Schachter’s Eye on Energy: OPEC Considers Production Cutbacks To Offset Consuming Countries Strategic Reserve Oil Sales. A Nasty Battle May Ensue!

Each week Josef Schachter gives 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 also hold quarterly webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more. 

EIA Weekly Oil Data: The EIA data of Wednesday November 24th was mixed. US Commercial Crude Stocks rose 1.0Mb (forecast a decline of 481K) as Net Imports rose 1.26Mb/d. The key was a decline in Exports of 1.02Mb/d. Refinery Utilization Rose by 0.7 points to 88.6% from 87.9% in the prior week. Total Motor Gasoline inventories fell 0.6Mb while Distillate volumes fell 2.0Mb. US Crude Production rose by 100Kb/d to 11.5Mb/d back to the year high so far. Total Demand rose by 123Kb/d to 21.75Mb/d. Gasoline consumption rose before the US Thanksgiving long weekend by 92Kb/d to 9.33Mb/d which is just above the 9.20Mb/d consumed in 2019 at this time. Jet Fuel Consumption rose 125Kb/d to 1.51Mb/d versus 1.88Mb/d consumed in 2019 during that holiday season travel time. Cushing Inventories rose 800Kb to 27.4Mb/d.

EIA Weekly Natural Gas Data: Weekly injections continue as we get close to the winter withdrawal season. Last week there was an injection of 26 Bcf, lifting storage to 3.644Tcf. The five year average for last week was a withdrawal of 26 Bcf. Storage on a five-year basis was 3.735Tcf so storage is only 2.2% below the five-year average. Injections for the last nine weeks have been above 2020 levels so NYMEX prices have retreated 22% from their robust levels of US$6.47/mcf in early October when there was fear of too low storage levels for the upcoming winter. NYMEX today is US$5.03/mcf and AECO spot is at $3.77/mcf down over $2/mcf from recent highs. As to be expected, natural gas stocks have retreated from their 2021 highs. 

Baker Hughes Rig Data: The data for the week ending November 19th showed the US rig count rose by seven rigs (up by six rigs in the prior week). Of the total of 563 rigs working last week, 461 were drilling for oil and the rest were focused on natural gas activity. This overall US rig count is up 82% from 310 rigs working a year ago. The US oil rig count is up 100% from 231 rigs last year at this time. The natural gas rig count is up a more modest 34% from last year’s 76 rigs, now at 102 rigs. Texas saw an increase of seven rigs last week to 271 rigs and was up 88% from 144 rigs last year. The Permian saw an increase of six rigs to 278 working and was up 78% from 156 rigs working last year. 

Canada had a decline of one rig (versus a rise of eight rigs in the prior week) to 167 rigs. Canadian activity is now up 65% from 101 rigs last year. There was one more oil rig working last week and the count is now 102 oil rigs working, up from 42 last year. There are 65 rigs working on natural gas projects now, up from 59 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 over the coming months, especially with the DUC count (drilled but uncompleted well count) at very low levels. The data from many companies on their plans for Q4/21 and forecasts for 2022 support this rising production profile expectation. We expect to see US crude oil production reaching 12.0Mb/d before the end of 2021. Companies are taking advantage of attractive drilling and completion costs and want to lock up experienced rigs and crews as staffing issues are getting tougher for the sector. 

Conclusion:

Bearish pressure on crude prices:

1. A coordinated effort by consuming nations to lower rising gasoline prices by opening their strategic reserves (SPR’s) appears to include China, India, Japan, South Korea, the UK and the US. Total releases may be in the range of 100-120Mb (US 50Mb) or just over one day of world demand. This may not be enough to lower prices immediately but should open up a Pandora’s box for OPEC as consuming nations balk at their current pricing and production policies. OPEC holds its next meeting on December 2nd. They increased production by 486Kb/d in September (exceeding nicely the 400Kb/d approved level) but in October they increased volumes by only 217Kb/d. What level they approve at that meeting may force consumers to lift SPR sales even more (US has 604 Mb). 
2. The US may increase pressure on top of SPR sales by cutting off all imports from OPEC countries. Last week the US imported a total of 496Kb/d from only three OPEC countries (mostly from Saudi Arabia – 453Kb/d – the rest from Iraq and Nigeria) and could easily cut them off from sales access to the biggest consuming nation. The US imports the largest amount of needed crude from Canada at 3.43Mb/d (61% of the total). To replace OPEC crude the US could import more from Canada or from Mexico, Colombia, Ecuador, Brazil and Trinidad which also supplied the US last week. The US is also considering a new ban on crude exports which was allowed to start in 2015 after a 40-year ban.
3. Covid caseloads are growing around the world. In the US, the death rate is over 772K deaths (up 8,000 during the last week). Worldwide, the death count is now 5.16M. Deaths are rising in Europe particularly in Austria (imposing lockdowns on the unvaccinated with fines of $30K, Bulgaria, Czech Republic, Croatia, Germany (now over 51K new daily cases plans to tighten restriction next week), Netherlands (21,615 new daily cases), Romania, Russia, Slovakia, Slovenia, and Ukraine. South Korea is now facing record caseloads and is planning to tighten up their economy. If they and Germany tighten up, that will add to world supply chain problems and slow economic growth.
4. Energy demand is under pressure as high prices for most food, rent, taxes, child care, health expenses, auto costs and other daily necessities make spending decisions tougher for consumers. This gouge in prices will surely impact consumers’ buying behaviour in the coming months. The spending pie of consumers is shrinking and some spending habits of the past will have to be dropped. Demand destruction is on the way. Recent US economic releases indicate that we may already be in the early stages of a recession. 
5. China has seen a rising wave of new infections in 19 of its 31 provinces. Many industrial plants in China have been closed due to the high cost of fuel and the Government’s plan to lower emissions in the Beijing area for the upcoming 2022 winter Olympics from February 4th to the 20th. Clean air is needed for the event and China wants to show it is making progress on its climate initiatives. 

Bullish pressure on crude prices:

1. OPEC may be considering lower crude exports to offset sales from SPR’s of the consuming countries planning such sales to keep world inventories tight. The December 2nd meeting in Vienna will be closely watched for the next phase of this tussle.
2. Speculative long investors (options traders, hedge and commodity funds) and a short squeeze on bearish positions in the futures and options markets on crude, have spiked up prices. Energy bulls like Bank of America see US$120/b by June 2022.
3. The Iran deal may not see much progress in the coming months so the concern about 1-2Mb/d of new Iranian oil is abating.
4. JP Morgan and other US investment banks see world demand exceeding pre-pandemic levels in Q2/22. 

CONCLUSION: 

WTI is at US$78.46/b unchanged from last week despite the SPR sales and the retaliatory comments by OPEC members. Crude has retreated over 8% from the high in late October. We see prices as still having US$20-25/b of speculative value which should disappear as demand weakens in the US and China as they both appear to be headed into recessions. If repeated economic data comes out supporting recessionary conditions, the oil price slide could be quick and painful. Leveraged speculative longs in crude oil futures are vulnerable to nasty margin calls in the future. 

Energy Stock Market: The S&P/TSX Energy Index currently trades at 169, up four points from last week as investors jump on OPEC’s talk of restricting future supplies. We think that the supply side bullish view will be trounced by the weakened demand side as the two biggest economies face slower growth and move towards recession. Add in problems in Germany, Japan and South Korea and the world’s economic juggernauts will offset any supply moves by OPEC. Remember regular recessions can lower world demand by 2-5Mb/d rising to over 8Mb/d of lower demand as was seen during Covid-impacted 2020. 

Josef will be away next week. Our next ‘Eye on Energy’ issue will come out on Wednesday December 8th. 

Our November Schachter Energy Report Monthly comes out tomorrow Thursday November 25th with detailed updates on 25 companies that have released their Q3/21 report since our Interim Report. 

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