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 28 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: Wednesday June 10th’s EIA data was mostly bearish. The headline number of commercial crude stocks showed a rise of 5.7Mb versus the estimated 1.7Mb draw. The rise was due to net imports rising by 1.04Mb/d or 7.3Mb on the week. Imports rose by 685Kb/d and exports fell by 355Kb/d. Motor gasoline stocks rose by 0.9Mb and Distillates by 1.6Mb. Overall stocks rose 11.9Mb last week. Total stocks are now up 132.5Mb over last year. Commercial crude oil stocks are up 52.6Mb above last year or by 10.8%. We expect that there will soon be worry again about insufficient storage with these sizable weekly total stock increases. Refinery runs rose to 73.1% from 71.8% in the prior week as the Memorial Day long weekend demand raised consumption..
US production of crude fell by 100Kb/d to 11.1Mb/d and is now down 2.0Mb/d from the peak in mid-March at 13.1Mb/d. We are nearing our expected level of 11.0Mb/d that we have been forecasting for the summer production level. However, there is now more talk about some US energy companies bringing back hundreds of thousands of barrels of shut-in low cost production now that crude is in the high US$30’s/b. If so, this would exacerbate the inventory glut as these volumes return. Cushing saw a decline of 2.3Mb to 49.4Mb as refinery activity consumed more crude.
The most bullish part of the report was that overall product consumed rose during the Memorial holiday weekend by 2.5Mb/d to 17.6Mb/d, but is still down 3.5Mb/d or 17% from 21.1Mb/d consumed last year at this time. Finished motor gasoline demand rose by 352Kb/d on the long weekend to 7.9Mb/d, but is still down 20% from 9.9Mb/d last year. Jet fuel demand rose during the heavy holiday travelling week by 328Kb/d to 713Kb/d. However, it still was 1.1Mb/d lower or 60% less than last year’s 1.8Mb/d, as travellers remain reluctant to get on planes while there is no cure for Covid-19. We should see weaker consumption numbers in the coming weeks.
Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a decline in the US rig count of 17 rigs (prior week down 17 rigs) to 284 rigs and down 71% from 975 rigs working a year ago. The Permian had a rig loss of 7 rigs (last week down 14 rigs) or down by 68% from a year earlier level of 446 rigs. The Eagle Ford had a large rig loss of 9 rigs to 13 rigs and was down by 82% from a year earlier level of 74 rigs. The US oil rig count fell by 16 rigs to 206 rigs (down 15 rigs last week) and down 74% from 789 rigs working last year. Canada had a rise of one rig and the count now is at 21 rigs working but is down 80% from 103 rigs working at this time last year. The rate of weekly rig releases is now decelerating and we are getting close to the bottom for this key energy service sector. We expect to start seeing weeks of rising activity over the coming months but it should stay at low levels under 300 rigs for the US and under 50 in Canada until we see sustained crude prices over US$50/b; which are not likely until Q4/20.
OPEC Deal – Compliance Suspect: OPEC on the weekend came up with an extension of one month to the end of July for their current 9.7Mb/d production cut deal with Russia. However Iraq, Iran and Nigeria are producing whatever they can and are not meeting their OPEC quota levels. In addition Libya which has been shut in due to an ongoing civil war is now getting ready to bring production back on line as they are desperate for funds. The Russia’s Energy Ministry now sees the global surplus at >7Mb/d (Reuters report) so world storage inventories will continue to grow in June and likely in July. OPEC loves the talk of deals but does not walk the walk with its actions.The rally of the last few weeks on a longer deal and greater production cuts has come to naught.
Conclusion: As we write this, WTI is at US$38.60/b for the July contract (down US$0.34/b on the day) due to the overall inventory build. After a robust short covering rally of nearly 90% from the April low to US$40.44/b on Monday, crude prices are now rolling over. Some beaten down energy and energy stocks saw rises of 30-40% over the last week but this short covering and speculative buying is ending now that crude prices are reversing. We see a decline below US$30/b as the line in the sand for crude oil bulls. The breach of US$30/b should start the next phase of worry for energy bulls and restart aggressive selling of energy and energy service stocks. Much lower levels are expected once we get into the fall and the wage support programs by the US government end, and layoffs pick up and we see more bankruptcies. In addition this is also the window for the next expected Covid-19 wave. The companies with the most downside are those with high debt loads, high operating costs, have current balance sheet debt maturities of some materiality over the next 12 months and those that produce heavier barrels. Hold cash and remain patient for the next low risk BUY window as we saw in mid-March. If over-invested take appropriate action.
The short covering rally of the last few weeks took the S&P Energy Bullish Percent Index from 0% on March 9th to 100% yesterday. As the general stock market declines in the coming weeks, we expect to see the energy sector fall heavily as well. The Energy Bullish Percent Index is likely in this situation to fall to below 10%, providing the next low risk BUY signal. For the S&P/TSX this means a decline to below 40 for the Index. The S&P Energy Index today is at 88.60 and is down from the recent bear market rally high of 96.07. So far the energy index is down 8%. Be prepared for significantly lower energy and energy service stock prices in the coming weeks. A breach of 80 will cause mayhem for high risk entities.
Speculative ownership of crude oil futures continues to rise chasing crude, with many buying later dated contracts after the May expiry problem. Last week speculators owned a net long position of 570Mb up from 548Mb the week before. Commercials are now short 605Mb up from 580Mb the week before. We expect that the current market decline will have massive intermarket margin calls that will knock the speculator’s position down to below 200Mb net long at the next bottom in crude prices. It is possible that commercials will move to net long positions in this event.
Our June SER Monthly Report will come out next Thursday. We go over the current market conditions and why we see an imminent breakdown in the overall stock markets that will drag energy stocks down as well.
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