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 32 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 price of WTI crude oil fell sharply last week due to overly bearish EIA data and the slap at China by President Trump who signed the Congressional bill supporting the protest movement in Hong Kong. The phase one trade talks now have little chance of being passed before year end. Crude prices fell last week nearly US$3/b to <US$56/b.
EIA DATA: Commercial crude inventories rose by 1.6Mb versus the consensus estimate of a decline of 880Kb. If net imports of -236Kb/d or 1.6Mb on the week are included inventories would have risen by 3.2Mb. The net decline was due to US exports rising by 453Kb/d to 3.48Mb/d. Total motor gasoline rose by a whopping 5.1Mb on the week even though refinery utilization fell to 89.3% from 89.5%. Distillate fuels rose by 700Kb so we had all three key categories showing inventory growth. US consumption fell by 125Kb/d to 21.1Mb/d as cold weather slowed down demand. US production rose to a record 12.9Mb/day up 100Kb/day and is likely to reach 13M before the end of the year. However with the recent slowing of drilling activity and the significant decline of the rig count the production growth rate in 2020 will be much lower than forecast and consensus. This sets up our view of higher crude oil prices in the second half of 2020 and our bullish view on the sector.
A decline below US$54.85/b would set up our target of US$50/b or slightly lower over the coming weeks. Last year we saw a decline of $10/b from late November to late December.
Tax loss selling last week was very nasty with many energy and/or energy service stocks getting smacked 5-7%. We see more than 10% additional downside for the Energy Index and if this occurs then many energy and energy service stocks may go below their late August lows to new lows for 2019.
CONCLUSION: We see the S&P/TSX Energy Index now at 132 (down from 138 two weeks ago) as vulnerable to below 120 in the coming few weeks. If so, there will be some very attractive energy and energy service BUYS for investors. We intend to send out BUY Alerts to our subscribers when we see this low risk capitulation window occuring. Get ready to take advantage of the great BUYS! The upcoming year should be a very rewarding one for energy investors. Our target for the S&P/TSX Energy Index is 200 which could provide outsized returns for courageous investors.