Schachter’s Eye on Energy: A Potential 2Mb/d Glut Pushes OPEC To Talk About Further Cutbacks Versus Prior 2Mb/d Increase In Early 2021. If OPEC Does Not Shut In Production Crude Could Fall To US$30-32/b Area In The Coming Months

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 November 4th showed commercial stocks falling by 8.0Mb as US production fell by 600Kb/d or by 4.2Mb on the week and as net imports fell by 634Kb/d or 4.4Mb on the week. The two of these items of 8.6Mb together cover off the decline. In addition exports fell by 1.195Mb/d or by 8.4Mb on the week as exports fell from 3.46Mb/d to 2.27Mb/d. US crude production fell as Hurricane Zeta (the 27th Atlantic Hurricane this year) hit the prior week which forced the  industry shut-in 600Kb/d of production. US domestic production fell to 10.5Mb/d from 11.1Mb/d and is down 2.1Mb/d or 17% from the 12.6Mb/d produced last year at this time. Gasoline inventories increased by 1.5Mb as demand fell last week and as Refinery Runs rose 0.7 points to 75.3% from 74.6% in the prior week. Commercial stocks are up 8.4% above last year (37.6Mb) at 446.8Mb. Total stocks (excluding the SPR) remain high at 101.8Mb above last year or 8.0% above the 1.275Bb in storage at this time last year. Cushing oil inventories rose 900Kb to 60.9Mb compared to 47.7Mb last year at this time. These excess inventory data points highlight the downside risk to crude prices. 

Total product demand fell last week by 1.27Mb to 18.4Mb as Hurricane’s Zeta’s effects impacted demand. This level is 2.7Mb or 13% below last year’s consumption level of 21.1Mb/d. Gasoline demand last week fell by 209Kb/d to 8.34b/d and is down 809Kb/d or 9% from last year’s level of 9.15Mb/d of consumption. Jet fuel remains the weakest area. Consumption last week was 910Kb/d down 104Kb/d on the week. It remains 901Kb/d or 50% below last year’s level of 1.83Mb/d. Until a vaccine is readily available it is unlikely that these numbers will improve. This may not occur until Q2/21. 

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 nine rigs (up six rigs in the prior week) to 296 rigs working, but remains down 64% from 822 rigs working a year ago. The Permian saw the largest increase at nine rigs (three in the prior week) to 142 rigs. The Permian rig count remains 66% below a year ago’s level of 416 rigs. The US oil rig count rose by 10 rigs (up six rigs last week) to 221 rigs, but is down 68% from 691 rigs working last year. If we are right about crude oil prices falling near term as demand wanes and there is a pick up in pandemic cases, we may start to see a reversal of this positive trend in the coming weeks. 

Canada saw an increase of three rigs last week (three the prior week) to 86 rigs working. The rig increase now has activity down only 39% from a year ago when 142 rigs were working. In the breakdown the most encouraging data point was rigs working for natural gas which was at 46 rigs versus 49 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 stronger AECO prices this winter as storage in Canada is below normal and drilling activity has not replaced demand. Most companies are likely to show declining production in Q3 versus the prior year and many could show declines from their Q2/20 volumes.

Natural gas prices are very profitable now with AECO at $2.93/mcf while NYMEX is at US$3.01/mcf. We expect much higher prices once the depths of winter arrive next month. With demand strengthening in Asia LNG prices have recovered recently to US$7/MMBtu. US Gulf Coast LNG exports have recovered and booked cargoes should be at record shipment levels before year end. This bodes well for winter 2020-2021 and thereafter. Natural gas is our commodity of choice at this time. 

Conclusion: As we write this, WTI for December is at $US$38.51/b (last week it was at US$37.18/b) as the market liked today’s EIA report with a crude stock decline. 

Positives for crude prices:

• US Gulf Coast production was shut in again due to Hurricane Zeta (the eleventh Hurricane this year to hit Gulf Coast production. The Gulf produces 17% of US crude production and 5% of natural gas production. 
• OPEC is talking about not bringing back on 2Mb/d of shut-in production in January as they are wary of weakening crude oil demand while economies face rising Covid-19 caseloads and increasing lockdowns.
• Winter is coming and demand usually rises worldwide by 1.5-2.0Mb/d.

Negatives for crude prices:

• Germany, UK, France, Italy, Russia and Austria are reporting record increases in Covid case loads. The Czech Republic has the worst outbreak in Europe and is in lockdown once again. Ireland has initiated a six week lockdown across the country to halt the disease. Tracing is becoming tougher to do in those countries. Energy demand is falling across Europe and there are forecasts that demand has fallen in recent weeks by 1.0Mb/d. 
• In over 40 US states and Washington DC the number of new cases has increased. In some they are at record levels and some states have hospitals that are maxed out on their ICU beds. Patients are being taken to other in-state hospitals or to hospitals in  nearby states.
• Libya is reopening its exports now that the civil war is over. Before the agreement they produced 156Kb/d in September. Last week’s production was at 800Kb/d as more ports  reopened. Additional fields should lift production >1.0Mb/d later this month. By year end LIbya is forecasting production of 1.3Mb/d. This will mean over a 1.0Mb/d increase in production in just three months.
• If Biden wins the Presidency (now still too close to call in five states) then a new nuclear deal with Iran is possible in the new year. If so Iran could agree to more intensive inspections and in return get sanction relief allowing them to again sell oil around the world. Iran produced 3.6Mb/d in 2018 before the sanctions took hold. They produced 1.96Mb/d in September according to OPEC data. An addition of over 1.5Mb/d of Iranian crude would require an offsetting cutback by other OPEC countries to keep from glutting the market and plunging crude oil prices.

WTI fell to US$33.64/b last week when five countries in Europe announced increased lockdowns and as Libya announced the large increase in production. In total there has been a swing of 2Mb/d of product. Half from lower demand and half from new production. Downside pressure is expected in the coming weeks as the pandemic caseload rises. Last week the price of crude smashed through the prior support level of US$36.63/b. The OPEC announcements have bounced crude back but we don’t see the price staying here as OPEC is unlikely to move until their next meeting scheduled for December 1st.  The critical breach level now is last week’s low of US$33.64/b. The key will be what OPEC does about their production quota in January and if they move to cut production instead of raise it. Our forecast for WTI crude oil is for it to fall to the US$28-32/b level over the next month or so. 

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 have started and will continue through the end of November. So far the results have been weak. The one positive is that many companies have announced financing support from BDC and EDC and that the paperwork is being completed. This will remove the stigma of survival concern for the entities able to complete the deals with these entities and their bank syndicates. 

Hold cash and remain patient for the next low risk BUY window expected during tax loss selling season during Q4/20. 

Energy Stock Market: The S&P/TSX Energy Index has fallen from the June high at 96.07 to the current level today of 67.51 (last week it was at 63.87). Overall the index is now down by 30% in four months. We see much more downside over the coming months as unfavourable Q3/20 results and lower crude prices 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 in early October). Further lows are likely in Q4/20 as tax loss selling is likely to be very nasty this year. We see potential for the final low for the index this year  could be in the 32-36 area during tax loss selling season. We expect to see a very attractive BUY signal generated during this time period and expect to recommend new ideas as well as highlight our favourite Table Pounding BUYS, which should trade at much lower levels than currently. 

Please consider becoming subscribers before our November 26th webinar as we will be discussing the best ideas to invest in during the tax loss selling season. In addition during the 90 minute webinar we will discuss the third quarter results (those that did well and those that did not perform) of the 27 companies we cover. 

Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all archived Webinars, 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. 

Next week Thursday we will release our November Interim report and we cover the general stock market’s erosion and downside risk. As well we review the companies that reported Q3/20 results before our research cut-off of Friday November 6th. The report will also include an update of our Insider Trading Report and our analysis.

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