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 July 21st was mixed for crude oil prices as energy product demand rose however Commercial Crude Inventories also rose. The headline Commercial Crude Inventories data showed a rise of 2.1Mb on the week (forecast was for a draw of 4.47Mb) to 439.7Mb. The main reason for the rise was a sharp decline in exports of lighter crudes which see little demand from US refineries which are focused on processing heavier crudes. Last week exports fell by 1.56Mb/d to 2.46Mb/d or down by 10.9Mb on the week highlighting the reason for the forecast miss. Refinery Utilization fell 0.4% to 91.4% last week (last year was 77.9% and in 2019 was 93.1%). Gasoline Inventories fell 0.1Mb and Distillate Fuel Inventories fell by 1.3Mb.
US Crude Production was flat versus last week or at 11.4Mb/d of production, but is up 400Kb/d so far this month, and up 1.7Mb/d from the pandemic low. Over the coming months we see US crude production continuing to lift and getting close to the 12.0Mb/d level. The increase in drilling activity and higher energy company cash flows are causing a growth in reinvestment to stabilize production volumes which were declining for many producers. Private energy companies are the most focused on growth. We expect the vast majority of energy companies to indicate a go-forward strategy of increased drilling activity with production growth in 2H/21 and much more growth in 2022 than in their prior forecasts.
Total Product Demand rose by 1.28Mb/d to 20.6Mb/d. However, demand is below late July 2019 when consumption was 21.6Mb/d. Gasoline Demand rose a modest 12Kb/d to 9.29Mb/d (9.67Mb/d consumed in late July 2019). Jet Fuel Consumption fell 151Kb/d to 1.41Mb/d (below the pre-pandemic level of 1.84Mb/d in late July 2019). Cushing Inventories fell last week by 1.4Mb to 36.7Mb compared to 50.1Mb last year.
Baker Hughes Rig Data: The data for the week ending July 16th showed the US rig count with a rise of five rigs to 484 rigs (up four rigs last week). Of the 484 US rigs active, 380 were drilling for oil and 104 were focused on natural gas activity. This overall rig count is up 91% from 253 rigs working a year ago. The US oil rig count is up 111% from 180 rigs last year. The natural gas rig count is up a more modest 46% from last year’s 71 rigs.
Canada had a big 13 rig increase (up by one rig in the prior week) to 150 rigs. Canadian activity is now up 4.7x from the low of 32 rigs last year. Of the Canadian increase there were six more oil rigs working last week for a total of 94 oil rigs working, up from just six last year. There are 55 rigs working on gas projects now, up from only 26 last year.
The increase in rig activity in both the US and Canada should continue to translate into rising liquids and gas production.
On Sunday July 18th OPEC agreed to resolve their quota and production levels standoff. The agreement provided for a rise of 400Kb/d over each month from August to the end of the year and would add 2.0Mb/d before year-end. The big concession was to raise quotas for the UAE and Russia and the Saudis took an increase as well. It appears that this deal is a result of the pressure by the US, China and India, as the largest consuming nations, to force the members to an accommodation and ensure adequate supplies for the rest of this year. The UAE got a 332Kb/d increase in their quota to 3.5Mb/d starting in May 2022 (production June 2021 – 2.68Mb/d). Russia and the Saudis took 500Kb/d increases. The chaos in OPEC is not over. Cheating by OPEC members desperately needing revenues (like Iraq) may see a current shrinking worldwide inventory level move to a regular weekly build starting this fall. The UAE agreed to this deal for now but still wants to lift their production to 4.0Mb/d as they have invested heavily to increase their productive capacity.
On Monday July 19th the stock market was pummeled (Dow Jones Industrials were down 725 points to 33,963) as more ‘Delta’ Covid cases exploded around the world. Over 83% of US new cases are due to this more virulent mutation and is impacting mainly the unvaccinated. Most of the pain was felt by the ‘reopening’ trade stocks led by the energy sector which faced the most downside pressure. WTI fell US$5.53/b to US$66.30/b. It is bouncing back now from this sharp one day decline.
Bearish pressure on crude prices:
- The Delta Covid variant is spreading around the world and more countries are facing renewed lockdowns as this new variant takes hold and becomes the dominant version. Australia is facing over half the country under lockdown. US caseloads are up over 100% in just one week to more than 32,000. Some US states with vaccine hesitancy are seeing their highest increase in hospitalizations and deaths. Most of the ICU patients are young and anti-vaxxers. Asian demand is being hit in China, South Korea, Indonesia, Japan and Vietnam as they tighten movement restrictions again. The rate of vaccination in these countries is very low and plans to increase vaccination rate are not occurring. One indicator of lower demand in China is that steel production fell 5.6% in June according to a Reuters report on July 14th. China crude imports were reported as down for the first half of 2021, the first time this has happened in eight years. Refiners in China are saddled with excess jet fuel which cannot be stored for long periods as the fuel deteriorates in quality over time.
- Iran is working to return to the 2015 UN nuclear deal and an accord is likely to be completed in August under the auspices of the newly elected President. Iran is cash strapped and their economy is imploding, facing rapidly rising inflation and shortages of food and medicine. It needs a deal if they are going to afford necessary imports. They have started to ship crude to China from their new export terminal at Jask in the Gulf of Oman. They should be able to lift production to 4.0Mb/d from 2.47Mb/d produced in June 2021 if a deal is concluded in the coming weeks.
- China lowered imports by 3% in Q2/21 as the Chinese government import quotas were shrunk and refineries went into maintenance cycles. With the current price level for crude many refiners are not seeing adequate returns and have lowered their buying.
Bullish pressure on crude prices:
- Rising vaccination levels of the adult US population toward herd immunity level has lifted summer travel both by air and land. Worldwide demand should rise by 1.5-2.0Mb/d during the summer travel months. This demand increase should last into early September and then we should see a seasonal slowdown of 1.5-2.0Mb/d of consumption and an inventory build to meet winter peak demand.
- Weather impacts (hurricane season has started early) may necessitate shutting in some of the offshore Gulf of Mexico production.
- Extreme heat waves, crippling droughts and shortage of electricity for air conditioning across the US and Canada is aiding consumption of natural gas. It is a big beneficiary of this increase in electricity demand as hydro has in many cases low water levels. NYMEX natural gas prices are now at US$3.87/mcf. AECO prices are at C$3.83/mcf. These are awesome prices for this time of year.
CONCLUSION: We remain skeptical of the optimists projected 4-5Mb/d full recovery in energy demand to 100Mb/d before year-end. 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 (ex-Iran) alone. Between some OPEC cheating, US production growth and Iran adding 1Mb/d+, the additional product will be in excess of current demand and will build global inventories this fall. This would endanger the OPEC bullish scenario for crude prices of over US$80/b before year-end.
WTI crude oil prices bounced today to US$69.53/bon the US consumption recovery. While up today by US$2.33/b it is down from US$73.30/b at this time last week. We see this bounce from the low of US$65/b on Monday as just a short-term oversold recovery. In the coming days we see the decline commencing again. Once we see a close below the intraday low of Monday the next plunge should take WTI down to the US$60-62/b level and then it should again churn for a while at that level. Lower prices should occur once the summer driving season ends in September. The price of crude remains above the pre-pandemic price of early 2020, yet demand is 3-4Mb/d less and OPEC is ramping up production while still having lots of spare capacity. Lower crude oil prices will follow the economic impact of this fourth pandemic wave. If the caseloads rise and economic activity stumbles and vaccination hesitancy continues, then the more pessimistic case for demand and crude oil prices becomes more likely.
Energy Stock Market: The S&P/TSX Energy Index trades currently at 126 (down 19 points from 145 in mid-June or down so far by over 13%). The close below 132 that we mentioned last week has occurred. The level to watch now is the intraday low of this Monday at 119.02. A close below this level would set up the next support level of the 111 area. A bust of US$60/b for WTI would likely mean a decline in the Energy Index to the 100 level or lower. This is likely to occur in September. Much lower levels are likely. Just to the 100 level means a nasty decline of over 30% from the mid-June high.
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