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, energy service and pipeline & infrastructure companies with regular updates. We hold quarterly subscriber webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more.
EIA Weekly Data: The EIA data on Wednesday May 19th was mixed. Commercial Crude Inventories rose 1.3Mb to 486.0Mb but would have risen more if not for Net Imports falling 587Kb/d or by 4.1Mb last week. Motor Gasoline Inventories fell 2.0Mb as gasoline demand rose while buyers lined up to fill their gas tanks due to the Colonial Pipeline ransomware attack. Refinery Utilization rose 0.2% to 86.3% last week (last year 69.4%). US Crude Production remained at 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 are reinvested to stabilize production volumes which are still declining for many producers.
Total Product Demand rose last week by 1.79Mb/d to 19.3Mb/d reversing most of last week’s 2.21Mb/d decline. Gasoline Demand rose by 424Kb/d to 9.2Mb/d as consumers rushed to keep their tanks full. Jet Fuel Consumption fell by 96Kb/d to 1.19Mb/d. So far this year overall demand for products is 4.9% above last year as we recover from the pandemic plunge. Motor Gasoline Demand is up by 8.4% from last year but Jet Fuel remains a negative component, down 4.8% from a year ago. Cushing Inventories fell last week by 100Kb to 45.8Mb compared to 56.9Mb last year.
Baker Hughes Rig Data: The data for the week ending May 14th showed the US rig count rise by five rigs (up eight rigs in the prior week). Canada had its second weekly rise with an increase of four rigs (up four rigs in the prior week). Canadian activity is now up 156% from the pandemic lows of last year. There are 59 rigs working in Canada now compared to 23 rigs working last year. In the US there were 453 rigs active, up 34% from 339 rigs working a year ago. The oil rig count in Canada was up three rigs to 25 rigs working and is up from seven rigs working last year. The natural gas rig count was up by one rig to 34 rigs active, up from last year’s level of 16 rigs.
The Colonial Pipeline system ransomware disruption lifted gasoline prices to over US$3.00/gallon with some stations gouging patrons at over US$7.00/gallon and now face Federal charges for this extortion move. Reuters reported that almost 12,000 gasoline stations in the US east coast had closed as they ran out of product to sell as of Monday May 17th. The company, Colonial, has started up again but with some products moving at a speed of 5 MPH, it may take two more weeks for denser products to be fully available again in all the markets.
Over the next two months OPEC will increase production by 2.1Mb/d with latest industry reports showing them having increased production by 1.0Mb/d this month. With worldwide demand now around 95Mb/d we expect by year-end demand may rise to 97Mb/d, but not back to pre-pandemic levels of 100-101Mb/d.
Bearish pressure on crude prices:
- 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 586K deaths. Worldwide deaths have risen to 3.39M.
- The US economy is slowing down to a more sluggish pace. The recent declines in core retail sales, in housing starts (down 9.5% in April due to higher lumber and other input costs) and housing sales (single family home sales down 13.4% in April) was not expected. Weak and stagnating economies in many places in Asia, North America and Europe mean the full recovery in consumption to pre-pandemic levels will likely not happen until 2022. Rising mutation caseloads in Singapore and Taiwan are new outbreak areas. Japan’s economy fell by 5.1% in Q1/21 adding to the recessionary worries for three of the five largest economic areas (Japan, the EU and India).
Bullish pressure on crude prices:
- Rising vaccination levels in the US is increasing the comfort of going out, lifting energy consumption. 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 by 1.0Mb/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 expects to come up with a ‘certification’ process to allow Canadians to travel safely and internationally.
CONCLUSION:. We remain skeptical of the 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 11% 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 holiday travel demand and the worsening Covid-19 infections remains the key determinant of future energy consumption and crude oil prices.
WTI crude oil prices are down today by US$3.44/b to US$62.05/b or down by 5.3% on the day. From last week, prices are down over US$4.50/b. The fear about the Colonial Pipeline had taken prices up to nearly US$67/b. A breach of USS$60/b would have negative implications. Technically a close below US$57.63/b (the early April low) would be very bearish and set up a decline to US$48-52/b.
Energy Stock Market: The S&P/TSX Energy Index now trades at 125 as energy stocks retract with the general stock market correction. A close below 111.00 (the mid-April low) should initiate the next sharp decline. An initial downside target after such a breach is the 100 area. The current general stock market weakness is the catalyst for the energy sector to lose its current strength and back off meaningfully.
Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all archived Webinars, Action Alerts, TOP PICK recommendations when the next BUY or SELL signal occurs, as well as our Quality Scoring System review of the 30 companies that we cover. We go over the markets in much more detail and highlight individual companies’ financial results in our reports. If you are interested in the energy industry this should be of interest to you.
We had a very successful 90 minute webinar tomorrow last Thursday May 13th. If you want to review it in our archives, to become a subscriber to go over the presentation. Go to https://bit.ly/3jjCPgH to subscribe. Our topics for discussion started with an update on the overall stock market and our bearish concerns and an analysis of Q1/21 results of companies we cover (the good and the not so good results). In addition we focused on the investment opportunities in the five Pipeline & Infrastructure stocks that we recently introduced coverage on. There were also two Q&A sessions.
We are completing our review of 12 energy, energy service and infrastructure companies for our May Monthly SER which will be released next Friday May 28th. It will include reviews of all of the five Pipeline & Infrastructure companies we now follow.