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 May 12th was mixed. Commercial Crude Inventories fell 0.4Mb to 484.7Mb but would have fallen more if not for net imports falling by 2.36Mb/d, as exports fell by 2.33Mb/d. Motor Gasoline Inventories rose a modest 0.4Mb. Refinery Utilization fell 0.4% to 86.1% last week (last year 67.9%). US crude production rose 100Kb/d to 11.0Mb/d. Over the coming months we see this lifting to 11.5-12.0Mb/d as the increase in drilling activity and higher energy company cash flows is re-invested to stabilize production volumes which are still declining for many producers.
Total Product Demand fell 2.21Mb/d to 17.5Mb/d. Gasoline Demand fell a modest 64Kb/d to 8.80Mb/d while Jet Fuel Consumption rose by 198Kb/d to 1.28Mb/d. So far this year overall demand for products is 4.4% above last year as we recover from the pandemic plunge. Motor Gasoline Demand is up by 7.1% from last year but Jet Fuel remains the only negative component, down 7.4% from a year ago. Cushing Inventories fell last week by 400Kb to 45.9Mb compared to 62.4Mb last year.
Baker Hughes Rig Data: The data for the week ending May 7th showed the US rig count rise by eight rigs (up two rigs in the prior week). Canada had its first rise now that break-up season is ending with an increase of four rigs (down four rigs in the prior week). Canadian activity is now up 112% from the pandemic lows of last year. There are 55 rigs working in Canada now compared to 26 rigs working last year. In the US there were 448 rigs active, up 20% from 374 rigs working a year ago. The oil rig count in Canada was up two rigs to 22 rigs working and is up from seven rigs working last year. The natural gas rig count was up by two rigs to 33 rigs active, up from last year’s level of 19 rigs.
OPEC May Monthly: The May report came out yesterday. OPEC has kept its forecast for the year at 96.46Mb/d. It has lowered the nearby quarter again but optimistically raised the consumption level for Q3/21 and Q4/21. They see Q2/21 consumption at 94.79Mb/d (down from 95.09Mb/d in their prior forecast) and see it rising to 97.9Mb/d in Q3/21 and to 99.74Mb/d in Q4/21. We don’t expect either of those forecasts to be correct. With current consumption in the 94-95Mb/d area we see only a maximum of 97Mb/d of consumption by year end. As OPEC continues to lower near term demand it should, at some point, have a negative impact on prices especially if OPEC brings on the additional production of 2.1Mb/d in the next two months. This month they are adding 600Kb/d. For the month of May OPEC production rose by a modest 26Kb/d to 25.1Mb/d. The largest increases came from cheaters. Iran raised production by 73Kb/d as they found buyers for their discounted crude in China. Nigeria raised production by 75Kb/d. The surprise was the decline from Venezuela which saw a fall of 81Kb/d to 445Kb/d. They had been seeing rises in prior months as China and Russia were buying their crude. OECD Inventories according to the report were 102 days or 4.53Bb. This is down from 120 days in Q1/20 but is up from 93 days in pre-pandemic days.
The Russian mob’s (cybercrime gang Darkside) ransomware attack against the 5,500 mile Colonial Pipeline system that runs from the Gulf Coast to the New England area (45% of east coast consumption) and moves 2.5Mb/d of gasoline, diesel, jet fuel and other products, has lifted gasoline price. Many gas stations are now closed (over 1,000 so far) as they run out of product to sell. Gasoline prices now exceed US$3/gallon (highest since 2014) and many stations are seeing five hour plus line-ups and some very angry customers. The company, Colonial, sees starting up feeder lines already and hopes to be back on fully across their system by the weekend. With products moving at a speed of 5 MPH it may take 19 days for denser products to be fully available again in all the markets. This has lifted crude prices by over US$1/b to US$66.40/b, similar to levels seen last week.
Over the next two 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.
- Vaccine hesitation and vaccine resistance is likely to delay herd immunity. Many individuals in the US who have their first shot of the Pfizer or Moderna vaccine have not gone to get their second shot even though they are eligible. The US as of yesterday was at 582K deaths.
- The US economy is slowing down to a more sluggish pace. The April jobs report came in at just 266K job growth versus the 1.0M expected. The unemployment rate rose to 6.1% from 5.8% expected. Most disconcerting was Manufacturing jobs fell by 18K in the month. Canada’s labour market lost 207,000 jobs in April. The unemployment rate rose to 8.1% from 7.5% in March. Ontario led the way lower with job losses of 153,000. Weaker economies in North America and Europe mean the recovery in consumption may not happen until late this year or into 2022.
Bullish pressure on crude prices:
- Rising vaccination levels in the US is increasing the comfort of going out, lifting energy consumption. By July the US should have most adults who want a vaccine covered and those 12-15 years old are now eligible for the Pfizer vaccine. Studies for children under 12 years old are underway and if successful the FDA may approve some spectrum of these younger people in the week ahead.
- 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. The exception is India which is seeing international flights cancelled due to the rapid spread of the disease.
- Vaccine passports (or certificates) 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. Canada’s Health Minister Patty Hajdu will come up with a ‘certification’ process to allow Canadians to travel safely and internationally.
- Increased violence and rocket attacks in Israel and Gaza is adding a war premium to crude prices. Iran has provided Hamas (who control Gaza) with longer range missiles that can now hit Israel’s largest city Tel Aviv. If these attacks continue Iran could get dragged in with Israel striking at the weapons supplier to Hamas.
CONCLUSION:. We remain skeptical of the current optimism about a full recovery in energy demand before year-end. The challenges we face in Alberta, Ontario, Manitoba and Nova Scotia highlight how quickly things can change from re-openings to lockdowns as caseloads explode. Alberta now has the highest positivity rate at over 12% on the continent with Fort McMurray being the hardest hit area. We think it is likely that the US and Europe will face equivalent reversals in the weeks and months ahead. The tug of war between the normal summer seasonal demand growth hopes and the worsening Covid-19 infections remains the key determinant of future energy consumption and crude oil prices.
The decision on what is to happen on the Line 5 Enbridge pipeline is expected later today. Whatever the decision it will be taken by the loser side into the State or Federal court system. It may take a final court ruling at the highest level for this to be resolved. This Line is important for many of the US States it passes through and is of great importance to Ontario and Quebec which get nearly half of their liquids supplies from this pipeline.
Energy Stock Market: The S&P/TSX Energy Index now trades at 127. We expect the current enthusiasm to wane and the S&P/TSX Energy Index to reverse direction falling substantially in the coming months. A breach of 111.59 should initiate the next sharp decline. An initial downside target after such a breach is the 100 area. The current general stock market weakness may be the catalyst for the energy sector to lose its current strength and back off meaningfully.
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We will be having our second quarter 90 minute webinar tomorrow Thursday May 13th at 7PM MT. If you want to join us go to https://bit.ly/3jjCPgH to subscribe. Our topics for discussion will start with an update on the overall stock market and on the energy market and an analysis of Q1/21 results of companies we cover (the good and the not so good results). In addition we will focus on the investment opportunities in the five Pipeline & Infrastructure stocks that we recently introduced coverage on. There will also be two Q&A sessions. Please join us for a detailed review of the sector and the best ideas to consider for investing in when we get the next low risk BUY signal.