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: Canada is following other countries with aggressive quarantining of the population while keeping open essential services like food and pharmacies. Most social venues have been closed from gyms to social gathering places like the Petroleum Club in Calgary. The caseload is rising, as unfortunately, is the death rate. The economic impact is now clearly recessionary but there is concern this could get worse as we don’t know how long society will be in quarantine. The Bank of Canada and the Government of Canada are coming out on Wednesday March 18th with unprecedented financial support for the economy and individuals as they get impacted by job loss. The border between the US and Canada is restricted to only necessary business travel and ending tourism travel, etc. We are now looking at a recession that may impact Canada and the world for 2-3 quarters. One positive is that China’s economy is now recovering and their key cities outside of the Wuhan area are showing GDP recoveries of 70% or more. Overall we may see real GDP decline in Canada and the US by 6-8% in 2020 and unemployment may rise to nearly 10% in both countries. Bottom line we need to see the caseload flatten out and that most of those affected start to see recovery. The quarantine approach is working and we are all changing the way we live. Supply chains are working and stocking of food stores is working well. This will pass as time goes by but how long is the wild card. Optimistically the best case is into the summer for this to be under control and for the economy to get on track and people back to work. We may see more travel restrictions in the near term but the faster we get the case load to peak the better off we all will be and the faster we can get this behind us.
Saudi/Russia Oil Price War: Both Russia and Saudi Arabia are increasing crude production and are leasing large crude carriers to bring the production to buyers. Prices of ships have gone from US30K/day to US$300K/day and it appears that the stock of crude vessels has been taken up. For now these ships will be loaded and sent to markets but once land storage is filled up, then these ships will be used for floating storage. At US$300K/d and falling crude prices this shortly will not be economic. We had a price war target of US$20-24/b and we are now there. The low on Wednesday March 18th as we write this is US$20.77/b. Once the ships are sitting in harbours waiting to unload then the price war will be close to ending. With no more buyers and no way to ship more the game of Russian roulette will have played out. Both Russia and Saudi Arabia have healthy financial positions before this price war started but this is very impactful on their economies. For the Saudi’s the price war has shafted ARAMCO’s shares and those who bought the shares under duress will be working to get the leadership to stop this insane brinkmanship. It is likely that the leadership of Saudi Arabia will be under pressure and there may be changes in the ruling establishment if the unrest escalates the tensions in the country.
EIA Weekly Data: The report this week was again mixed for energy prices. Commercial stocks this week rose by 2.0Mb as net imports fell by 841kb/d or 5.9Mb on the week. If not for exports rising by 968Kb/d there would have been a bigger build of 5.9Mb. US production recovered by 100Kb/d to 13.1Mb/d back to the record high. Consumption fell by 383Kb/d to 21.477Mb/d. Motor gasoline consumption rose by 247kb/d as more people drive and less fly.
Conclusion: The price war is underway but it does have a limit as once all of the storage is used up then the next barrel of oil theoretically would be worth zero. With operating costs and royalties etc. this will not occur. Once the marginal cost of production is reached then production will be shut in. Across the world energy companies are announcing cutbacks in spending and lowering their production plans for the year. With the shales having high decline rates we should see US production fall below 11.0Mb/d later this year as the seven shale basins fall from the current 9.075Mb/d to less than 7.0Mb/d by the end of the year. At US$22/b for WTI crude, declines will be very rapid. Our target of US$20-24 has been reached and we see tremendous bargains out there for investors with patience and fortitude.
We issued an Action Alert to our subscribers and added eight new ideas to our BUY List on March 13th. We ourselves have been adding to ideas we currently own and to ideas that were on our previous list. For the new names added we will wait the requisite five business days before we can consider buying them.
We will hold our Q1/20 webinar on Thursday March 19th. If you want to join in then you need to become a subscriber. Go to http://bit.ly/2OvRCbP for subscriber options. The webinar will last 90 minutes and will be available in our archives thereafter for those not able to attend live. During the webinar we will cover the current bear market and others through history and why we issued the recent Action BUY. In addition we will spend quite a bit of time on individual energy and energy service names under a section we call: The Good, The Bad and The Ugly of Energy and Energy Service Companies.