Schachter’s Eye on Energy: Second Big Week Of Commercial Crude Oil Stocks Build Should Dampen Prices But Has Yet To Do So Significantly.

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 Wednesday March 10th was clearly bearish for prices as both crude inventories rose and US production recovered meaningfully. Commercial Crude Inventories rose by 13.8Mb last week following a record build of 21.6Mb last week. The forecast this week was for a build of 816Kb. US production recovered, rising 900Kb/d in just one week, to 10.9Mb/d,but remains 2.1Mb/d below last year’s 13.0Mb/d of production. In the coming weeks this could recover another 1.1Mb/d to reach 12.0Mb/d as rig activity remains strong and some more weather related production shut-ins come back on line. Private operators are driving the growth in production at the current time as large public companies are under pressure to pay down debt and provide shareholder returns. Private companies see the less competitive landscape as attractive to build their companies. For example private company DoublePoint Energy is running more rigs than energy giant Chevron. In specific basins private companies have large footprints. In Haynesville 74% of rigs are operated by private companies, in the Eagle Ford 38% and in the Midland basin 41%.

Refinery Utilization recovered to 69.0% from 56.0% but remains below last year’s 86.4%. Overall Commercial Inventories are 46.6Mb above last year or up by 10.3% to 498.4Mb. This is the build problem we have been warning about. Inventories will continue to build until we start the summer driving season. Total Product consumed fell by 88Kb/d to 18.67Mb/d.  Gasoline Demand was the one bright spot rising by 578Kb/d to 8.73Mb/d as driving picked up with better weather driving conditions. Gasoline inventories fell as a result by 11.9Mb. Jet Fuel consumption fell by 436Kb/d to 849Kb/d. Overall US consumption of all products is 15% below a year ago, gasoline demand down by 8% and Jet Fuel demand down by 46%. Inventories at Cushing rose 500Kb to 48.8Mb and are up from 37.9Mb a year ago.

Baker Hughes Rig Data: The data for the week ended March 5th showed the US rig count up by one rig (five rigs up in the prior week). Canada had a decline of 22 rigs (nine rigs lower last week) as we have ended the winter drilling season and break up season has started. Canadian activity is 31% below last year when 203 rigs were working. In the US there were 403 rigs active, but that is down 49% from 793 rigs working a year ago. The US oil rig count rose by one rig. The Permian saw an increase of three rigs to 211 rigs working and activity is 49% below last year’s level of 415 rigs working. The rig count for oil in Canada fell by 12 rigs to 80 rigs working and is down 40% from 134 rigs working last year. The natural gas rig count fell by 10 rigs to 61 rigs active and is down from 69 rigs working at this time last year. 

Conclusion: 

Crude oil prices spiked up over the last week by nearly US$9/b to US$67.98/b as the Saudis held back from returning their shut in production (original cutback was for the two months of February and March with a 1.0Mb/d cut) that they were expected to bring back on in April. In addition the market was expecting a 500Kb/d increase from other OPEC+ members with Russia getting the largest allocation. Except for Russia and Kazakhstan all members rolled over their quotas. Russia received an increase of 130Kb/d and Kazakhstan an increase of 20Kb/d. So this approach was well received by oil markets and oil prices jumped. However, just this week the US added back 900Kb/d and with the addition of production by Russia alone, you have fully offset the Saudi quota move. In the coming weeks we expect to see further US production additions and if there is OPEC cheating as is likely, world inventories will grow in Q2/21 and prices will have reason to retreat meaningfully. Today WTI is down due to the big inventory build and is trading at US$63.43/b, down $0.58/b on the day. OPEC’s next meeting is on April 1st to discuss production levels for May.

Iran in the meantime is selling more oil into China and has plans to increase sales to India in the coming months as they see the Biden administration wanting a nuclear deal and willing to ignore Iran’s cheating on sanctions. The buyers love the lower prices that Iran is offering and as well payment terms are very generous with refiners not paying for the crude until after it is processed. Iran had been shipping 306Kb/d in 2020 but this has risen to 600Kb/d in January 2021 and to 850Kb/d in February according to Reuters and Chinese customs data.

Technically the support level for WTI crude is US$59.24/b now. Energy and energy service stocks are overbought and have been chased by hot momentum money and quarterly window dressing as we near the end of Q1/21. We remain in the bear camp now. 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 many companies for Q4/20 have been released and were not strong enough to justify current lofty stock price levels. If crude prices retreat these stocks could get battered. 

We have had a SELL signal since January 14, 2021. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of 14 stocks and the prices at which we think they should be harvested. We sent out a second SELL Alert on February 5th and added four additional ideas for harvesting. The next two-three months could see significant downside for the energy sector. The topping process for the general stock market is ongoing and some surprise event will prick this bubble.

Energy Stock Market: The S&P/TSX Energy Index now trades at 123 and is part of a lengthy, extended, and broadening topping process. The S&P/TSX Energy Index is likely to fall substantially in the coming months. A breach of 107.66 should initiate the sharp decline. 

I will be on MoneyTalks radio on the Corus (Global) network with Michael Campbell on Saturday March 20th at 10AM MT. If interested in our discussion on the risks in the general stock market and the energy market specifically, please listen in. 

If you want to listen to our February 25th webinar in the archive please go to our subscriber page and become a subscriber. For new subscribers, the quarterly choice gives you three months to see if the product meets your needs. 

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 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’ financial results in our reports. If you are interested in the energy industry this should be of interest to you. 

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