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 27 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 EIA data on Thursday October 15th showed commercial stocks falling by 3.8Mb and US production fell by 500Kb/d to 10.5Mb/d or by 3.5Mb on the week as Hurricane Delta shut in offshore US production of both crude oil and natural gas. The estimate had been for a decline of 2.8Mb on the week. Gasoline inventories fell by 1.6Mb and total inventories excluding the SPR fell 16.8Mb on the week. Refinery runs fell 2 points to 75.1% from 77.1% in the prior week. US Production is now down 2.1Mb/d from 12.6Mb/d last year. Commercial stocks are 54.3Mb above last year or up by 12.5%. Cushing oil inventories rose by 2.9Mb to 59.4Mb compared to 43.0Mb last year at this time.
Total product demand rose last week by 1.13Mb/d to 19.48Mb/d but remains 1.46Mb/d or 7% lower than last year’s 20.9Mb/d. Gasoline demand fell last week due to the bad weather in the South falling 320Kb/d to 8.58b/d. It is down 778Kb/d or 8.0% from last year’s level of 9.35Mb/d of consumption. Jet fuel remains the weakest area. Consumption last week was 1.17Mb/d, but remains 441Kb/d or 278% below last year’s level of 1.61Mb/d. Overall product inventories remain high at 1.92Bb or 117.7Mb (6.1%) above the previous year’s level. Excluding the SPR, the commercial stocks are 120.2Mb or 9.4% above the prior year’s 1.28Bb. This high stock level of total product storage should put pressure on WTI crude prices.
Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed an increase in the US land rig count. The US rig count rose by three rigs (up five rigs last week) to 269 rigs working, but remains down 69% from 856 rigs working a year ago. The Permian basin saw an increase of one rig (up four rigs last week) to 130 rigs working but this is still down by 69% from a year earlier level of 421 rigs. The US oil rig count rose by four rigs to 193 rigs but is down 73% from 712 rigs working last year.
Canada saw a rise of five rigs (up four rigs last week) to 80 rigs working. The rig increase in recent weeks now has activity down only 45% from a year ago when 146 rigs were working. In the breakdown the most encouraging data point was rigs working for natural gas which was at 41 rigs (up three on the week) versus 44 rigs working last year. Natural gas stocks have held up better than oily names during the correction over the last few months as it is expected that we will see strong AECO prices this winter as storage in Canada is below normal.
OPEC Monthly Report: The OPEC report with September data came out on Tuesday and they have lowered expected demand in Q3 and Q4 of this year due to the expanded lockdowns or partial closures across Europe and the US. To them oil demand now appears to be fragile. For 2020 they see demand at 90.3Mb/d and for 2021 at 96.8Mb/d. Only in 2022 do they see demand returning to pre-pandemic levels. In September OPEC produced 24.1Mb/d with a net decline in the month of 47Kb/d. The UAE had the largest decline at 239Kb/d while Libya saw a rise of 53Kb/d and Saudi Arabia of 35Kb/d. Surprisingly Venezuela was able to sneak more oil sales around the tough sanctions it is facing and their volumes rose 32Kb/d to 383Kb/d. Overall OECD inventories at 3.211Bb and are nearly 300Mb above normal. Days of forward consumption are at 110 days versus 94 days in Q3/19. With OPEC producing 24.1Mb/d in September and the call on them at 22.4Mb/d it is clear that OPEC needs to cut production not increase production by 1.9Mb/d as they are currently planning for January 2021.
Conclusion: As we write this, WTI for November is at US$40.50/b. The price is up on the week by nearly US$1/b as the tug of war of the following have occured. As production in the gulf returns in the coming weeks and Norway’s workers strike ends, we expect crude prices will continue to decline.
Positives for crude prices:
- US Gulf Coast production was shut in due to Hurricane Delta. Crude production of 1.67Mb/d or 92% of gulf production. In addition, 62% of the region’s natural gas production was shut in or 1.675Bcf/d. The gulf produces 15% of US crude production and 5% of natural gas production.
- Norway’s strike by energy workers shut in six offshore fields with production of nearly 966Kb/d. Both sides have now agreed to arbitration so this production should be brought back on.
- Colder weather has arrived and demand normally picks up.
Negatives for crude prices:
- Germany, Italy and Austria are reporting record increases in case loads. Tracing is becoming tougher to do in those countries.
- Amsterdam has gone to a four week partial lockdown (restaurants and bars) as it has the highest per capita infection rate in the world.
- Tougher socializing measures (curfews) are being applied to hot spots in London and Paris.
- In 38 US states and Washington DC the number of new cases have increased. In some they are at record levels and some states have hospitals that are at max on their ICU beds.
- Russia plans on increasing its production shortly as it appears to be breaking with OPEC+.
- Libya is reopening its exports and produced 156Kb/d in September. Earlier this week it rose to 355Kb/d as more ports were opened. When the large Sharara field comes on shortly they will raise production by 300Kb/d to 655Kb/d. Of note, before the civil war Libya was producing over 1.1Mb/d.
Downside pressure is expected in the coming weeks as the pandemic caseload rises and production increases around the world. The next breach level to watch is US$36.63/b and we see this occurring later this month. We have been range bound between US$41.47/b at the high end and US$36.63/b at the low end as the weather and shut-ins dominate the price of crude. Once production returns and if the pandemic expands as Wave Two takes hold, we should depressed crude prices and a breach of the US$36.63/b key level.
Most energy and energy service stocks have significant downside risk. The most vulnerable companies are energy and energy service companies with high debt loads, high operating costs, declining production, current balance sheet debt maturities of some materiality within the next 12 months and those that produce heavier crude barrels. Results for Q3/20 should start next week and continue through November. Most results will not be investor friendly.
Hold cash and remain patient for the next low risk BUY window expected during tax loss selling season during Q4/20.
The S&P/TSX Energy Index has fallen from the June high at 96.07 to the current level today of 67.75. Overall the index is now down by 30% in under four months. We see much more downside over the coming months as unfavourable Q3/20 results impact the stocks even more. We will be watching to see how companies discuss their debt loads and lender support. Companies with pessimistic views about their reserve base lending, cutbacks in lines of credit and potential additional impairment write-downs will face significant stock price pressure. The next support for the S&P/TSX Energy Index is at 60.38 (the low two weeks ago). Further lows are likely in Q4/20 as tax loss selling is likely to be very nasty this year. We see the likelihood that the final low for the index could be in the 32-36 area during tax loss selling season. We expect to see a very attractive BUY signal generated during Q4/20 and will recommend new ideas as well as highlight our favourite Table Pounding BUYS which should trade at much lower levels than now.
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