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 30 energy and energy service companies with regular updates. We hold quarterly subscriber webinars (next one May 13th) and provide Action BUY and SELL Alerts for paid subscribers. Learn more.
EIA Weekly Data: The EIA data on Wednesday April 28th was mixed with a positive bias for prices. US Commercial Inventories rose by 0.1Mb to 493.1Mb (versus an expected decline of 0.1Mb). Demand last week rose by 1.63Mb/d to 20.4Mb/d as product usage rose for Distillates by 475Kb/d, Residual oil by 211Kb/d and Propane demand rose by 471Kb/d. Gasoline demand fell by 227Kb/d, while Jet Fuel consumption rose by a modest 9Kb/d. The big reason for the build in inventories was due to imports rising by 1.21Mb/d or by 8.5Mb on the week. One other item supportive of prices was domestic production fell off by 100Kb/d to 10.9Mb/d. We see this decline as due to weather related issues. Refinery Utilization rose 0.4% to 85.4% and is above last year’s 69.6%. Cushing Inventories rose last week by 0.7Mb to 46.1Mb.
Baker Hughes Rig Data: The data for the week ended April 23rd showed the US rig count fell by one rig (rise of seven rigs in the prior week) and we see this as due to weather issues in the US south. Canada had a decline of one rig (two rigs lower last week) as we are still in the spring break-up season and the road bans have not been lifted. However, Canadian activity is now over double the pandemic lows of last year. There are 55 rigs working in Canada now compared to 26 rigs working at this time last year. In the US there were 438 rigs active, down only 6% now from 465 rigs working a year ago. The oil rig count in Canada was unchanged at 17 rigs working and is up from eight rigs working last year. The natural gas rig count was down one rig to 38 rigs active but is up from last year’s level of 18 rigs at this time last year.
WTI Crude oil prices have risen today by US$0.78/b to US$63.82/b due to the US lower 48 production 100Kb/d decline, the increase in consumption of product last week and on general optimism of a world wide demand return in the coming months. We remain in a trading range between US$58-64/b. A closing over US$64/b would energize the bulls and a close below US$58/b would accelerate the bearish view. While at the top of this trading range we remain bearish on crude prices in the near term, due to the pandemic spread widening and more lockdowns occuring.
Over the next three months OPEC will increase production by 2.1Mb/d, more than is needed for world wide demand growth into late 2021 which will help to drive crude prices lower. We expect to see a sustained and meaningful breach of US$60/b in the coming weeks.
Bearish pressure on crude prices:
- OPEC (outside of the Saudis) will be adding 350Kb/d in May, 350Kb/d in June and 440Kb/d in July. The Saudis will separately ease their cuts by 250Kb/d in May, 350Kb/d in June and 400Kb/d in July.
- The US and Canada are being hit by more cases and faster spread of the mutations (now over 50% of all cases). Alberta is now seeing an 11.4% positivity rate, the highest since the pandemic began and Nova Scotia announced today a two week province wide shutdown. Ontario is moving iCU patients out of high hit areas like Toronto to across the province and has even sent some down to US border cities. The US has now detected a new variant BV-1 that shows signs of antibody resistance and more severe illness in young people.
- India is seeing more lockdowns as daily infections rise to 353K/day (up from 274K a week ago) and the total number of cases has risen to 17.6M (up 2.3M in just one week and ahead of Brazil and second only to the US). The country is facing a severe shortage of oxygen supplies. Fuel demand has fallen 90% in some cities. Prior to the virus flare-up in India motor fuel demand was 750Kb/d and diesel sales were 1.75Mb/d.
- Vaccine hesitation is at 30% of the US population so herd immunity may not happen by the summer time as expected. The US as of yesterday was at 573K deaths.
- Japan’s two largest cities (Tokyo and Osaka) are moving to a declaration of emergency to contain a surge in cases just three months before the delayed summer Olympic games.
Bullish pressure on crude prices:
- Rising vaccination levels in the US is increasing the comfort of going out, lifting energy consumption.
- Optimism over international travel as restrictions are lifted, is gaining momentum and some forecasters expect global jet fuel demand will rise by1.5Mb/d by year end.
- Vaccine trials for children are underway and approval for injections may occur this summer so students can get vaccinated before the start of the fall school year.
- Vaccine passports are getting more support from countries increasing the likelihood of a 2021 summer tourism industry in Europe. The UK may lead the way with passports and may start to issue them as early as next month.
- The US Congress is moving with antitrust suits against OPEC. The NOPEC bill has passed in the House Judiciary Committee. The Congress is angry with the manipulation of crude oil prices by OPEC. Based upon current excess inventories and spare worldwide crude capacity they see oil prices as much too high.
CONCLUSION:. The next few months should see material downside for the energy sector. The topping process for the general stock market is ongoing and some ‘Black Swan’ event will prick this bubble.
Energy Stock Market: The S&P/TSX Energy Index now trades at 117 down, up four points from the 113 level of last week’s report. The S&P/TSX Energy Index is likely to fall substantially in the coming months. A breach of 111.59 (only a short distance away) should initiate the next sharp decline. An initial downside target after such a breach is the 100 area.
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