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.
Overview: Crude oil prices have fallen over US$4/b this week from US$59/b to US$54.80/b as China quarantines those cities with outbreaks of the Coronavirus. Over 570 cases have been found in China already and it has spread to Japan, Thailand, Korea and there is now one case in the US. At the time of writing this, there have also been 17 confirmed deaths in China from this new virus format. The virus starts in animals and can and has jumped to humans. As seen from other pandemics this has impacted travel and use of jet fuel is expected to decline near term once again. Energy markets are knocking crude down and we see downside to the US$52-54/b range as a result of this health issue and slowdown in flights and car travel. If it is contained in the near term then the impact will be short term. Hopefully, this will be the case. China has been very accommodating with information to health authorities around the world as well as the media. Quarantines in the cities affected are seen as likely to stem the spread of the disease. We will likely see large number of people at airports wearing masks and also airport personnel checking flights from Asia for travellers to see if they have fever and need hospitalization.
EIA weekly data: The data this week did not have much sway on crude prices. Commercial stock fell 400Kb versus the estimate of a 1.0Mb build as net imports fell 53Kb/d or 371Kb on the week. Gasoline inventories rose modestly this week by 1.7Mb while distillates fell by 1.2Mb. Overall low numbers versus previous weeks. The largest change was in overall consumption in the US due to the cold winter weather which saw US consume 21.5Mb/d up from 19.0Mb/d last week. The largest increase in the components was in use of distillates which rose by 1.2Mb/d due to the cold weather and increase in home heating.
Conclusion: Energy stock prices are down 9% since the start of the year as the Iran/US conflict subsided and now this virus issue has taken the air out of the war hawk bulls upward push of crude. The S&P/TSX Index has fallen from nearly 150 to 136 on Thursday January 23rd. We see downside to the 120—125 level in the coming weeks. There are some fabulous bargains out there but we expect prices could get even more attractive as we reach the lower Energy Index targets. The S&P Energy Bullish Percent Index has fallen 10 points in recent days but still needs more downside to set up a low risk BUY signal. We added one new investment idea to our Coverage List for our subscribers this week and expect to add one more in the next two weeks. Bargains are everywhere but we are picking high quality names with significant upside over the next 4-5 years to add to our lists. If we get a low risk signal from the Energy Bullish Percent Index we will send out Action Alert BUYS to our subscribers.