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 & Drill Rig Activity:
The mitigation efforts against the Covid-19 virus are working as people are staying at home and consumption of energy is falling rapidly. Two weeks ago the US consumed 21.5Mb/d which fell the following week by 2.1Mb/d to 19.4Mb/d and Wednesday’s data for the week of March 27th showed a decline of 1.6Mb/d to 17.8Mb/d. Last week the US produced 13.0Mb/d of crude oil and 6.8Mb/d of other liquids (NGLs and ethanol) for total production of 19.8Mb/d. So there is an excess production over demand of 2.0Mb/d. US commercial stocks rose by 13.8Mb on the week versus a forecast of a rise of only 3.3Mb. US exports also fell by 695Kb/d to 3.16Mb as demand world wide has waned. It will not take long to fill up storage in the US and then we should start to see US production fall off materially. Storage at Cushing rose 3.5Mb to 42.8Mb and this hub may be able to hold 65-70Mb at most.
The biggest decline in demand last week was for motor gasoline which fell 25% to 6.7Mb/d and was followed by jet fuel down 9% to 1.34Mb/d and overall consumption fell by 8% to the aforementioned 17.8Mb/d. It is likely that consumption may fall to the 13-14Mb/d over the coming weeks and domestic storage could be at capacity by the end of April. The prior plan by the President to buy oil for the strategic petroleum reserve (SPR) now has changed to renting out the remaining storage to domestic producers wanting to continue production and putting the excess into the SPR storage. The plan would be to sell this oil in storage when crude prices have recovered.
Last week the Baker Hughes drilling data showed that the industry is retrenching quickly. US rig count fell by 44 rigs to 728 rigs and is down 28% from a year ago. Canada’s data is even more pronounced also with a decline of 44 rigs but this time to 54 rigs and down from last year’s level of 88 rigs. Even the Permian basin is getting clobbered with the rig count down by 23 rigs to 382 and down 16% from the 454 active last year. We expect the overall rig count in the US to fall below 400 rigs in a few months and over the coming weeks we should see this decline in drilling hit US production levels. We expect US weekly production to fall by 2-3Mb/d over the next 4-6 months.
Economic, Monetary and Stock Market Issues:
The virus impact on the economy is now starting to come out with the March ISM data coming in at 49.1% for the PMI versus 50.1% in February. New orders came in at 42.2%, Production at 47.7% and the Employment Index at 43.8%. Numbers over 50% note a growing economy and all of these numbers are highlighting below 50%. This shows that we are heading into a recession. How deep the recession will be is still not known but the economy is looking worse than the 2008-2009 financial crisis decline. Later this week data will come out on US Factory Orders and the March Employment data. If these are worse than consensus, then the stock markets on both sides of the border will falter and tank below the mid-March levels. The various fiscal and monetary support programs are coming out finally and the question will be how quickly this will arrive into the hands of individuals and businesses that have payrolls, rent, utilities etc. to pay at the start of each month. Any delays in funds receipt by weeks, and how detailed the process to apply for the funds are, would be disconcerting to those awaiting the funds. The media coverage of this delay and frustrating paperwork process, may exacerbate the downside pressure. The balance between controls to stop fraud and getting companies functioning, will be a delicate balance.
WTI crude oil today is flat at US$20.48/b as the chatter of talks between Trump and Putin/MBS get hopes up of a deal to end the price war. This optimism we see as premature. More pain will be felt before the protagonists are willing to sit down and do a deal that works. The priority is to get through the virus and get on the other side of the curve and then President Trump can use moral suasion or economic or political pressure to get the Saudi’s and Russia to end their dumping process. On the political side, the US could threaten the Saudi’s to remove their military umbrella if they don’t end the price war. On the economic side President Trump loves his tariff revenues so the US could charge US$20-30/b in import tariffs if the price of crude remains where it is. Only Canada and Mexico should be exempt. Two weeks ago the US imported 6.1Mb/d of which 3.4Mb/d came from Canada and 687Kb/d from Mexico. This tariff would impact the Saudi’s that shipped that week 604Kb/d to the US and Iraq shipped 395Kb/d. This tariff would lock them out of the US market and if they could not find other buyers they would face having to shut in their production as well. Once storage on land and on sea is filled up the price war will be over and OPEC will have lost access to the US market. These alternative steps should end this price war. However we see the timing as occurring only after the Covid-19 peak has occurred and this card can be played by the US.
If this drags out as the stock market is falling then crude could breach US$20/b again and go down to the US$18-20/b area. The TSX Energy Index now at 58.17, after a nice rebound over the last two weeks from 38.81 or up 50% could fall to the 32-36 area later this month. Many stocks have had great short covering rallies over this time frame. The S&P Energy Bullish Percent Index rose from 0% to 63% during the rally over the last two weeks and is now off the high and at 59%. If we are right about another down-leg then this Index should later this month on the expected decline give off another BUY signal below 5%. Hold cash for now and don’t chase energy and energy service stocks. Another great buying window should arise later this month. We will send out an Action Alert to SER subscribers when the next low risk BUY window opens. To subscribe go to http://bit.ly/2OvRCbP.
I will be on MoneyTalks radio on the Corus network with Michael Campbell this Saturday at 10AM MT. Please join the radio show as we discuss the sector.