Schachter Eye on Energy: OPEC increases production by 943Kb/d led by Saudi Arabia - adding to the near term glut - Canadian Energy News, Top Headlines, Commentaries, Features & Events

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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.

ENERGY DATA: Last week we again saw a build in inventories which was 2.2Mb and above the 1.5Mb forecast. This would have been higher by 4.1Mb as net imports fell by 589Kb/d. So once again inventories are too high for this time of year. WTI fell on reporting day by 24 cents to US$56.88/b but is staying up higher than expected as optimism about a phase one of a trade deal with China continues to get enthusiastic support. We remain skeptics that a “real” deal will be consummated in the near term. Crude oil lifted over US$1/b last Friday to over US$57.50/b on this optimism prevailing in the news media.

Gasoline inventories rose by 1.9Mb on the week as refineries got back to work. The refinery utilization rate rose to 87.8% from 86.0% last week. US production got a surprise lift as we are now up another 200Kb/d to a new record of 12.8Mb/d in US domestic production as the new pipelines get product in them. The issue is will there be much more product brought on before year end. Forecasts have been running at 13.4Mb/d and we see this as a stretch given the decline in rig count. The US rig count fell a week ago by 5 rigs to 817 rigs and is now down 24% from a year ago. For Canada the rig count fell 2 rigs to 140 and is now 29% below a year ago. With the cold weather in the US we may have seen the last natural gas injection week for the season. The EIA Storage report showed an injection of 3Bcf to 3,732Bcf. We see this as the peak in storage for this year and with the cold weather now blasting across the US and Canada we may see large drawdowns from storage which should positively impact natural gas prices. NYMEX today is US$2.68/mcf and AECO spot is C$2.49/mcf. Higher prices are expected as we see large drawdowns and continued cold weather.

OPEC’s report last week showed a large increase in supply as Saudi Arabia’s recovery in production after the facility attack is now being seen. Saudi production rose by 1.09Mb/d to 9.89MB/d but is still below the 2018 average of 10.3Mb/d. Overall OPEC production was up 943Kb/d to 29.65Mb/d (with even Venezuela adding volumes – up 42Kb/d to 687Kb/d). This is too big of a build and we will expect downward pressure on prices if Saudi Arabia keeps production at these levels. At the next OPEC meeting in early December (Dec 5 & 6) a cut of 500,000 b/d is needed so that inventories do not build up just after the peak winter season is over.

CONCLUSION: We remain in the camp expecting lower crude prices in the coming weeks. Wait for a breach of US$54/b to get comfortable that our view is unfolding. Into late December we expect to see tax loss selling this year as very nasty and we want to take advantage of this weakness to add to favourite positions. Hold cash for now. We will send out Action Alert BUYS to subscribers when prices are at attractive BUY levels and the indicators are highlighting a BUY at low risk.