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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 (SER) 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 August 4th was mostly negative for crude oil prices as Commercial Crude Inventories rose 3.6Mb (forecast was for a decline of 3.1Mb). The main reason for the rise was that Net Imports rose by 510Kb/d, or by 3.57Mb on the week. Had there been a flat Net Import number, Commercial Crude Inventories would have been unchanged. In the mix of imports and exports, exports fell last week by 585Kb/d. Refinery Utilization rose 0.2% to 91.3% last week (last year was 79.6% and in 2019 was 96.4%). Gasoline Inventories fell 5.3Mb and Distillate Fuel Inventories rose by 0.8Mb.
US Crude Production was flat last week at 11.2Mb. Over the coming months we see US crude production continuing to lift and getting close to the 12.0Mb/d levels, as the rig count continues to rise and companies are increasing field activity with higher cash flows. Private energy companies are the most focused on growth. We expect the majority of public and private energy companies to indicate a go-forward strategy of increased drilling activity with production growth in 2H/21 and even more growth in 2022 than in their prior forecasts.
Total Product Demand rose by 45Kb/d to 21.2Mb/d. However, demand is slightly below early August 2019 when consumption was 21.5Mb/d. Gasoline Demand rose 481Kb/d to 9.78Mb/d (9.65Mb/d consumed in early August 2019). Jet Fuel Consumption fell 10Kb/d to 1.64Mb/d (below the pre-pandemic level of 1.81Mb/d in early August 2019). Cushing Inventories fell last week by 0.5Mb to 34.9Mb compared to 52.0Mb last year.
Baker Hughes Rig Data: The data for the week ending July 30th showed the US rig count with a decline of three rigs to 488 rigs (up by seven rigs last week). Of the 488 US rigs active, 385 were drilling for oil and 103 were focused on natural gas activity. This overall US rig count is up 94% from 251 rigs working a year ago. The US oil rig count is up 113% from 180 rigs last year. The natural gas rig count is up a more modest 49% from last year’s 69 rigs. The Permian rig count rose by one rig last week to 243 rigs or up 96% from last year’s 124 rigs.
Canada had a four rig increase last week (versus a one rig decline in the prior week) to 153 rigs. Canadian activity is now up 3.4x from the low of 45 rigs last year. The increase of four rigs was all for natural gas drilling. There were 93 oil rigs working, up from just 11 last year. There are 59 rigs working on natural gas projects now, up from 33 last year.
The material increase in rig activity in both the US and Canada over the last year should continue to translate into rising liquids and gas production.
Conclusion:
The recent OPEC+ agreement resolved their quota and production levels standoff for now. The agreement provided for a rise of 400Kb/d each month from August to the end of the year and would add 2.0Mb/d before year-end. Cheating by OPEC members, desperately needing revenues (like Iraq), should increase the likelihood that we see a worldwide inventory build starting next month after the summer driving season is over.
Bearish pressure on crude prices:
- The Delta Covid variant, rapidly spreading around the world with more countries facing new lockdowns, is negatively impacting worldwide energy demand. Those not vaccinated are now the main patients in hospitals and some US States (i.e. Florida and Louisiana) are now maxxed out at new record highs on ICU beds filled with mostly the unvaccinated. Countries such as Argentina, Australia (military sent in to enforce Zero Covid lockdown) Bangladesh, China (14 of 32 provinces seeing spikes – including Wuhan where the outbreak started, and the capital Beijing), Cuba, Indonesia, Iran, Iraq, Japan, Malaysia, Mexico, Morocco, South Africa, South Korea, Thailand and Vietnam are seeing rising caseloads and are tightening movement and putting in curfews. The rate of vaccination in many of these countries is very low and plans to increase vaccination rates are not occurring. This list has nearly doubled in recent weeks. Death counts are now up to 4.24M worldwide and are at over 614K in the US.
- Iran is working to return to the 2015 UN nuclear deal and an accord is likely to move forward this month under the auspices of its newly elected hawkish President. Iran is cash strapped and their economy is imploding, facing rapidly rising inflation and shortages of water, food and medicine. It needs a deal if they are going to afford necessary imports. They should be able to lift production to 4.0Mb/d from 2.47Mb/d produced in June 2021 if a deal is concluded. OPEC also announced that their July production was the highest since April 2020.
- The US economy, the world’s largest, is now stalling due to the rising ‘Delta’ wave and weaker economic data. The ISM national factory activity in July fell to 59.5, the lowest reading since January 2021 and the ADP non-farm employment change saw a modest rise of only 330K jobs versus the 695K expected. The official US employment data comes out this Friday. China, the number two economy, is also seeing signs of slowdown. Factory orders slipped sharply in July.
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. The US now has 49.7% of Americans completely vaccinated and 54.8% with an initial dose. Worldwide crude demand rose 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) 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$4.05/mcf. AECO prices are at C$4.00/mcf. These are awesome prices for this time of year.
CONCLUSION:
Between official OPEC+ increases, and some OPEC cheating, US production growth and Iran’s addition of 1Mb/d+ (once a nuclear deal is completed and sanctions removed), the additional product will be in excess of demand and will build global inventories starting next month. This would endanger the OPEC bullish scenario for crude prices of over US$80/b before year-end.
WTI crude oil prices fell today by $1.72/b to US$68.84/b on the EIA report of today with the Commercial Crude stock build. In the coming weeks after the summer driving season ends we see the crude price decline commencing again. Once we see a close below the intraday low of last Monday at US$65.01/b the next plunge should take WTI down to the US$60/b level and then it should again churn for a while at that level. The price of crude remains above the pre-pandemic price of early 2020, yet demand is 3-4Mb/d less worldwide and OPEC is ramping up production and still has 4-5Mb of spare capacity. Lower crude oil prices will follow the negative economic impacts of the current rising fourth ‘Delta’ pandemic wave. If worldwide 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 122 and down 23 points from 145 in mid-June, or down so far by 16%). The level to watch now is the low of 119.02 from July 19th. 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 or down by an additional 19%. This is likely to occur in September. Just falling to the 100 level means a nasty decline of over 30% from the mid-June high. Much lower levels are possible later this fall.
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