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.
Covid-19 Virus: The coronavirus has expanded to 38 countries with large outbreaks now in Italy, Iran and Korea on top of the massive number of cases in China. With over 80,000 cases and nearly 3,000 fatalities world-wide the hope for it to be contained in the short term appears unlikely. Wednesday evening President Trump will attempt to allay fears of the pandemic impacting the US but health officials in the US are themselves of mixed opinion. The hope that warmer weather in April will kill off this rampant, and quickly evolving and spreading disease may prove unlikely. The disease has now hit Middle East countries like Algeria which are much warmer than the 20 degrees Celsius that has killed off other viruses. Stock markets worldwide had been ignoring the pandemic in China as liquidity and central bank support have kept the momentum FAANG stock game going. A week ago that bubble view of this being only a China issue burst. The Dow Jones Industrials have fallen 9% from 29,600 to 27,000 on Wednesday and the TSX from 17,970 to 17,100. This week we had the third largest point down day in history for the Dow Industrials and more downside is likely.
EIA Weekly Data: The weekly Commercial inventories only built by 500Kb versus the over 2Mb expected and initially lifted crude prices Wednesday. However in the details it appears that Net Imports played the decisive factor. Net Imports fell 423Kb/d or by nearly 3.0Mb on the week so without this inventory move overall inventories would have grown by 3.5Mb on the week and would have been considered bearish. Domestic production remained at 13.0Mb on the week. Total product supplied rose a modest 294Kb/d on the week to 19.884Mb/d.
Conclusion: Last week we mentioned the critical support level of US$49.31/b for WTI. Today we pierced this level and at the time of this report (Wednesday, February 26) WTI was at US$48.33/b down US$1.57/b on the day. OPEC does not seem to have its act together with Russia not willing to cut and Saudi Arabia not able to get other members to agree yet to a cut until they have more information on the virus lifespan. OPEC now has a regular meeting scheduled for March 5th but no firm decision is likely, especially the 600,000 b/d cut proposed by Saudi Arabia. The supply chain disruption and the impact on economies is still an unknown and much speculated issue. Will China see real GDP growth in Q1/20 or economic decline? With much of China shut for the month of February the likelihood of negative economic data may prove disconcerting when announced. We now see the probability of lower crude prices in the coming weeks as the economic impact of the virus gets more actual data points. It is likely that our bearish forecast of US$42-44/b for WTI will be seen as the Dow Jones heads down to the 23,000-24,000 area as investors react to the viruses economic pain. The S&P/TSX Energy Index has fallen over the last week from 135 to 120 and may yet see 110-115 in the coming weeks. A great buying opportunity is close and we expect to be sending out Action Alerts to subscribers when this window opens. The S&P Energy Bullish Percent Index has plunged in the last week and we are close to a BUY signal. Once we see this BUY window we will send out Alerts about this and expect to add 5-8 new investment ideas for our subscribers. To receive these Alerts one needs to become a subscriber. Go to http://bit.ly/2OvRCbP for subscription options.