intermarket impact and crude oil will surely be clipped further. Our below US$50/b target for WTI crude oil is likely in the coming weeks. We await our next low risk BUY signals to kick in.
The 2nd Annual Schachter Catch the Energy Conference will be held at Mount Royal University in Calgary on Saturday, October 19th. This is a rare opportunity for investors to learn more and interact with 26 Energy Sector CEOs. Register early as a VIP to have lunch with your preferred CEO or company. Learn more and register.