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.
The attack by Iran or Iranian proxies against Saudi Arabia oil infrastructure has changed the outlook for the sector. Now a risk premium for security of supply has been added to the pricing of crude. We still expect lower crude prices this quarter from the present level of US$58/b, as we see an inventory build in commercial stocks in the US before winter. With concern about the attack on the Saudi oil infrastructure and the chance that this can occur again, we reiterate that this is a game changer for our near term and long term outlook for crude prices. Iran’s Supreme Leader Ayatollah Khamenai is now reportedly taking credit for the attack.
EIA Data: The EIA data for crude showed a rise of 1.1Mb last week versus an expected decline of 2.7-2.9Mb. The difference was due to net imports rising by 446Kb/d or 3.1Mb on the week.
US production last week remained at 12.4Mb/d even though we have three new Permian pipelines moving product from the producing fields to the Gulf Coast. On the demand side the seasonal slowdown is occurring even faster than we expected. From an August product consumed level of 22.4Mb/d the US showed a decline of a whopping 1.2Mb/d to 20.3Mb/d last week. Some of the drop off could be related to the storm off the east coast after Hurricane Dorian was downgraded and still impacted the whole east coast of the US and Canada. In the coming weeks we see demand falling below 20.0Mb/d and when this occurs we should see much larger crude inventory builds.
Canada has benefited from the Saudi difficulties and added 80Kb/d on the week to ship 3.483Mb/d to the US. If Alberta’s Premier Kenny gets the industry to take down the rail capacity signed up by the prior NDP government, then crude sales could lift further. Of note, Canada’s sales to the US are up 12.2% from two years ago but are flat versus last year.
In the EIA report it showed US imports from Venezuela were zero, with increases in imports from Colombia (up to 643Kb/d) and Brazil (up to 300Kb/d). Canadian and US energy stocks had a wonderful lift last Monday as investors plunged in and those who were short, covered their short positions in a hurry. From the low of 119 two weeks ago, the S&P/TSX Energy Index lifted to 149 on Monday and has since backed off to 143 last Friday. We expect lower levels over the coming weeks if Saudi does get its production back on as it is forecasting.
CONCLUSION: Tax loss selling this year will again be nasty in the period of mid-November into mid-December and we expect a decline to below 125 during this period. Hold cash and remain patient. The euphoria on Monday and the strong market for energy stocks last week has lifted the S&P Energy Bullish Percent Index to 54%. This needs to come down to below 5% for us to become aggressive buyers again. Crude will move around a lot in the near term as we await the timeline for the full repairs to the damage done in Saudi Arabia, the evidence of where the attack originated, and what if any retaliation will take place. Over the next few weeks a range of $55-64/b is likely and then later this fall crude prices should retreat towards the low US$50’s/b. Our past expectation of a breach of US$50/b during Q4/19 is now unlikely!
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. Below are the 26 companies presenting at the conference.
Due to high ticket demand we have opened more space and are introducing Basic Breakout Tickets which include access to company breakout sessions with Lunch included. These tickets are available for $69 (plus GST)on our website.
Register early as a VIP to have lunch with your preferred CEO or company. Learn more and register.