Schachter’s Eye on Energy: Big swing in stock markets and energy prices – a bottom is in the making

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 31 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. 

EIA Weekly Data:  The economic slowdown due to the Covid-19 virus and the forced self quarantining has now shown up in the EIA data. This week consumption of all products fell 9.7% or by 2.1Mb/d to 19.4Mb/d with gasoline demand down 859Kb/d or 8.8% to 8.84Mb/d. Jet fuel demand fell 16% to 1.47Mb/d as flights were cancelled both domestically and internationally. US production backed off by 100Kb/d to 13.0Mb/d. Commercial stocks rose by 1.6Mb/d as exports fell by 528Kb/d or by 3.7Mb on the week. In the coming weeks we should see total consumption decline with the biggest drop to be in the usage of jet fuel. US production of 13.0Mb/d should start to drop in the coming weeks as a lack of drilling and high depletion in new shale wells takes its toll. One should expect US production to fall below 12.0Mb/d during Q2/20. The rig count fell last week by 20 rigs in the US to 772 rigs and it is likely that we will be down to 400 rigs in the coming months. Of the decline the Permian had the biggest fall on the week down 13 rigs to 405 rigs and down 12% from last year’s level of 459 rigs.

Economic, Monetary and Stock Market Issues: The large stimulus packages being brought forward by governments around the world are focusing on providing GDP stimulus of 7-10% of real GDP to offset the rapid slowdown in economic activity in March. How quickly this gets to individuals, small business etc. is the key to managing the economic crisis. In the meantime, central banks are using every tool in their helicopter money program to lower rates and provide liquidity across the financial system. In the US the Fed is backstopping commercial paper and now money markets. Stock markets have bounced from their savage declines and are being watched to see if there are real bottoms in place or just bear market sharp rallies. The Dow Jones on March 24th had its largest single point up day at 2,093 points to 20,685, up 11.3% on the day. Follow through will need to be seen for the fear level to subside and the $VIX retreat. We see a range of 17,000 to 25,000 for the next few months with sharp swings towards both sides of the range as we get more information on the spread of the virus in the US and the economic outcomes.

Conclusion: The low for crude oil has been US$20.52/b on a closing basis and below U$20/b intraday. On Wednesday March 25th the price is holding around US$24/b and we see it range bound between US$20 to US$28/b for the next month or so. The lower end seen as Saudi oil is seen glutting markets and filling storage around the world and the high side seen if the virus comes under control in the weeks ahead with the apex seen in the US, Canada and some of the worst hit countries in Europe; Italy, Spain and France. Energy stocks are being obliterated without any perception of the value of the underlying assets, their hedge books and balance sheets. We are using days of weakness to add to our favourite positions. We expect the current market turbulence and high volatility to last into the end of April as that may be the time window for the case load of the Covid-19 virus to peak and roll over. Our webinar last Thursday had record live attendance and is available in the archives for those interested in seeing the presentation. Due to the large number of questions it lasted two hours versus the normal 90 minutes. Go to http://bit.ly/2OvRCbP to subscribe.

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