CDN NEWS | 
US NEWS 
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 Thursday January 20th (as Monday was a holiday – Martin Luther King Jr. Day) was moderately bearish for energy prices as US Commercial Crude Stocks rose 0.5Mb (a decline of 940Kb was expected). The most bearish part for crude prices was that Motor Gasoline Inventories rose by 5.9Mb. Refinery Utilization was at 88.1%, down from 88.4% in the prior week but above the 82.5% level of a year ago. However, it was below the 90.5% utilization level of two years ago before the pandemic hit. US Crude Production remained at 11.7Mb last week.
Total Demand rose 1.086Mb/d to 21.915Mb/d as Distillate demand rose by 807Kb/d (in mid-January 2020 demand was 21.504Mb/d). Total Demand is now above pre-pandemic levels. Motor Gasoline demand rose by 317Kb/d to 8.224Mb/d (in mid-January 2020 demand was 8.662Mb/d). Jet Fuel Consumption fell 92 Kb/d to 1.513Mb/d compared to 1.551Mb/d in mid-January 2020. Cushing Inventories fell 1.3Mb to 33.5Mb.
Overall we would rate this week’s data as modestly negative for energy prices but it’s being ignored by the bulls who are focused on potential lower production from Russia if sanctions are imposed if they invade Ukraine in the coming weeks. These sanctions if implemented would end exports to western Europe (NATO countries) and the US. The US has been a buyer of Russian crude. Two weeks ago they purchased 151Kb/d.
EIA Weekly Natural Gas Data: Weekly withdrawals are rising as the depths of winter are now here. Last week data showed a large withdrawal of 206 Bcf (the largest so far this winter), lowering storage to 2.810 Tcf. The biggest US draws were in the South Central (69 Bcf), the Midwest (65 Bcf) and the East (61 Bcf). The largest US draw ever occurred in early January of 2018 at 359 Bcf and the largest draw in 2021 occurred in mid-February with a draw of 338 Bcf.
The five-year average for last week was a withdrawal of 153 Bcf and in 2021 was 187 Bcf. Storage is now 1.2% above the five-year average, so the US is not facing a natural gas shortage as is seen in Europe and Asia. NYMEX today is US$3.83/mcf due to the expected warming trend for the upcoming week. AECO spot today is trading at $4.10/mcf as we are in a cold spell across much of Canada. With the rest of January and all of February (the two key winter months for natural gas demand) we are likely to see large price moves to the upside on very cold days. Spikes over $6/mcf could occur if multiple weekly withdrawals of over 200 Bcf are seen.
After winter is over natural gas prices should retreat and if the general stock market decline unfolds as we expect, a great buying window could develop at much lower levels for natural gas stocks in Q2/22.
OPEC January Monthly: On January 18th OPEC released their January 2022 Monthly Forecast Report (December data). As seen in the past few months they have not added the 400Kb/d, their stated monthly production increase. In November only 285Kb/d was added and in December only 166Kb/d was added. Production rose to 27.882Mb/d in December 2021 but remains below the 29.368Mb/d produced in December 2019 before the pandemic hit. So they still have nearly 1.5Mb/d to bring on just to get back to pre-pandemic levels. Moral suasion by the US, China and India does not seem to be influencing OPEC’s production decisions.
The biggest increase came from Angola at 85Kb/d, followed by Saudi Arabia at 61Kb/d and then by Iraq at 28Kb/d. Surprisingly Kuwait only added 21Kb/d to 2.55Mb/d, even though they could have added 150Kb/d more, just to get back to 2019 pre-pandemic levels of 2.71Mb/d. Sanctioned Iran saw production rise by a modest 8Kb/d to 2.478Mb/d and Venezuela saw a modest rise of 20Kb/d to 681Kb/d. OPEC sees 2022 consumption at 100.8Mb/d, up 4.15Mb/d from the 96.63Mb/d consumed in 2021. They have reduced their 2022 Q2 & Q3 demand levels due to the ongoing pandemic impact on demand.
Baker Hughes Rig Data: The data for the week ending January 14th showed the US rig count rose by 13 rigs (up two rigs the prior week) to 601 rigs last week. Of the total working last week, 492 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 61% from 373 rigs working a year ago. The US oil rig count is up 71% from 287 rigs last year at this time. The natural gas rig count is up a more modest 28% from last year’s 85 rigs, now at 109 rigs.
Canada had a sharp increase of 50 rigs as activity continued to recover from the Christmas holiday season to 191 rigs. Canadian activity is up 19% from 161 rigs last year. There were 43 more oil rigs working last week and the count is now 121 oil rigs working, up from 90 last year. There are 70 rigs working on natural gas projects now, down one rig from 71 last year.
The overall increase in rig activity from a year ago in both the US and Canada should continue to translate into rising liquids and natural gas volumes over the coming months. The data from many companies’ plans for 2022 support this rising production profile expectation. We expect to see US crude oil production reaching 12.0Mb/d in the coming months. Companies are taking advantage of attractive drilling and completion costs and want to lock up experienced rigs, frack units and their crews as staffing issues are getting tougher for the sector. We expect US production to reach 12.5Mb/d by 2H/22.
Conclusion:
Bearish pressure on crude prices:
- The US Federal Reserve is ending its US$120B/month bond and mortgage purchases in March 2022, which will remove 6%+ of monetary stimulus from the economy. Forecasters now expect four or five increases in Federal Funds rates in 2022. In addition the Fed is likely to stop repurchasing maturing bonds and mortgage holdings which would remove an additional US$100B per month of monetary stimulus. Overall this would remove 11+% of monetary heroin by the end of 2022 from GDP and should cause a weakening US economy and slow down rising inflationary pressures. Many economic indicators released recently are showing this slowing economic trend (from employment to retail sales to industrial production and to declining consumer sentiment). The Fed meets next week (January 25 & 26) and all eyes are on the words and tone of their release and the Chairman’s press conference.
- Omicron Covid-19 caseloads are growing around the world with record infection rates and increasing usage of ICU beds by the unvaccinated. Deaths in the US have reached 854K (up 12K over the last week) and worldwide 5.55M. China has tightened travel restrictions that may last for at least six months and slow their economy down. Three cities with over 20M people have now been shut down.
- Both the EIA and IEA see growth in non-OPEC production and modest growth by OPEC+ creating a build in inventories starting in Q2/22 and progressing higher in build in each of the other quarters. Their forecast does not include any production fall-off from Russia if the US and NATO allies put sanctions on Russia and end their purchases.
Bullish pressure on crude prices:
- Russia provides over 20% of western Europe’s crude oil needs and any sanctions ending their sales would not be easily filled by other producers. Over time OPEC could send more to Europe while Russia could sell sanctioned oil to China. The window for an invasion is the coming weeks. The Biden administration believes there will be an invasion and he mentioned in his press conference yesterday that he expected a ‘minor incursion’. What a ‘minor incursion’ means leaves a lot of room for speculation. The Ukraine government was apoplectic with this comment.
- OPEC met on January 4th and agreed to lift February production by their 400,000 b/d long-term plan. In December they increased production by only 166 Kb/d. OPEC+ holds their next meeting on February 2nd. Many OPEC members (led by Oman) want to see US$100/b for Brent in 2H/22.
- The Iran deal is not seeing progress as the Iranians continue to want removal of sanctions to sell oil, but do not want to slow down their nuclear weapons program or allow intrusive UN inspections. For energy bulls this means that 1-2Mb/d of incremental Iranian oil is now unlikely to come onstream in 2022.
- Speculators and hedge funds are betting on over US$100/b by the summer and over US$120/b by the end of the year. Futures buyers have added >5000 contracts or over 500Mb of long positions. In addition options buyers have added increasing amounts of out of the money contracts. The highest price being bought is US$200 calls for December 2022.
CONCLUSION:
The growing concern about an invasion/annexation of eastern Ukraine spiked oil prices higher. Removal of Russian crude oil (which provides over 20% of crude consumed and over 40% of natural gas consumed) from western European buyers, would be difficult to replace in the near term. WTI rose to US$87.05/b today (up US$5/b over the last week) as the war drums indicated that the invasion is imminent. This is not a one-sided western pressure campaign. Russia has already started cyber attacks against Ukraine and has warned NATO and the US that they violated their agreement to not move troops and weapons into Poland and the Baltic States but did so. Russia is annoyed by the hypocritical move by the US and its NATO allies to expand NATO into its former member states. In retaliation it has threatened to send strategic military assets to Cuba and Venezuela if the US does not demilitarize in eastern Europe. The poker game is on and Putin does not appear to be bluffing. President Biden is coming off as the Neville Chamberlain of this confrontation.
If there is no invasion or if a ‘minor incursion’ does not set up sanctions against Russian energy exports as the winter weather subsides, the price of WTI crude should retreat towards US$62-65/b. More downside is likely if the US and China economies stagnate and/or fall into recession in the coming months. We see the current price strength as similar to what occurred in Q2/08 when crude ran from US$85/b in January to over US$147/b in July. There was little excess capacity anywhere in the world and crude demand was strong that summer. Not long thereafter, when the financial crisis was at its worst WTI had fallen to US$33.55/b in March 2009. Another big pendulum swing in prices is likely if energy demand falls in a recessionary situation in the US and China.
Energy Stock Market: The S&P/TSX Energy Index currently trades at 194 (up 8 points over the last week) as bullish energy investors elevate their favourite names and generalist money managers have rushed into the sector. Generalist investors watch the weighting in the TSX and many mirror the market average. The financial media is having more and more articles on this herd mentality. Where were these money managers in March 2020 when there were bargains galore? This is just the opposite of late 2008 – early 2009 or like Q1/20, when running for the exits was occurring. The S&P Energy Bullish Percent Index is at 95.24% or in SELL territory. Caveat Emptor! For a sector that was so hated in recent years, the current lovefest is disturbing.
We are planning to return to Mount Royal University (MRU) (after a two year pandemic halt) for our ‘Catch the Energy’ conference on October 22, 2022. We will be discussing the protocols on attendance, food service, masking and QR code verification with MRU in Q1/22. We look forward to adding more companies and focus the event on attendees having safe and maximum, face to face time with company management. More on this to come. Please save the date in your calendars.
Our January SER Report will come out next Thursday January 27th and will include our concerns about the general market (MEME stocks have been massacred and the FAANG’s are topping out). Many of the underpinnings of the general market are weakening and we are seeing a bumpier ride in recent days. We also include a section on the Russian/Ukraine confrontation and why an invasion of eastern Ukraine could be a big negative, sparking a big decline in the markets. In addition we will have an update of Insider Trading activity of the companies on our Coverage List.
I will be presenting my regular keynote annual energy macro presentation at the World Outlook Financial Conference (WOFC) on February 4 & 5. Michael Campbell will be doing a Q & A with me on Friday evening as part of this virtual event. Access passes are still available. Please go to their website to get your tickets to this excellent and informative event.
Our next quarterly webinar will be held on Thursday February 24th at 7PM MT.
If you would like to access our January SER Report or any of our previous reports or the webinar archives, go to https://bit.ly/3jjCPgH to subscribe.
Please feel free to forward our weekly ‘Eye on Energy’ to friends and colleagues. We always welcome new subscribers to our complimentary macro energy newsletter.
Share This:
