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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 virus case growth count in China appears to be settling down but new cases are picking up around the world. Iran, Korea, Italy and Japan seem to have the highest number of new cases (and concentrated pods of new cases) and of fatalities. It is hitting the old and those who are/were smokers and have lower immune levels. To date (Wednesday March 4, 2020) there are now 93,000 cases worldwide and over 3,100 fatalities. The fear is now causing shortages in stores of masks, cleaning supplies, paper towels, toilet paper and hand sanitizers. COSTCO is reporting that all of their “emergency food kits” are disappearing off the shelves. Many companies are restricting international travel (examples: Citigroup, Wells Fargo, Google and Ford) and airlines are grounding planes (Lufthansa). Flights to Asia have been the worst hit. The cruise industry has been particularly hammered. As more cases are announced in Canada and the US fear is rising and outside activities by families are being limited.
Going forward the impact on world economies is starting to be seen with announcements by many companies of the adverse impact on their operations. From GE on we are seeing negative comments on economic prospects. One report out of China shows that the data point (PMI Services) was half of what it had been before the virus exploded across the country. The US is facing a distress level by its citizens as there are not enough test kits yet (maybe 1-2 weeks away for sufficient numbers) to facemask needs being only 10% of supplies. The HHS (Health and Human Services) official Dr. Robert Kadlec mentioned on Tuesday March 3rd that they needed roughly 3.5 Billion N95 masks and that they had only 35 million in stock for front line health workers and patients who are diagnosed. 3M is the major US supplier and the company has all its plants running 24 hours per day to meet demand.
Outside activities have been cut back and many conferences have been cancelled. Japan is now thinking of delaying the summer Olympics. The economic impact is hard to quantify and this is why the financial markets have been on a roller coaster. The move by the US Fed and the Bank of Canada to lower their key rates by 50BP has brought some stability to financial markets for now but this is a health issue so no amount of monetary stimulus is likely to be a game changer. As long as we are seeing large numbers of new cases then the markets will stay frightful as will citizens around the world. This health crisis still needs time to be contained.
Upcoming OPEC Meeting: OPEC is meeting on Thursday March 5th and Friday March 6th to determine how much additional cuts in production are needed on top of the 500Kb/d cut made in Q1/20. Some have mentioned an additional cut of 1.0Mb/d for Q2/20 and others holding the Q1/20 cut through the end of Q2/20. We suspect a larger cut is needed so that there is not a big build in inventories world wide during Q2/20. Russia seems to be in the dove camp and Saudi Arabia in the hawk camp wanting bigger cuts. If the decision is muted, crude prices will come under renewed pressure.
EIA Weekly Data: The data released on Wednesday March 4th was mixed and as a result the price of crude is down moderately. On the positive side Total Product Demand grew by 1.388Mb/d to 21.272Mb/d and Gasoline demand on the week grew by 150Kb/d to 9.186Mb/d, with gasoline stocks falling on the week by 4.3Mb. On the bearish side commercial crude stocks rose by 800Kb/d and net imports fell by 476Kb/d as exports rose by 497Kb/d, lowering US inventories by 3.3Mb on the week. Also on the bearish side US domestic production rose to a new all time high of 13.1Mb on the week or up 100Kb/d, as new pipelines bring on new shale production from the Permian basin.
Conclusion: Crude prices today are down 22 cents to US$46.96/b. After a nice bounce when China said they were reopening their economy and getting people back to work the price of crude rose from US$49.31/b to US$54.66/b in mid-February. Over the last two weeks we busted below the support level at US$49.31/b falling to US$43.32 late last week. Since then we have seen a technical bounce back to the breakdown point of US$49.31 with crude reaching US$48.41 so far. In the coming days we expect the price to roll over and head down to the US$42-44/b area as we get more info on the negative economic impact of Covid-19 and as OPEC does not make a sufficient cut to reassure markets. We expect one more period of market disturbance to take the stock markets lower (example: the Dow Jones Industrials down to 23,000 or lower – today at 26,480). If so we expect the price of crude will reach our target of US$42-44/b and that the S&P/TSX Energy Index will fall to the 105 level or lower – today 112. We are close to getting a BUY signal on the S&P Energy Bullish Percent Index at a Bullish number of <5%. We are now below 10% so a Table Pounding BUY signal is imminent. When it occurs we will send out an Action Alert to subscribers and include some 6+ new investment ideas that are great BUYS. To receive this Alert one needs to become a subscriber. Go to http://bit.ly/2OvRCbP.
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