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 3rd was clearly bearish. Commercial Inventories rose by a colossal 21.6Mb on the week compared to a forecasted decline of 735Kb. The biggest part of the difference was due to US production rising by 300Kb/d to 10.0Mb/d and net imports rising by 1.665Mb/d or by 11.6Mb on the week offset by lower Refinery Utilization and lower product components being made. Overall Commercial Inventories are 40.5Mb above last year or up by 9.1% to 484.6Mb. This is the build problem we have been warning about. It is just starting and will be a factor until we get into the summer driving season. Total Product demand rose a modest 72Kb/d. The best component was Gasoline Demand which rose 942Kb/d to 8.148Mb/d as driving picked up with better weather driving conditions. However this consumption level is down 11% from 9.186Mb/d consumed last year. Refinery Utilization fell 12.6 points to 56.0% from 68.6% as most of the Texas refinery industry was shut down and maintenance season is starting. Last year at this time Refinery Utilization was 86.9%. Because of this lower utilization Motor Gasoline Inventories fell 13.6Mb and Distillate Inventories fell by 9.7Mb. Inventories at Cushing rose 500Kb to 48.3Mb and are up from 37.2Mb a year ago.
Baker Hughes Rig Data: The data for the week ended February 26th showed the US rig count up by five rigs as the effects of the freezing weather in Texas subside. Canada had a decline of nine rigs as we are ending the winter drilling season and as the weather warms up, the break up season will start. Activity is 32% below last year when 240 rigs were working. In the US there were 402 rigs active, but that is down 49% from 790 rigs working a year ago. The US oil rig count rose by four rigs and there was a one rig increase for natural gas drilling. The Permian saw an increase of four rigs to 208 rigs working and activity is 49% below last year’s level of 411 rigs working. The rig count for oil in Canada fell by eight rigs to 92 rigs working and is down 44% from 163 rigs working last year. The natural gas rig count fell by one rig to 71 rigs active and is down from 77 rigs working at this time last year.
We believe that there is a total of US$14-16/b of downside risk for WTI. WTI crude is down US$3/b over the last week, from the high of US$63.75/b to today’s US$60.69/b. Crude is lifting today due to product levels having sharp declines and a rumour as I am writing this that some in OPEC are recommending no increase in supplies in April. We are skeptical that such a deal will occur. Russia and many OPEC countries want to add more volumes as they need revenues desperately.
The top line commercial inventories should swing prices negative at some point after the OPEC meeting. A breach of US$58.60/b should start a rapid decline to the US$50-52/b area as the speculative horde retail money exits another losing trade. OPEC meets tomorrow March 4, 2021 to ease curbs and are likely to increase production 500Kb/d in April to lower Brent and WTI crude prices without impacting the nascent economic recovery or giving incentive to the US shale industry to increase production. Russia and Iraq are the most interested in seeing quotas raised with Russia alone wants to raise production by 250Kb/d. In addition, Saudi Arabia will be disclosing when they bring on their cut of 850,000 b/d that they removed in February. It was supposed to have been a 1.0Mb/d cut for February and March.
Technically the support level for WTI crude is US$58.60/b. Energy and energy service stocks are overbought and have been chased by hot momentum money. We are clearly 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 Q4/20 are being released and are not strong enough to justify current lofty stock price levels if crude prices retreat. Some oil companies still have very high debt loads and when oil prices retreat their debt/cash flow ratios will become more precarious. These will face the largest percent declines.
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 few months could see significant downside for the energy sector. The topping process for the general stock market is ongoing and some surprise events will prick this bubble.
Energy Stock Market: The S&P/TSX Energy Index now trades at 115 and is part of a lengthy, extended, and broadening topping process. The S&P/TSX Energy Index is expected to fall substantially in the coming months. A breach of 103.60 should initiate the sharp decline.
Our Q1/21 120-minute recorded webinar took place on Thursday February 25th at 7PM MT. There were two investment presentation sections. The first covered the downside parameters we see for the stock market depending upon which of the many mania bubbles burst. The second section discussed how to build an energy portfolio for the new Energy Bull Market that we foresee lasting into 2025 after the coming market correction. The different approaches that conservative, growth and entrepreneurial investors should consider were discussed. Individual ideas for each investor approach were also covered.
We also have decided to expand our product and add coverage of the pipeline and infrastructure areas via a Level Two research product. This will occur over the coming months. Consideration of covering special situations that would benefit from a resurging western Canadian economy is also being considered as part of the expanded product offering.
If you want to listen to our 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.
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