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 Wuhan coronavirus epidemic is widening in scope with nearly 6,000 cases now reported worldwide and as of Wednesday morning January 29th over 130 deaths. Many airlines are cancelling flights to China. China is planning on extending the Lunar New Year holiday season into the first or second week of February (depending upon conditions on the ground) to get past the virus cultivation period and get control of this spreading event. The WHO is to meet tomorrow to decide if a global emergency should be called due to the rapid increase in cases. OPEC is concerned and has mentioned that they may extend their Q1/20 cut of 500,000 b/d (400,000 b/d from Saudi Arabia) to ensure a glut of crude does not develop due to weaker usage in China particularly.
The EIA data was expected to show a small build of 250,000b for commercial inventories but this was way too low. Inventories rose by 3.5Mb as net imports rose by 134,000b or by 938,000b. Production remained flat at 13.0Mb on the week. The EIA in their monthly productivity report forecast overall shale production rising only a modest 22,000 b/d to 9.2Mb/d, with the Permian providing a rise of 45,000 b/d offset by the Anadarko basin showing a decline of 16,000 b/d and the Eagle Ford a decline of 7,000 b/d for the largest changes. The Permian alone is forecast at 4,803,000b/d up from 4,758,000b/d. Gasoline inventories rose again, this time by 1.2Mb despite refinery utilization falling from 90.5% to 87.2%. Overall consumption in the US fell last week by 1.865Mb/d to 19.638Mb/d with distillate demand falling 488,000 b/d. Overall a bearish weekly report. WTI crude prices initially fell below US$53/b but have recovered to US$53.30/b on the overall stock market strength.
Conclusion: We remain in the camp expecting to see prices fall to the US$50/b level over the coming weeks. While energy and energy service stocks are very cheap they are likely to get cheaper if we see prices retreat to US$50/b. The TSX Energy index now at 135 could retreat to the 120-125 level and would likely provide the next very attractive BUY window. Patience required for now.