Schachter’s Eye on Energy: Russia Cuts Off Two European Countries For Not Paying In Roubles

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. 

Russia/Ukraine War Update:

The Russian battle plan for control of the east and the south of Ukraine is now underway. They may have moved over 150,000 rekitted and rearmed troops into position for this phase. Their focus now is on capturing the whole of the Donbas and then moving to gain all the ports in southern Ukraine. Recent Russian releases report that the Russian army will move all the way to Moldova before the campaign is over. They would then control all the ports along the Black Sea and have a stranglehold on the Ukrainian economy.

Russia has focused the land war in the east but its air campaign has been increased in western Ukraine to destroy the rail infrastructure needed to move military and humanitarian aid across the country. The attacks have been close to neighboring NATO countries.  

The EU has threatened to cut off all sales of Russian oil in the near term but this initiative of President Biden is not gaining traction in Austria, Germany, Hungary and Serbia which are opposed. Russia has acted on its requirement of being paid in roubles. It cut off Poland and Bulgaria today for not meeting this payment process. Poland gets half their needs from Russia while Bulgaria gets 90% of its needs. This economic warfare move is a warning shot to the EU that Russia is not without its own pressure tactics if the EU and NATO up their sanctions and weapon shipments to Ukraine. German buyers have the capability to pay in Euros which are then converted by Gazprombank into roubles. This is acceptable to Russia at this time. Volumes have only been cut to Poland and Bulgaria with all other contracted buyers receiving the base volumes contracted. Russia could supply more natural gas volumes, but if they did it would be at much lower prices than the spot market so they have an incentive to keep prices up. 

EIA Weekly Oil Data: The EIA data of Wednesday April 27th was moderately bullish for oil prices. US Commercial Crude Stocks rose 0.7Mb to 414.4Mb versus the forecast of a build of 2.0Mb. The Strategic Petroleum Reserve (SPR) had a withdrawal of 2.9Mb last week. Motor Gasoline Inventories fell 1.6Mb while Distillate Fuel Oil Inventories fell 1.4Mb. Refinery Utilization fell 0.7 points to 90.3%. US Crude Production was flat at 11.9Mb/d. Total Demand last week was 19.8Mb/d up 788Kb/d as Other Oils Demand rose by 1.05Mb/d to 4.38Mb/d. Motor Gasoline usage fell 129Kb/d to 8.74Mb/d. Jet Fuel Consumption rose 66Kb/d to 1.59Mb/d. Cushing Crude Inventories rose 1.3Mb last week to 27.5Mb. 

EIA Weekly Natural Gas Data: With winter over in most parts of the US we are seeing storage rebuilding but at a slow pace as significant volumes of US natural gas is being shipped to  Europe. There was a build of 53 Bcf last week which compares with a build of 15 Bcf in the prior week. Storage is now 1.397 Tcf. The biggest increase was in the South Central (33 Bcf). 

The five-year average for last week was an injection of 44 Bcf and in 2021 was an injection of 38 Bcf. Storage is now 16.8% below the five-year average of 1.742 Tcf. Today NYMEX is at US$7.17/mcf. AECO is trading at $6.80/mcf. These are fabulous prices for this time of year and is why natural gas stocks have been such great performers. 

The low storage levels for natural gas in Europe, the US and Canada and the increase in US LNG shipments to Europe is keeping prices in the US and Canada higher than normal. Europe needs to refill storage levels ahead of the summer air-conditioning electricity season. Russia is now withholding export volumes to Poland and Bulgaria as they were not willing to pay in roubles. 

Baker Hughes Rig Data: The data for the week ending April 22nd the US rig count showed an increase of two rigs to 695 rigs (up four rigs last week). Of the total rigs working last week, 549 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 59% from 438 rigs working a year ago. The US oil rig count is up 60% from 343 rigs last year at this time. The natural gas rig count is up 53% from last year’s 94 rigs, now at 144 rigs. The industry is responding to higher prices with more activity and this will lift overall US production in the coming months. Industry E&P companies are forecasting shortages of fracking crews later this year with prices rising materially. Overall day rates for drilling and fracking may rise over 15% in Q4/22.  

Spring break-up and road bans continue in Canada. Last week two more rigs were removed from activity (down eight rigs last week) to 101 rigs. Only rigs staying on location drilling pad wells will be active. Canadian activity however is up 84% from 55 rigs last year as more activity moves to pad drilling and returns on new wells are under one year (some under six months). There was a one rig decrease for oil rigs and the count is now 48 oil rigs working. However this is up from 17 working at this time last year. There are 53 rigs (down one on the week) working on natural gas projects now, but still up from 38 rigs working last year. Staffing of rigs in Canada and the US is a problem and adding significantly more rigs this summer may be problematic. While rig and frack day rates are rising, so are costs, so margin improvements are not what one would expect. Service industry margins should rise starting in Q3/22. Once breakup is over we expect a rapid increase in Canadian rig activity drilling for both oil and natural gas.

Security of energy supply for Europe is now an important goal. With Russia adding to the stress on supplies by cutting off natural gas to Poland and Bulgaria the urgency to find alternatives has risen. The problem is that this will take quite a while given the logistical problems.

We expect to see US crude oil production reaching 12.5Mb/d in the coming months (now 11.9Mb/d). The EIA forecasts US production reaching 12.8Mb/d by the end of this year, others are more optimistic and see volumes growing to over 13.0Mb/d and reaching all time high crude oil volumes. From a prior focus on mainly paying down debt and increasing shareholder returns, we see companies adding a volume growth wedge to their plans. The security of supply discussion by energy company Boards is now as important as directing returns to shareholders.

Conclusion:

Bullish pressure on crude prices:

• Russia’s invasion of Ukraine has rallied European nations against Russia. With help from the US, Europe is trying to replace the energy they import from Russia by the end of 2022. Prices should stay high due to the logistics challenges and longer shipping times to buyers but this is all in Russia’s favour at this time. Asian countries like India have stepped up their purchases of Russian crude.
• The Biden administration continues talks with Iran to conclude a nuclear deal so that they can remove sanctions and increase crude sales by 1.3-1.5 Mb/d in the near- term. So far no deal has been announced and there is fear that Iran is just weeks away from having nuclear weapons which will make any deal impossible. 

Bearish pressure on crude prices:

• China has locked down more cities and provinces due to their Covid outbreaks. The largest impact is on Shanghai, a city of 26M people which is under an extended lockdown. China has now some form of lockdown on more than half of their largest cities, that produce >20% of its GDP.  Demand for crude energy in the country was 14.5Mb/d (2021 data) and appears to have declined around 2.0Mb/d. Ports in China see gridlock with over 500 ships or 10% of the global fleet waiting but unable to load cargos. Food shortages in the lockdown cities have increased protests. The newest concern is that the government may lockdown Beijing. 
• Covid deaths worldwide have now reached 6.22M and in the US 992K and may breach 1.0M next month, a shocking number given the initial forecasts.
• The US and allies are releasing oil from their strategic oil reserves. This should add 1.5Mb/d to partially offset the 1Mb/d potential loss of Russian crude to the sanctioning countries. The US released 2.9Mb from its SPR last week.
• Russia has increased its exports to Asia to 4.0Mb/d from ports in the Black Sea, the Baltic and the Arctic coasts. Shipments to Asia are up over 750Kb/d from a month ago. 
• The likelihood of a worldwide recession is rising. The high cost of energy is lowering consumers’ and industry’s capacity to handle the cost pressures. Many businesses are closing or limiting their hours in Europe. Some grain prices have doubled resulting in food costs exploding. Central banks are behind the inflation curve which they themselves caused by their generous monetary heroin accommodation during the pandemic. Raising both the price of money and reducing the quantity of money will be painful and speed up the move to recession. 

CONCLUSION: 

The invasion of Ukraine has spiked up crude prices. We expect that higher energy costs will knock down crude demand by 4-5Mb/d later this year due to a global recession. When global recessions unfold, crude prices plunge sharply. In 2008-2009 during the financial crisis demand fell by over 5Mb/d (from over 88.5Mb/d to 83Mb/d). The price of crude fell from US$147.27/b to US$33.55/b in eight months. During Iraq’s invasion of Kuwait prices rocketed from US$16.16/b in July 1990 to a high of US$41.15/b in October and then plunged in four months to US$17.45/b as recessionary demand destruction occurred. WTI today is at US$100.72/b. WTI has fallen from the high at US$130.50/b in early March and may only exceed that level if WMDs are used in Ukraine.  

 

Energy Stock Market: The stock markets around the world are gyrating with large daily price moves. Last week we had a down day of 981 points for the Dow Jones Industrials and yesterday a down day of 809 points. Volatility is rising and large price swings are becoming the norm which is not good for the markets and investors. Earnings and outlook disappointments at Netflix, Meta and Boeing have led the pressure on the US markets. The NASDAQ has fallen more than 20% and is now in a bear market. China’s stock markets are seeing declines of over 5% on some days and the markets there are leading the world markets lower. 

 

The S&P/TSX Energy Index is down 12 points from last week and is at 231 today. More downside is ahead as the general stock market malaise drags the sector lower despite current strong fundamentals. 

 

We are having our Q2/22 Webinar on Thursday May 19th at 7PM MDT. We will cover the sharp decline in the markets over the last few weeks and what we see occurring from here. In addition the webinar will go over those companies that have reported their Q1/22 results before the event.  

 

Our April SER Monthly Report comes out tomorrow Thursday April 28th. It will include a detailed review of the economic impact and likely difficult recession the world will be facing in the coming months. Recessions, after parabolic energy and other commodity inflationary price spikes, have been severe and stock markets have been hurt. Downside for the Dow Jones Industrials is towards the 24,000-25,000 range during Q3/22 (down from the year high at 36,953). Use days of remaining strength to lower your exposure and build cash reserves for the next great buying opportunity expected during Q3/22.

 

If you want access to this encompassing and timely market update report or the webinar one needs to become a subscriber. Go to https://bit.ly/3jjCPgH to subscribe.

 

We are moving forward nicely with our 2022 ‘Catch The Energy’ conference after the two year pandemic hiatus and booked the event for Saturday October 22nd in Calgary at Mount Royal University. Our goal is to have 600+ attendees (up from 400 in 2019) and 35 companies presenting (up from 22 in 2019). 

 

Please feel free to forward our weekly ‘Eye on Energy’ to friends and colleagues. We always welcome new subscribers to our complimentary energy overview newsletter. 

 

 

 

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