Schachter’s Eye on Energy: US commercial crude oil inventories surprise with a build of 500Kb/d last week

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 Wednesday October 7th showed commercial stocks rising by 0.5Mb as net imports rose 1.46Mb/d or by 10.2MMb on the week. The estimate had been for a decline of 0.8Mb on the week so a bit of a negative. Gasoline inventories fell by 1.4Mb (a positive as demand rose) and  total stocks excluding the SPR fell 2.0Mb on the week. US production rose 300Kb/d to 11.0Mb/d as US offshore production returned after the recent hurricanes. Overall US Production is now down 1.6Mb/d from 12.6Mb/d last year. Commercial stocks are 67.4Mb above last year or up by 15.8%. This high stock level of storage  has been putting pressure on WTI crude prices. Cushing oil inventories rose by 400Kb to 56.5Mb compared to 41.7Mb last year at this time. 

Total product demand rose last week by 898Kb/d to 18.345Mb/d but remains 3.07Mb/d lower than last year’s 21.41Mb/d. Gasoline demand rose 367Kb/d to 8.896Mb/d but is still down 565Kb/d or 6.0% from last year’s level of 9.46Mb/d of consumption. Jet fuel remains the weakest area. Consumption last week was 907Kb/d, up 49Kb/d on the week but remains 863Kb/d or 48.8% below last year’s level of 1.77Mb/d. Refinery runs rose by 1.3 point to 77.1% up from 75.8% in the prior week. Overall product inventories remain high at 1.93Bb or 132.5Mb (6.9%) above the previous year level. Excluding the SPR, the commercial stocks are 135.2Mb or 10.5% above the prior year’s 1.28Bb. This high stock level of total product storage will likely continue to put pressure on WTI crude prices. 

With coronavirus cases picking up again as schools and more businesses reopen, the US caseload has risen to 7.5M cases (7.2M cases last week) with a new high of >212K deaths (207K fatalities the week prior). The next few weeks will be critical as the colder weather and normal seasonal flu season starts. If the Wave Two situation being seen in France, the UK, Spain and South Korea occurs in the US, then high caseload areas may see additional lockdowns which will hit energy demand and depress crude prices. Large cities like Madrid, New York and Paris are seeing localized large flare-ups. In Canada the caseload is rising in Quebec and Ontario and in Alberta an increase in cases at schools is disturbing. 

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 five rigs (up six rigs last week) to 266 rigs working, but remains down 69% from 855 rigs working a year ago. The Permian basin saw an increase of four rigs (up two rigs last week) to 129 rigs working but this is still down by 69% from a year earlier level of 415 rigs. The US oil rig count rose by six rigs to 189 rigs but is down 73% from 710 rigs working last year. 

Canada saw a rise of four rigs (up seven rigs last week) to 75 rigs working. The rig increase in recent weeks now has activity down only 48% from a year ago when 144 rigs were working.  

Conclusion: As we write this, WTI for November is at US$39.34/b. Further downside pressure is expected in the coming weeks as the pandemic caseload rises. The next breach level to watch is US$36.13/b and we see this occurring during October. The key level for WTI thereafter is US$34.36/b. If this is breached then the sector will face enormous selling pressure. We continue to see a likelihood of WTI falling below US$30/b if OPEC excess production is not reigned in and US economic activity weakens without a major second stimulus program approved. If there is no deal then we could see the US economy contract in Q4/20 as millions of jobs (especially in the service sector) are lost. Crude prices have held up over the past week as there is a strike in Norway which has removed 8% of production or 330K boe/d and there is a watch on for more hurricane activity that may hit the Gulf of Mexico in the coming days. If a disruption of production in the area occurs, crude  prices may hold up for a bit longer. 

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 by month end 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 Q4/20. 

The S&P/TSX Energy Index has fallen from the June high at 96.07 (when we recommended profit taking) to the current level today of 65.57 (unchanged from last week). Overall the index is now down by 32% 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 last week). 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.  

Our October Interim Report comes out tomorrow, October 8th, and includes our extensive review of our overview Stock Market Decline Checklist. The data covers market related issues, monetary policy issues, fiscal policy issues, weakening market internals data and energy market indices pricing parameters. An extensive chart presentation is included. Many of the key indicators highlighted have deteriorated over the past few weeks.

Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all archived Webinars (our next one will be held at 7PM on Thursday November 26th), Action Alerts, TOP PICK recommendations when the next BUY signal occurs, as well as our Quality Scoring System review of the 27 companies that we cover. We go over the markets in much more detail and highlight individual companies in our reports. If you are interested in the energy industry this should be of interest to you.

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