Schachter’s Eye on Energy: OPEC plan to cut an additional 500,000 b/d lifts crude prices

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. 

VIRUS IMPACT: The key feature of the energy industry today is the OPEC preliminary meeting underway today in Vienna to cut production by an additional 500,000 b/d almost immediately so that production cuts of 1.0Mb/d during Q1/20 will offset the loss of demand due to the ongoing and worsening situation from the Coronavirus in China. The plan is to have an official meeting and decision on cutbacks on Feb 14-15 with Saudi Arabia and Russia taking the largest of the cuts. With the Coronavirus incubation period being extended by another two weeks for new cases it appears that this will prolong the unease into the end of February at least. The number of cases has rocketed to nearly 25,000 and there have been 490 confirmed deaths including one outside China. A Princess Cruises ship with 3,700 passengers and crew are now under mandatory quarantine for two weeks off the coast of Yokohama, Japan as 10 passengers tested positive last weekend for the Coronavirus. The individuals did not show any symptoms when they boarded.

What is disconcerting for the markets is how quickly China gets its economy back on a growth path once the disease is under control. China was expected to consume about 14.0Mb/d in 2020 and it is estimated that because of the quarantines (now 50M people) and business and plant closures; demand has fallen by 3.0Mb/d. As a result new buying of crude has slowed, crude oil is not being unloaded at the ports and many refineries have shut down due to too much product inventories. On the positive side there have been announcements from various labs around the world that they are near to a vaccine. How soon this could be available is not mentioned – are we talking weeks or months for distribution? Hopefully the current Coronavirus doesn’t mutate before this vaccine becomes available.

EIA DATA: This week there was another build in commercial stocks that normally would have been a depressant on crude prices. Crude stocks rose 3.4Mb on the week ahead of the 2.8Mb build expected. Motor Gasoline inventories fell 0.1Mb and distillates by 1.5Mb on the week. On the bullish side US production fell last week by 100Kb/d to 12.9Mb/d. The peak was the level of 13.0Mb for the US and if crude prices remain weak then we could see the US production level fall off further in the near term. Demand rose nicely last week with consumption of 20.8Mb/d up 1.2Mb/d from the prior week. Gasoline demand rose by 139Kb/d to 8.93Mb/d and distillate demand rose by 309Kb/d to 4.21Mb/d as cold weather helped demand.

CONCLUSION & PRICE IMPACT: The speedy decision by Saudi Arabia and Russia to move to cut production by an additional 500,000 b/d lifted crude prices today above US$50/b to US$51.44/b; up $1.83/b on Wednesday. This is a nice bounce from the low Tuesday of US$49.43/b. Maybe this is the start of a bottoming process if the cut is implemented after the meeting next week. If not, we may see more downside pressure especially if the number of Coronavirus cases and the spread of cases rises much higher around the world. Energy and energy service stocks are bouncing around in recent days with decent percentage moves on positive and negative days. This is something that is seen at bottoms. Fear and Greed come into play depending on the mood and price move of crude. Wednesday was an up day for crude so there are many  stocks up 4-8% that day. On down days we see the reverse. 

Canada stocks are also seeing a positive bump due to the Supreme Court ruling in favour of the Trans Mountain line and the Enbridge Line 3 getting the support finally from the Minnesota Public Utilities Commission to replace the old pipeline which moved 390,000 b/d. Both of these announcements have brought buying back into the Canadian sector. Wednesday was a good day but it is still likely that the problems in China may worsen or that OPEC does not actually make the cut they are talking about. If this negative situation unfolds then stock prices will likely take another down-leg. Our favourite indicator the S&P Energy Bullish Percent Index while down from its highs of three weeks ago still needs to fall quite a bit to generate a low risk BUY signal. We are buying favourite ideas on days of substantial weakness and plan on continuing this patient approach. When the Energy Bullish Percent Index gives off a BUY signal we will inform subscribers and expect that we will send out emails with quite a few new Action BUYS. To become a subscriber go to: http://bit.ly/2OvRCbP 

We will be at the World Outlook Financial Conference this weekend in Vancouver and will give our keynote energy speech on Friday night at 6:00PM in the Bayshore’s main ballroom. Please come over and visit our booth during the two day conference February 7 & 8. Ten energy and energy service companies will be presenting and have booths for individual investors to come over and chat.

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