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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 September 15th continued to be impacted by Hurricane Ida followed by Hurricane Nicholas (now a tropical storm). Demand fell while US production only recovered 100Kb/d. Total US production was 10.1Mb/d (up 100Kb/d on the week) but is down from 11.5Mb/d, produced before the recent hurricanes. It was expected that half of the shut in offshore crude oil production would be back on by now but the continued storm season has delayed the restart. It may take into late September for the refineries and offshore production facilities to return to normal operating levels. Commercial Crude Oil Stocks fell 6.4Mb on the week versus the forecast of 3.5Mb. Gasoline Inventories fell 1.9Mb. Refinery activity rose 0.2 points to 82.1% from 81.9%, as some Gulf Coast refineries restarted. Some of the refineries still remain without electricity. We expect to see US production rising and reaching 12.0Mb/d before year end.
Demand for all products fell last week. Total Product Demand fell a modest 43Kb/d to 19.9Mb/d. Gasoline consumption fell a sharp 716Kb/d to 8.89Mb/d with Jet Fuel Consumption falling by 246Kb/d to 1.38Mb/d. Cushing Inventories fell last week by 1.1Mb to 35.3Mb compared to 54.3Mb last year and 38.7Mb two years ago.
Baker Hughes Rig Data: The data for the week ending September 10th showed the US rig count rose by six rigs (fell 11 rigs last week) as Hurricane Ida subsided and Louisiana was able to bring back four rigs. Of the total of 503 rigs working last week, 401 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 98% from 254 rigs working a year ago. The US oil rig count is up 123% from 180 rigs last year at this time. The natural gas rig count is up a more modest 42% from last year’s 71 rigs at 101 rigs. The Permian saw an increase of four rigs to 254 rigs and is up 105% from 124 rigs last year at this time.
Canada had a decline of nine rigs (up five rigs the prior week) to 143 rigs. Canadian activity is now up 2.75x from 52 rigs last year. There were 87 oil rigs working last week, up from 19 last year. There are 56 rigs working on natural gas projects now, up from 33 last year.
The material increase in rig activity over a year ago in both the US and Canada should continue to translate into rising liquids and gas production over the coming months once the impact of the hurricane/storm season is over. The data from the many companies that reported Q2/21 results and their plans for the second half of 2021 support this rising production profile expectation.
OPEC Monthly Oil Market Report:
The OPEC Monthly Oil Market Report for September was released on the 13th. The highlights were a 110Kb/d reduction in their forecast for demand in Q4/21 from 99.82Mb/d to 99.70Mb/d due to the Delta variant’s impact on consumption. We think this reduced forecast is still too high. Overall production rose by 151Kb/d to 26.76Mb/d with increases from Angola (43Kb/d), Iraq (90Kb/d), Saudi Arabia (69Kb/d) and UAE (55Kb/d). This was offset by production declines in Nigeria of 114Kb/d. This increase of 151Kb/d was far below the 400Kb/d that OPEC+ had promised and has added to the speculative spike in crude prices. OPEC expects demand to rise in 2022 to 100.8Mb/d from 96.7Mb/d this year. We see demand now at around 97Mb/d as the biggest consuming nations, the US and China, have weakening demand (note the weaker US demand for gasoline and jet fuel in the EIA report coverage). The OPEC forecast for 2022 is in our view, very optimistic. It assumes that there are no new waves of the pandemic or mutations that can evade the current vaccines.
Conclusion:
Now that the summer driving season is over, we are seeing weaker consumption and soon after the storm season is over there should be weekly builds in Commercial Crude Stocks around the world, as inventories build to meet the winter 2021-2022 needs. Normal fall builds are 2-3Mb per week but if we see any builds over 5Mb in any week, that would put meaningful downward pressure on crude prices. The current spike in prices is speculative in nature and is not sustainable in our view.
Bearish pressure on crude prices:
- The EU is recommending that non-essential travel to the US be halted due to the rapid rise in US caseloads. This will lower air travel and the demand for Jet Fuel, and as a result, lower crude oil prices will occur. Cancellations of passenger flights in the US have caused many US airlines to lower September capacity by 8-10%. The recent Labour Day holiday season may increase case counts in the coming weeks. Consumer Confidence in the US has fallen sharply in recent weeks. In August it fell to 113.8 from 125.1 in July and is the lowest level since February 2021. In China, retail sales grew only a very modest 2.5% (just inflationary levels not volume growth) and was below the 7% forecast. China’s construction spending fell 3.2% last month.
- The Mu Variant is spreading around the world. This variant started in Colombia and now is impacting 39% of those infected with the pandemic disease. This variant is now seen in more than 40 countries and in 49 US States. A London immunologist at the Imperial College in London says “that the early research indicates it appears to be highly effective at evading immunity”.
- The Saudis are pricing crude oil for October delivery to Asia at US$1/b lower than previous months as the fight for market share in the patchy economies in the area continues. China demand is especially sloppy. To arrest the higher prices, China plans on selling 7.4Mb from their state crude reserves on September 24th to cool off prices.
Bullish pressure on crude prices:
- Hurricane Ida and now Nicholas shuttered in most of the offshore Gulf of Mexico oil and gas production. Over 1.7Mb/d of crude was shut in, which equates to over 90% of offshore production. Only 100Kb/d has since recovered. It may take weeks for all this production to be reinstated.
- Hurricanes, extreme heat waves, forest fires, crippling droughts and shortage of electricity for air conditioning across the US and Canada are all 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$5.56/mcf. AECO prices are at an attractive C$4.66/mcf. US natural gas prices have spiked as one facility in the Gulf coast that produces LNG for export is now closed due to the storms. Russia also seems to be having production problems and their exports to Europe have suffered and prices in that market have rocketed higher.
CONCLUSION:
WTI has lifted to US$72.63/b (up US$2.17/b today) due to the continued shut-in of most of the US offshore crude production and OPEC adding less new volumes in August versus expectation. With the summer driving season over and the normal fall build season starting shortly, we expect WTI crude oil prices to reverse and go down again. We see a breach of US$60/b as likely in the next few weeks. How low we go will depend upon the health of the largest economies (the US, China and the EU) and how large the seasonal crude oil storage builds are.
Energy Stock Market: The S&P/TSX Energy Index currently trades at 133, up 5 points on the day due to the sharp increase in crude prices. We expect as crude prices reverse that the recent low for the Energy Index at 109.72, when crude fell to US$61.74/b, will be breached. Once WTI breaches US$61.74/b, we should be heading towards 100 for the Energy Index.
When, not if, in our view, WTI breaks US$60/b the S&P/TSX Energy Index is likely to breach 80 resulting in a painful 45% decline from the peak in mid-June. Over-invested bulls are likely to get hurt pretty badly. We recommend caution and holding cash for the next low risk entry point on that portion of one’s portfolio which is energy focused. The energy and energy service companies with the most downside are those with stretched balance sheets and have missed production, revenue or EBITDA forecasts. Take profits and raise cash.
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