Schachter’s Eye on Energy: US Consumption Falls 1.57Mb/d Last Week. Crude Oil Retreats.

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 14th was mostly bearish. US Commercial Inventories rose by 0.6Mb to 493Mb (versus an expected decline of 3.3Mb). Demand last week fell as total consumption came in down 1.57Mb/d to 18.8Mb/d. Net Imports fell 417K/d or by 2.9Mb on the week which would have made the inventory build even higher if it stayed flat. Gasoline demand rose by a modest 160Kb/d to 9.1Mb/d and Jet Fuel consumption fell 181Kb/d to 1.18Mb/d. US lower 48 production recovered by another 100Kb/d. Refinery Utilization remained flat at 85.0% and is above last year’s 67.6%. Cushing Inventories fell last week by 1.3Mb to 45.4Mb.

Baker Hughes Rig Data: The data for the week ended April 16th showed the US rig count rising by seven rigs (rise of two rigs in the prior week). Canada had a decline of two rigs (11 rigs lower last week) as we are still in the spring break-up season. Canadian activity is now 87% above the lows of when the pandemic fears were at their highest. There are 56 rigs working in Canada now compared to 30 rigs working at this time last year. In the US there were 439 rigs active down only 17% now from 529 rigs working a year ago. The oil rig count in Canada fell by two rigs to 17 rigs working but is up from seven rigs last year. The natural gas rig count was unchanged at 39 rigs active but is up from last year’s level of 23 rigs working at this time last year. 

Conclusion: 

Crude oil prices have declined US$0.57/b to US$62.10/b on the weekly crude inventory increase and the US lower 48 production 100Kb/d rise. We remain in a US$58-64/b trading range. A closing over US$64/b would energize the bulls and a close below US$58/b would accelerate the bearish view. 

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 and will help to drive crude prices lower. We expect to see a sustained breach of US$60/b shortly. A repeat close below US$58/b could set up a quick decline to the US$48-52/b level.  

Bearish pressure on crude prices:

1. 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. 
2. 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 650Kb/d more if sanctions were removed in a revised nuclear deal. Discussions are ongoing in Vienna and appear to be making progress. Other sanction busting buyers of Iranian crude now include: India, Turkey and North Korea.
3. 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. 
4. The US and Canada are being hit by more cases and faster spread of the mutations (now over 50% of all cases). Some Provinces are putting in border restrictions for non-essential travel. BC, Ontario and Quebec are among those imposing restrictions.
5. India is seeing more lockdowns as daily infections rise to 274K/day (up over 100K from a week ago) and the total number of cases has risen to 15.3M (ahead of Brazil and second only to the US).
6. Vaccine hesitation is at 30% of the US population so herd immunity may not happen by the summer time as expected. Also a new study in Israel shows a reduced effectiveness of the Pfizer vaccine against Covid variants. 
7. 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:

1. War tensions are escalating between Russia and Ukraine over the Donbas region and in China over its desire to annex Taiwan. If either turns into a shooting war the price of crude could see a war premium. Russia has now moved 150,000 troops and a significant number of war planes into the area and has established a likely war event situation as they have even set up triage hospital facilities.
2. 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. 
3. Libya has imposed a force majeure on exports of 180,000 b/d from their Hariga port as the country faces another budget and financial sharing crisis. 

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. 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 should see significant more downside for the energy sector. The topping process for the general stock market is ongoing and some ‘Black Swan’ event will prick this bubble. A bubble burst event for the crypto currencies appears to be one of the newest possible reasons. 

Energy Stock Market: The S&P/TSX Energy Index now trades at 113 down, seven points from the 120 level of our last report or down by nearly 6% just in the last week. The S&P/TSX Energy Index is likely to fall substantially farther in the coming months. A breach of 111.59 (only a short distance away) should initiate the next sharp decline. The next downside target after such a breach is the 100 area. 

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