Schachter’s Eye on Energy: WTI crude oil falls over US$8/b over the last three weeks due to four weeks of US inventory builds. Downside in April is to below US$50/b.

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 24th was overall bearish for prices as both crude inventories rose for a fourth week and US production rose by 100Kb/d to 11.0Mb/d. Commercial Crude inventories rose by 1.9Mb compared to a forecast of a 300Kb/d decline as net crude imports rose by 299Kb/d or by 2.1Mb on the week. In the coming weeks US production should continue to rise as drilling activity is robust and could recover another 1.0Mb/d to reach 12.0Mb/d. 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. Gasoline inventories rose a moderate 200Kb and Distillates rose by 3.8Mb as refinery activity recovered. 

Refinery Utilization recovered 5.5 points to 81.6% from 76.1% but remains below last year’s 87.3%. Overall Commercial Crude inventories are 47.4Mb above last year or up by 10.4% to 502.7Mb. Just in the last four weeks crude inventories have risen 39.7Mb. This is the build problem we have been warning about. Inventories should continue to rise until we start the summer driving season. This could add 40-60Mb of additional stocks in storage. Total Product consumed fell 231Kb/d to 18.73Mb/d.  Gasoline demand rose a modest 174Kb/d to 8.62Mb/d. Jet Fuel consumption rose by a modest 27Kb/d to 1.04Mb/d as the spring break travel season is underway. Inventories at Cushing fell 1.9M to 46.3Mb and are up from 39.3Mb a year ago.

Baker Hughes Rig Data: The data for the week ended March 19th showed the US rig count rise of nine rigs (one rig decline in the prior week). Canada had a decline of 24 rigs (25 rigs lower last week) as we are in the spring break-up season. Canadian activity is 6% below last year when 98 rigs were working. In the US there were 411 rigs active, but that is down 47% from 772 rigs working a year ago. The US oil rig count rose by nine rigs. The Permian saw an increase of four rigs to 216 rigs working and activity is 47% below last year’s level of 405 rigs working. The Eagle Ford saw an increase of three rigs to 32 rigs but remains 52% below last year’s rig level of 67 rigs working. The rig count for oil in Canada fell by 17 rigs to 41 rigs working and is down 21% from 52 rigs working last year. The natural gas rig count fell by seven rigs to 51 rigs active but is up 11% or five rigs from last year’s level of 46 rigs working at this time last year. 

We are now one year past the start of the pandemic shutdown of the economies world wide. From current levels economic data will be watched closely to see how quickly we are recovering.

Conclusion: 

Crude oil prices have fallen nearly US$10/b from the high less than three weeks ago of US$67.98/b after the Saudi announcement of extending their official 1.0Mb/d production cut through April, to this morning’s low of US$57.49/b. The large plunge has many reasons which we have been covering for some time:

1. First, Europe is seeing more cases (a third wave) of the mutant pandemic versions and has gone into longer lockdowns. Germany the engine of Europe is extending its lockdown until April 18th (with a strict lock-down during Easter) and may extend it if case-loads and deaths don’t decline. Cases doubled in Germany over the last month. Nearly a third of France just entered a month-long lockdown. 
2. Demand is showing signs of softening in various countries in Asia. 
3. Significant OPEC cheating is occuring (Iran, Iraq, Libya, Nigeria and Venezuela)
4. US production has recovered by 1.3Mb/d so far from the Texas winter blast and may be able to add 1.0Mb/d more in the coming months. US inventories have risen by 39.7Mb in the last four weeks busting the notion of inventories declining which has been the bulls’ thesis mantra. The IEA in their recent monthly report noted “global oil inventories and supply remain plentiful”. 
5. A stronger US dollar has a negative impact on commodity prices. The US dollar has risen recently to 92.35.
6. Speculative crude oil futures buyers have been hurt as the price fell sharply and margin calls added to the large plunge of US$4/b yesterday.

With the significant plunge in crude prices, reflex rallies are likely. Today we are seeing such a bounce as a giant China Evergreen operated container ship is blocking the Suez canal. It became wedged in length ways across the waterway causing over 100 vessels including oil tankers to be delayed in transit. Tugs boats are working to refloat the vessel and are likely to do so in the near future. This short term issue bumped WTI up from US$57.49/b to US$60.44 currently. This bounce should end shortly and the downtrend recommencing. 

With the big decline in the last few weeks we see the technical support levels for WTI crude now at US$57.75 on a close (not much below where we are now). Energy and energy service stocks were overbought and had 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 below US$50/b these stocks will get battered. 

We had a 100% SELL signal on 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 should be harvested. We sent out a second SELL Alert on February 5th and added four additional ideas for harvesting. The next two months could see significant downside for the energy sector. The topping process for the general stock market is ongoing and some  event will prick this bubble. Rising interest rates appear to be the most likely reason as the US 10-Year Treasury yield has increased to a new 2021 high of 1.74% more than triple the 0.52% of last August. 

Two weeks ago we got a second 100% Bullishness signal which is the first time in my career that we have seen back to back clear SELL signals in any one year. The danger is clear and the downside is significant. Just look at the horrible downside moves seen in yesterday’s trading. 

Energy Stock Market: The S&P/TSX Energy Index now trades at 117 and is part of a lengthy, extended, and broadening topping process from the peak at 128. The S&P/TSX Energy Index is likely to fall substantially in the coming months. A breach of 111.59 (yesterday’s low) should initiate the next sharp decline. Our target, once 100 is busted is down to the 60-70 area with WTI trading in the US$42-48/b area. In this range we will be looking for a bottom and the next low risk BUY signal. 

We are in the process of setting up models on five pipeline and infrastructure stocks and will launch coverage of these new ideas in our April SER Monthly to be distributed on Thursday April 22nd. Our research presentation will then move to all of our companies falling under three designations: Conservative, Growth and Entrepreneurial. Investors interested in this new coverage should become subscribers to get access to our expanded research coverage.

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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