Schachter’s Eye on Energy: US Consumption Near Prepandemic Levels. Iran Nuclear Deal Key For Supply/Demand Balance Or Glut Going Forward.

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 June 23rd was supportive of crude oil prices. The headline Commercial Crude Inventories data was bullish for crude as it fell 7.6Mb on the week (forecast a draw of 3.9Mb) to 459.1Mb. Refinery Utilization fell 0.4% to 92.2% last week (last year was 74.6%). Gasoline Inventories fell by 2.9Mb as consumption rose. Distillate Fuels rose by 1.8Mb.  

US Crude Production backed off by 100Kb/d to 11.1Mb/d last week after rising 200Kb/d last week. Over the coming months we see US crude production 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 by 180Kb/d to 20.75Mb/d. It is getting close to the demand of mid-June 2019 which was 20.81Mb/d. Gasoline Demand rose by 80Kb/d to 9.44Mb/d. Jet Fuel Consumption rose significantly, up by 326Kb/d to 1.58Mb/d (1.67Mb/d in mid-June 2019). Cushing Inventories fell last week by 1.9Mb to 41.7Mb compared to 45.8Mb last year.

Baker Hughes Rig Data: The data for the week ending June 18th showed that the US rig count rose by nine rigs (up five rigs in the prior week). Canada had a large 24 rig increase (up by 16 rigs in the prior week). Canadian activity is now up 6.9x from the low of 17 rigs last year. There are 117 rigs working in Canada now. Of the Canadian increase there were 15 more oil rigs working last week, a total of 74 oil rigs working, up from just five last year. There are 43 rigs working on gas projects now, up from only 12 last year. In the US there were 470 rigs active, up 77% from 266 rigs working a year ago. There were eight more rigs drilling for oil in the US or 373 rigs up from 189 last year. For natural gas rigs there were 97 working rigs up from 75 last year. 

The increase in rig activity in both the US and Canada should continue to translate into rising production. 

Conclusion:

This month OPEC will increase production by 700Kb/d, and in July they plan to lift production by a further 840Kb/d. OPEC will hold its next meeting on July 1st to determine future production increases or decreases depending on what happens with the Iranian nuclear talks and the resulting increase in Iranian crude production from August onward. They are talking about adding a further 500Kb/d under pressure from Russia. 

Bearish pressure on crude prices:

1. The new Covid variant ‘Delta” is spreading around the world and is replacing the prior B.1.1.7 variant. This version from India is now the most active in the UK and has been found in 60 countries including the US and Canada. Chile, Indonesia, Afghanistan and Zambia have the highest level of new case loads now. The UK may face new lockdown measures due to the ‘Delta’ outbreak. 
2. Iran is in the final stage of talks to return to the 2015 UN nuclear deal and an accord is likely to be completed in July (the seventh and likely final round). Significant progress has been made and 1,040 sanctions on issues such as insurance, oil and shipping have been agreed to. Once it’s signed off and energy sanctions are removed, Iran could increase production quickly by 1.0- 2.0Mb/d to 4Mb/d, up from 2.46Mb/d produced in May 2021. Iran last produced over 4Mb/d in 2016. They should be able to ramp up production quickly as it has a new 1,000Km – 1Mb/d pipeline that bypasses the Strait of Hormuz. It is situated at Jask, in the Gulf of Oman. This will make shipping crude cheaper to buyers in Asian countries. China and India are expected to be the biggest buyers of this new crude supply. Iran announced that they have 200Mb of crude in storage ready to be sold. Iranian floating storage offshore could be as high as 60Mb of which a large amount sits offshore Singapore. The US has signalled that things are progressing as they lifted sanctions on more than a dozen Iranian officials and energy firms. 
3. Rising crude and product prices may dampen worldwide demand.

Bullish pressure on crude prices:

1. Rising vaccination levels to herd immunity level of 70% by July in the US is expected to provide a return to normal summer holidaying and energy consumption, as well as Canada and the EU. Demand should rise by 1.5-2.0Mb/d during the summer travel months. 
2. Weather impacts (hurricane season) should start soon in the Gulf of Mexico which would necessitate shutting in some of the offshore production. 
3. High temperatures, crippling droughts and heatwaves in Texas and California are cranking up demand for air conditioning and natural gas is a beneficiary of this increase in electricity demand. NYMEX natural gas prices have lifted to US$3.35/mcf.
4. There has been a lift in crude prices in the last few weeks as some commentators have said that the Iran deal may come much later than the August forecast as talks drag on, delaying the large increase in Iranian crude volumes. 

CONCLUSION: We remain skeptical of the optimism about the projected 4-5Mb/d full recovery in energy demand to 100Mb/d before year-end (OPEC forecast 99.8Mb/d). The tug of war between the normal summer holiday travel demand pick-up and the 3-4Mb/d increase in crude oil supplies this year remains the key determinant of future energy consumption and crude oil prices. We see demand picking up by around 2Mb/d before year-end which is less than the amount of production that will be brought on by OPEC alone. Between some OPEC cheating and Iran adding 1-2Mb/d from August (if a deal is concluded), the additional product will be in excess of current demand and will build inventories. This would endanger the OPEC bullish scenario for crude prices.

WTI crude oil prices rose above US$74/b (first since October 2018 – today US$73.67/b) and are now quite overbought. A decline below US$66/b should start the corrective phase we have been forecasting. The current enthusiasm by hedge fund futures traders and now MEME speculators for the sector, appears to be like that seen in late 2018 when crude oil prices rose to US$76.90/b in September and three months later had declined to US$42.36/b, down by 45%. The price of crude now is above the pre-pandemic price of early 2020, yet demand is 4-5Mb/d less and production by OPEC is ramping up by 2.1Mb/d from OPEC alone. This does not make sense! 

Energy Stock Market: The S&P/TSX Energy Index trades currently at 143 (same level as last week). A close below 130 should initiate the next sharp decline. An initial downside target after such a breach is in the 100 area. The expected general stock market weakness would be the catalyst for the energy sector to lose its current momentum and back off meaningfully.

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Our June SER Monthly comes out on tomorrow Thursday June 24th and includes our normal Stock Market and Energy Market Updates as well as an update of our Insider Trading Report and a guest article by Ron Barmby which will be on the ‘Hydrogen Strategy For Canada’. If you want to access this report and to become a subscriber go to https://bit.ly/3jjCPgH to subscribe.

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