Schachter’s Eye on Energy: WTI crude price falls on large build in inventories and vaccine delays. Breach of US$50/b imminent.

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. 

EIA Weekly Data: The EIA data on Friday January 22nd (delayed one day due to Monday’s US Martin Luther King Jr. holiday and one day for the inauguration of President Biden) was mixed. Commercial Inventories rose by 4.4Mb on the week versus the forecast of a 1.7Mb decline. The miss was due fully to exports falling 760Kb/d, or by 5.3Mb on the week. Refinery runs rose modestly from 82.0% to 82.5% Motor Gasoline Inventories fell 300Kb and Distillate Fuel Inventories rose a modest 50Kb. Crude Oil Stocks are now 58.5Mb or 13.7% above last year’s level of 428.1.Mb. US Domestic Crude Production was unchanged at 11.0Mb/d, but is down 2.0Mb/d from last year’s 13.0Mb/d.  

Consumption rose a bit last week. Total usage rose by 35Kb/d to 19.64Mb/d. Finished Motor Gasoline Consumption rose by 579Kb/d to 8.11Mb/d while Jet Fuel consumption fell by 380Kb/d to 1.09Mb/d. Cushing Oil Inventories fell by 4.7Mb as refinery activity picked up. Inventories at Cushing are now at 52.5Mb down from 57.2Mb last were but up from 34.9Mb a year ago.

Baker Hughes Rig Data: The data for the week ended January 15th showed an increase in the US and Canadian rig counts. In the US rigs rose by 13 (up nine rigs in the prior week) to 373 rigs working, but remains down 53% from 796 rigs working a year ago. The US oil rig count rose by 12 (up eight rigs the prior week) to 287 rigs but is down 57% from 673 rigs working last year. The Permian saw an increase of ten rigs (up four rigs in the prior week) to 189 rigs working but remains 53% below last year’s level of 403 rigs working. Over US$45/b for WTI seems to be a price point where producers see economic returns from drilling. Yet, so far this increase in drilling activity has not seen a corresponding increase in US domestic production.

Canada saw a big increase in the rig count last week as activity picks up in the New Year. The rig count rose by 44 rigs to 161 rigs working. While a significant increase, it is 34% lower than the 244 rigs active last year. The rig count for oil has risen to 90 rigs (up 37 rigs last week) but is down 41% from 152 rigs working last year. The natural gas rig count rose by 7 rigs to 71 rigs active but is still down from 92 rigs working at this time last year. 

Conclusion: WTI today is at US$52.48/b (low today of US$51.44/b) down 65 cents on the day due to the headline inventory build. The top for Q1/21 may be in place at US$53.93/b in the US$52-55/b range we had been expecting. In the next few weeks we see crude breaching US$50/b and moving into the mid-US$40’s. 

The reason for our downside crude oil price view is:

1. Saudi Arabia and Russia are fighting for market share in the only growth market so far in 2021, that of China. In 2020 the Saudis shipped China 1.69Mb/d while Russia shipped 1.67Mb/d. This market may now be facing demand destruction as Covid-19 cases are now rising again in the large market areas of Beijing and Shanghai. Travel restrictions and strict visa travel testing requirements are being implemented. The government is urging people to not travel during the upcoming Lunar New Year holiday which normally sees millions of people typically head back to the villages that their extended family live. If China implements firm lockdown measures then energy demand will fall off.
2. Other Asian countries are also imposing more mobility and lockdown measures. Japan, South Korea and Indonesia are seeing a surge in Covid cases.
3. Mutation variations from the UK and South Africa are worrying medical professionals as they are transmitted faster and may in the case of the African version not be handled effectively by current vaccines.
4. Death rates in the US now exceed 408K and the total caseload is over 24.6M. A record 4,131 people died on Wednesday. Dr. Fauci and President Biden are saying that the worst may not be here yet as the new virus mutations may hit the US in the coming weeks. This may require more localized lockdowns where hospitals are maxxed out of ICU beds and ventilators. The US vaccine roll out is now nearing 1.0M people per day but needs to reach 3.0M people per day if herd immunity is to be reached this summer. President Biden’s request for a new US$1.9T stimulus package to fund the increase in vaccination is now before Congress and may face filibuster intransigence by Republicans. Getting to 60 Senators in favour of moving the bill forward may be difficult. Biden’s 100 day, 100 million people being vaccinated may be a challenge if funds and vaccines are not available. The Trump vaccination plan waiting for the new administration – was no plan.
5. Vaccine availability is now an issue as Pfizer is having production problems at their main European manufacturing facility. Shortages may last six to eight weeks. Canada is expecting to receive 3M doses in March. 
6. The climate change agenda of President Biden has hit the energy industry with his move to cancel the Keystone XL pipeline. This will remove the potential of 830,000 b/d of crude oil from politically safe Canada from being shipped to the US. He is likely to move to mandate stricter emission and mileage standards, work to decrease consumption of crude oil and move faster on renewable energy. 
7. The International Energy Agency (IEA) this week lowered their forecast of demand by 600,000 b/d in Q1/21 as renewed lockdowns are occurring. With the case-load rising and new mutations spreading they are likely to lower the Q2/21 demand forecast as well. 

Technically the near-term support level for WTI crude is US$46.15/b. Energy and energy service stocks are overbought and are now rolling over. We are bearish for the near term. 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 Q4/20 should start being released in early February and they will for the most part not be good. Depending upon the pressure from the above issues we may see crude prices range bound in February in the US$42-48/b area for WTI and in March crash through US$40/b if demand remains weak and world wide crude inventories build once winter is over. 

We have been warning for weeks about our concern about valuations and downside risk. We now have a SELL signal in place. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of which stocks and at what prices we think ideas could be harvested. The next few months could see significant downside for the energy sector.

Energy Stock Market: The S&P/TSX Energy Index now trades at 95.54 down nearly 8% from the recent high.  Our Q1/21 target of 100-105 was reached last week when the Index reached a high at 103.60. The S&P/TSX Energy Index is likely to fall below the low of 61.21 (the low in late October 2020) during March/April. A breach of 87.55 should start this sharp decline.

The Schachter Energy Report out on Thursday January 21st included our monthly guest article from Ron Barmby, a Professional Engineer and oil industry veteran, which was on the Federal Clean Fuel Standard.

Our report focused on our January 14th Action Alert SELL signal and our recommendation to SELL 14 of the 25 ideas on our BUY list. Many of these ideas had reached our 2021 year end targets providing excellent returns. Others had more downside risk from current levels versus the remaining upside potential, if we are right about the material correction now underway unfolds to its downside target objectives. When we get the next low risk BUY signal many of these stocks should be excellent investments for the upcoming energy BULL market. 

Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all archived Webinars (next webinar Thursday February 25th), Action Alerts, TOP PICK recommendations when the next BUY or SELL 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. 

To get access to our research go to  https://bit.ly/3jjCPgH to subscribe.

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