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 (this will be going up to 32 companies covered when we introduce research coverage of five Pipeline & Infrastructure companies next week). 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 14th was mixed. On the positive side US commercial inventories fell by 5.9Mb (expectation decline of 2.9Mb) as strong demand lifted total consumption last week by 1.09Mb/d to 20.3Mb/d. Year-to-date, total product supplied is up 0.2% from 19.39Mb/d to 19.42Mb/d. Imports fell 411K/d or by 2.9Mb on the week and impacted the inventory level (effectively the difference versus the forecast). Gasoline demand rose by 162Kb/d to 8.94Mb/d and Jet Fuel consumption rose 96Kb/d to 1.36Mb/d as the view of herd immunity is rising as more people receive their vaccines giving flyers more comfort. US production recovered by 100Kb/d to 11.0Mb/d but remains down from last year’s level of 12.3Mb. Refinery Utilization recovered 1.0 points to 85.0% from 84.0% and is above last year’s 69.1%. With this pick up in refinery activity Gasoline inventories rose 300Kb to 234.9Mb.
Baker Hughes Rig Data: The data for the week ended April 9th showed the US rig count rising by two rigs (rise of 13 rigs in the prior week). Canada had a decline of 11 rigs (12 rigs lower last week) as we are in the spring break-up season. Canadian activity is now above the lows of when the pandemic fear was at its highest. There are 58 rigs working in Canada now compared to 35 rigs working at this time last year. In the US there were 432 rigs active down 28% from 602 rigs working a year ago. The oil rig count in Canada fell by five rigs to 19 rigs working but is up from six rigs last year. The natural gas rig count fell by six rigs to 39 rigs active but is up 38% from last year’s level of 29 rigs working at this time last year.
OPEC April Monthly: The April report came out yesterday. OPEC raised its forecast for the year by 190Kb/d to 96.46Mb/d. Most of the demand growth is expected to occur in Q4/21. However they continue to lower the front quarters as the pandemic evolves lowering energy demand in the near term. For Q2/21 they lowered demand by 520Kb/d to 95.61M/d. I remain skeptical that even this level of consumption will occur and they will again be lowering the next quarter as they report in future monthly reviews. For the month of April OPEC production rose by 201Kb/d to 25.0Mb/d. The largest increases came from cheaters. Iran raised production by 137Kb/d as they found buyers for their discounted crude in China. Angola raised production by 40Kb/d, Iraq by 23Kb/d and Libya by 26Kb/d. OECD inventories according to the report were 106 days or 4.58Bb. This is down from 120 days in Q1/20 but is up from 93 days or 4.43Bb in Q4/18 or in pre-pandemic days.
Crude oil prices have spiked up nearly US$3/b today as the Commercial Crude Stock decline and the strong consumption data were well received. We remain in a US$58-64/b trading range. We were at the lower end of this range last week and now have moved into the upper part of the range. A rise over US$64/b would energize the bulls and a close under US$58/b would accelerate the bearish view.
Over the next three months OPEC will increase production by 2.3Mb/d, more than is needed for world wide demand growth into late 2021 and will help to drive crude prices lower. We expect to see a sustained breach of US$60/b shortly. A close below US$58/b could set up a quick decline to the US$48-52/b level.
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 its cuts by 250Kb/d in May, 350Kb/d in June and 400Kb/d in July.
- Significant OPEC cheating is occuring (Iran, Iraq, Libya, Nigeria and Venezuela). China plans to buy 1.0Mb/d from Iran this month (January 2021 they imported 600Kb/d) as they get a nearly 10% price discount and very generous payment terms. China is not concerned about the US sanctions regime. Iran could increase production quite quickly by about 625Kb/d more if sanctions were removed in a revised nuclear deal. Discussions are ongoing in Vienna. Additional production will require a lot of work and time to rehabilitate aged fields which have not had access to modern technology.
- Angola and Nigeria are cutting their official selling prices to find buyers. Stranded African cargos with no buyers are occurring more frequently as the competitive landscape picks up.
- US production has recovered by 1.3Mb/d from the pandemic low so far. The recovery in the US rig count supports the view that US production could rise by another 1.0Mb/d this year to 12.0Mb/d.
- The US and Canada are being hit by higher and faster spread of the mutations. Alberta is going back to tougher restrictions due to the pick up in caseload and UK mutation spread. MIchigan is being hit by more of the UK variant and hospitalizations are pressuring capacity.
- Energy demand is showing signs of softening in various countries in Asia as tourism remains lackluster. The EIA has again lowered its demand forecast for 2021. India is seeing more lockdowns as daily infections rise to 169K/day and the total number of cases has risen to 13.5M (ahead of Brazil and second only to the US).
- Vaccine refusals are at 30% of the US population and in the military a poll of the Marines showed 40% would refuse taking any vaccines at this time. The pulling off use of the J&J vaccine is adding to vaccine hesitancy.
Bullish pressure on crude prices:
- War tensions are escalating between Russia and Ukraine over the Donbas region and China over its desire to annex Taiwan. If either turns into a shooting war the price of crude could see a war premium.
- The Houthi’s in Yemen have increased their firing of drones and ballistic missiles supplied by Iran, into targets in Saudi Arabia. Aramco facilities in Jubail and Jeddah were attacked. Damage has not been disclosed.
- Israel reportedly has attacked and sabotaged the Iranian Natanz nuclear plant. Iran has vowed retaliation which again could add a war premium to crude.
- Rising vaccination levels in the US is increasing the comfort of going out, lifting energy consumption. If the variant mutations increase caseloads and severity this could reverse this demand increase.
We see the technical support levels for WTI crude now at US$57.63/b intraday and US$58/b on a close. Energy and energy service stocks are overbought. 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.
CONCLUSION: The next few months could see significant downside for the energy sector. The topping process for the general stock market is ongoing and some ‘Black Swan’ event will prick this bubble. Rising interest rates appear to be one of the most likely reasons.
Energy Stock Market: The S&P/TSX Energy Index now trades at 120 up three points from last week and is part of a lengthy, extended, and broadening topping process from the peak at 128 a month ago. The S&P/TSX Energy Index is likely to fall substantially in the coming months. A breach of 111.59 should initiate the next sharp decline.
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