Schachter Eye on Energy: Equity Holders Get A One – Two Punch

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EIA DATA: Crude oil prices were down last week as we had a larger than expected build in inventories. The estimate had been for a build of 0.5Mb and it came in at a 5.7Mb build. Commercial crude stocks are now 12.8Mb above last year or by 3%. US production remains at 12.6Mb/d as the rig count continues to fall, offset by new pipelines from the Permian to the Gulf Coast. The US rig count fell by 8 rigs last week to 822 rigs or down 23% from a year ago. The Canadian rig count fell by 5 to 142 rigs and is down 28% from a year ago. The inventory build was offset by Product declines with Motor Gasoline inventories falling by 3.0Mb and Distillate fuels by 1.0Mb. The reason for the larger build than expected was almost a reverse of last week as we had net imports rising by 1.196Mb on the week or by 8.4Mb. Of this imports rose by 840Kb/d and exports fell by 356Kb/d. If there was no change in imports, inventories would have fallen by 2.7Mb on the week which would have been considered bullish. US consumption rose last week by 433Kb/d to 21.6Mb/d as cold weather and rising gasoline demand increased usage.

Overall the report should be considered bullish but given the focus on the headline number of a build of 5.7Mb the price of WTI fell that day but recovered on Friday to US$56/b on the strong jobs report. We continue to expect a breach of US$50/b in the coming weeks. The next level to watch for downside breach is US$54/b. From there a decline to the US$50-51 level will be where the battle line will be drawn between the bulls and the bears. If the trade war issues persist and OPEC does not make further cut in production then the breach of US$50 should occur and the low for this corrective phase could occur before the worst of winter hits. If on the other hand, we do see a trade deal with China and OPEC makes a further cut of 500Kb/d then the lows will be in and as winter hits and demand rises we should see prices improve.

Encana is deserting Canada as the majority of its business is now in the US. This long standing Canadian company is even changing its name to remove any connection to the country. The political situation in Canada with its egress issues drags another company to focus more on the US. Also last week Pengrowth accepted a takeover deal from a private equity fund as they could not gain support to stay independent. The debt holders get whole in the deal and this high profile name from the Trust era disappears with equity holders only gaining a nickel for their long suffering support.

CONCLUSION: We are bullish for energy prices in 2H/20 and see WTI crude over US$70/b. However our confidence on pricing from now till then is predicated on the strength of the US economy, the impeachment and election cycle roller coaster, the trade issues with China and OPEC production levels. We are range bound in the mean-time with the lows around US$47-51/b and the highs US$56-60/b.

 

 

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