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 18th showed commercial stocks rising by 800K to 489.5Mb or up by 39.1Mb or 8.7% above last year’s level of 450.4Mb. Gasoline inventories rose by 2.6Mb while distillates fell by 5.2Mb as cold weather hit parts of the US. US crude production recovered, rising 400Kb/d to 10.9Mb/d as US production returned after the last hurricane closed down production in the Gulf of Mexico. Consumption fell last week with Total Demand down 616Kb/d to 19.56Mb/d, Gasoline usage fell 504Kb/d to 8.26Mb/d and Jet Fuel saw consumption fall 343Kb/d to 987Kb/d. The Boeing 737Max was given flight approval today but until we have a vaccine widely available and people vaccinated, flight activity will remain weak. Total demand remains 8% below last year’s level of 21.3Mb/d, Gasoline demand is down 10% from 9.19Mb/d consumed last year and Jet Fuel remains 40% below demand of 1.66Mb/d last year.
Refinery Runs rose 2.9 points to 77.4% from 74.5% in the prior week. This remains well below last year’s level of 89.5% as consumption is still weak. Total stocks (excluding the SPR) remained high at 92.1Mb above last year or 7.2% above the 1.26Bb in storage last year. Cushing oil inventories rose by 1.2Mb to 61.6Mb compared to 44.2Mb last year at this time.
Baker Hughes Rig Data: Last week Friday the Baker Hughes Rig Survey showed an increase in the US rig count. The US rig count rose by 12 (up four rigs in the prior week) to 312 rigs working, but remains down 61% from 806 rigs working a year ago. The Permian saw the largest increase at seven rigs (five in the prior week) to 154 rigs. The Permian rig count remains 62% below a year ago’s level of 408 rigs. The US oil rig count rose by 10 (up five rigs last week) to 236 rigs, but is down 65% from 674 rigs working last year. Current crude prices for low cost producers makes drilling economic.
Canada saw a rise of three rigs this week (none in the prior week) to 89 rigs working. The rig increase now has activity down only 34% from a year ago when 134 rigs were working. In the breakdown the most encouraging data point was rigs working for natural gas has risen to 50 rigs up from 46 rigs working last year. Natural gas stocks in Canada have performed better than oily names during the last few months. The liquids rich Montney area is getting the most drilling activity.
Natural gas prices are very profitable for producers now with AECO at $2.65/mcf, with NYMEX at US$2.73/mcf. We expect much higher prices once the depths of winter arrive next month. Natural gas is our commodity of choice at this time.
Conclusion: As we write this, WTI for December is at US$41.43/b down slightly from $41.68/b last week.
Positive issues for higher crude prices:
- The announcement this Monday by Moderna of a vaccine with 94.5% effectiveness has joined the Pfizer product with 95% effectiveness to lift investor spirits as there now is a road into 2H/21 to get back to a normal active existence. This is expected to lift energy demand in 2H/21, once most people who want a vaccine have it.
- 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 now here and demand usually rises by 1.5-2.0Mb/d.
- While OPEC has lowered the near term demand for crude oil they see demand rising in 2021 to 96.26Mb/d from 90.01Mb/d in 2020. The forecast for Q4/20 is for consumption of 93.67Mb/d. The level for Q4/21 is forecast at 97.09Mb/d.
Negatives issues for lower 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. Red Zones are occuring all across Canada and total lockdowns are likely in some of these extremely stressed areas. Pandemic lockdowns mean less activity and lower energy consumption. Total world cases now exceed 55.7M.
- In most US states the number of new cases has increased to a record over 170K per day and now there have been over 11.45M total cases. Many 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. Almost 250K deaths have occured in the US out of 1.34M around the world. If people don’t take adequate protection during the upcoming Thanksgiving holiday season the US case-load and death rate may explode in the coming months. There are forecasts that the death toll may exceed 350,000 before inauguration day if masking and distancing are not observed more fully.
- Libya is getting its production up sharply now that the civil war is over. In October OPEC had them producing 454K/d and they are now at over 1.0Mb/d. By year end they expect to be producing around 1.3Mb/d. This will mean over a 1.0Mb/d increase in production in just three months as they produced only 155Kb/d in September.
OPEC has its next meeting scheduled for November 30th and December 1st. We expect them to delay the next planned increase in production for one to two quarters which should help to lower the excess stock levels. We expect crude prices to retreat below US$40/b as it becomes clear that the vaccines will not be readily available until Q2/21 at the earliest for all who want to take it and that the virus continues to negatively impact the economy. Near term we see the crude price ranging between US$36-44/b. However if lockdowns pick up in the US and Canada and Europe extends theirs in high case load areas, we see crude falling further. Our downside forecast for WTI crude oil remains for it to fall into the US$28-32/b range over the next few months. We remind readers that WTI fell to US$33.64/b just two and a half weeks ago.
Most energy and energy service stocks have significant near term 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 are now mostly all in and results have been generally weak, especially for the oily names. The one positive is that some companies have announced financing support from BDC and EDC and for many the paperwork has been completed and funds released for drilling activity which should help 2020 exit levels and production in Q1/21.
Hold cash and remain patient for the next low risk BUY window expected during tax loss selling season during Q4/20. Tax loss season should start in the next week or so and go into week three of December.
Energy Stock Market: The S&P/TSX Energy Index has fallen from the June high at 96.07 to the current level today of 82.69 (last week it was at 77.41). It has recovered due to the euphoria of the vaccines starting in small quantities to being available in December. However the index is down by 14% since the June high when we recommended profit taking. While the recent bounce is encouraging we expect energy and energy service stocks to roll over shortly and recommence their descent as tax loss selling hammers stocks. Remember the S&P/TSX Energy Index started the year at 146 so it is down 43% year-to-date. Many oily debt-laden companies are down much more than this average. The best performing stocks this year have been natural gas stocks.
The S&P/TSX Energy Index should fall below the low at 60.38 (the low in early October) in the coming weeks as tax loss selling commences. We expect to see a very attractive BUY signal generated during December’s tax loss season and expect to recommend new ideas as well as highlight our favourite Table Pounding BUYS, which should trade at much lower levels than currently. Our initial downside target is for the S&P/TSX Energy Index to fall below 50 in the coming weeks. Lower lows are possible if we see crude oil move to the low US$30’s.
Please consider becoming subscribers before our November 26th webinar as we will be discussing the best ideas to invest in during the upcoming tax loss selling season and how tax loss seasons have unfolded in prior years. 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 and Insider Trading activity this year. On that same day we will release our November SER Report which will include a review of the 16 companies that have reported their Q3/20 results since our Interim Report on November 13th.
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