Schachter’s Eye on Energy: US crude oil demand falls nearly 1.0Mb/d last week. Wave Two is coming to the US and crude prices will fall below US$36/b in October.

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. 

Election Impact on Energy: Last night’s first Presidential debate was a low point for such events. The President interrupted Biden’s allocated two minutes to respond to the moderators’ questions almost every time and Chris Wallace, a well respected moderator, could not gain control of the agreed program. It was as if Chris was trying to referee a knife fight as the issues of covid-19, taxes paid, black lives matter and law & order were covered. Repeated lies, interruptions and attacks with no ability to fact check (right away) left viewers underwhelmed and infuriated. The President used his bully pulpit to do his thing while Biden took each attack mostly with decorum. Our view of a very nasty election period with a late decision on the winner looks very likely. That would increase uncertainty and stock markets hate uncertainty. The Dow Jones Industrials Index is now at 27,870 and a decline below 26,500 could start a severe decline. No new fiscal deal today between Congress and the White House, poor Q3/20 earnings to start shortly, a rise in pandemic numbers especially if Wave Two hits hard, and continued ugly politics could drive the US markets below the March 2020 lows. 

EIA Weekly Data:. The EIA data on Wednesday September 30th showed commercial stocks falling by 2.0Mb as net imports fell 535Kb/d or 3.7Mb on the week. The estimate had been for a decline of 1.6Mb on the week which would have occurred except for the rise in exports. Gasoline inventories rose by 0.7Mb and  total stocks excluding the SPR fell 0.5Mb on the week. Lower 48 production remained at 10.7Mb/d with no further recovery from the back to back Hurricanes. Production is now down 1.7Mb/d from 12.4Mb/d last year. Overall commercial stocks are 69.8Mb above last year or up by 16.5%. This high stock level of storage at a time of falling demand is putting pressure on WTI crude prices. 

Total product demand fell 992Kb/d to 17.4Mb/d and is down 3.32Mb/d from last year’s 20.8Mb/d of consumption. Demand for gasoline rose a modest 14Kb/d to 8.53Mb/d but is still down 608Kb/d or 6.7% from last year’s level of 9.14Mb/d of consumption. Jet fuel remains the weakest area with demand down 77Kb/d last week to 858Kb/d and remains 905Kb/d or 51.2% below last year’s consumption level of 1.76Mb/d. Refinery runs rose by 1 point to 75.8% from 74.8% in the prior week. Overall product inventories remain high at 1.94Bb or 127.0Mb (6.6%) above the previous year level. 

With coronavirus cases picking up again as schools and more businesses reopen, the US caseload has risen to 7.2M cases (6.9M cases last week) with a new high of >207K deaths (200K fatalities  last week). Over 1.0M people have now died worldwide. 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, then more high caseload areas may see additional lockdowns which will hit energy demand even further and depress 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 six rigs to 261 rigs working, but remains down 70% from 860 rigs working a year ago. The Permian basin saw an increase of two rigs to 125 rigs working but this is still down by 70% from a year earlier level of 414 rigs. The US oil rig count rose by four rigs to 183 rigs but is down 74% from 713 rigs working last year. The biggest recovery was in the Eagle Ford basin that saw a rise of 3 rigs to 12 rigs. However, it is still down 50 rigs or 81% from 62 rigs working a year ago. 

Canada saw a sharp rise of seven rigs to 71 rigs working (up 12 rigs in the prior week). The much better pricing environment for natural gas has lifted activity in the liquids rich Montney basin. The rig increase in recent weeks now has activity down only 444% from a year ago when 127 rigs were working. Canadian natural gas stocks have been the best performers in recent weeks.  

Conclusion: As we write this, WTI for November (the next contract) is at US$39.44/b with the day’s low at US$38.68/b. Further downside pressure is expected in the coming weeks as the pandemic caseload rises and the President’s indifference weights on the economy and individual behavior. The next breach level is US$36.13/b and we see this occurring during October. The next 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 risk of WTI falling below US$30/b if OPEC excess production is not reigned in. 

Most energy 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 shortly and continue through November and many reports will not be investor friendly. Another US producer fell by the wayside today – Bakken producer Oasis Petroleum filed for Chapter 11 with debts of US1.8B. 

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 (when we recommended profit taking) to the current level today of 65.76. Overall the index is now down by 32% in under four months. We see much more downside over the coming months as lousy Q3/20 results shaft 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 65.07 and then 58.05. Further lows are likely in Q4/20 as tax loss selling could be very nasty this year. We see the likelihood that the final low for the index will occur 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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