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.
Russia/Ukraine War Update:
Russia has adjusted its invasion goal to focus on taking over the eastern Donbas region and complete their land bridge from the Donbas to Crimea while having shorter logistics trains. They have added significantly to troops available for the next major phase. The total destruction of Mariupol has occurred. Now that the city is fully surrounded and food and munitions are exhausted many Ukrainian soldiers in the city have surrendered. The new general (General Alexander Dvornikov) in charge of Russian forces plans to take all of the Donbas and then grab Odessa, the last of the key southern Ukrainian ports. The next few weeks may see the most destructive phase of the Russian invasion. Putin may have given General Dvornikov a deadline of May 9th to achieve success as he wants to have a new reason to celebrate this date which has been a day of celebration for Russians. This date is celebrated as the day the Soviets defeated the Nazis and captured Berlin during the Great War.
After Putin has control of the east and the south of the country he may be ready to negotiate with Ukraine from a position of strength, demanding land concessions (keeping the east and south of the country) and demanding a non-NATO, non-EU Ukraine.
EIA Weekly Oil Data: The EIA data of Wednesday April 13th was clearly bearish. US Commercial Crude Stocks rose 9.4Mb to 421.8Mb versus the forecast of a modest build of only 0.8Mb. The storage increase was due to Net Imports falling by 1.2Mb/d or by 8.5Mb on the week and due to the sub-component Exports falling by 1.5Mb/d or by 10.6Mb on the week. Motor Gasoline Inventories fell 3.6Mb while Distillate Fuel Oil Inventories fell 2.9Mb as Refinery Utilization fell 2.5 points to 90.0% from 92.5% in the prior week. US Crude Production was steady at 11.8Mb/d. Total Stocks excluding the SPR rose 7.4Mb to 1,151Mb and Total Stocks including the SPR rose by 3.5Mb to 1,712Mb, so we saw a draw of 3.9Mb from the SPR last week consistent with Biden administration announcements.
The slowdown in the US economy is impacting demand data. Total Demand fell on the week by 1.04Mb/d to 18.77Mb/d. Other Oils Demand fell by 962Kb/d to 3.59Mb/d and Propane Demand fell by 442Kb/d to 829KMb/d. Motor Gasoline usage rose 174Kb/d to 8.74Mb/d. Jet Fuel Consumption rose 153Kb/d to 1.60Mb/d. Cushing Crude Inventories rose 0.4Mb last week to 26.3Mb.
The key data point for us was that US Total Demand is down from the strong winter pace. The EIA Weekly Petroleum Report for January 28, 2022 showed Total Product Demand at 21.4Mb/d. Now with Total Demand in the US at 18.8Mb/d we are 2.6Mb/d below peak winter demand. At the same time China’s demand is down around 2Mb/d due to the shut-down of the east coast of the country (20% of GDP) and Europe is seeing weaker demand due to high prices and slowing economies. Crude is trading up due to the daily war premium events. With Russia only losing 1Mb/d of sales but selling each barrel for much higher prices they are still bringing in record funds to finance their unrelenting war.
EIA Weekly Natural Gas Data: A late winter cold blast lowered storage last week and drove natural gas prices higher. There was a withdrawal of 33 Bcf last week which compares with an injection of 26Bcf in the prior week. Storage fell to 1.382 Tcf. The biggest withdrawals were in the East (22 Bcf) and the Midwest (21 Bcf). There was an 8 Bcf injection in the South Central.
The five-year average for last week was a withdrawal of 8 Bcf and in 2021 was an injection of 20 Bcf. Storage is now 17.1% below the five-year average of 1.667 Tcf. Today NYMEX is at US$6.86/mcf. AECO is trading at $6.70/mcf. These are fabulous prices for this time of year and why natural gas stocks have been great recent performers.
The low storage levels for natural gas in Europe and the increase in US LNG shipments, is keeping prices in the US and Canada higher than normal at this time of year. Europe needs to refill storage levels ahead of the summer air-conditioning electricity season. The market is also worried about increased sanctions against Russia due to the recent civilian massacre. Russia could withhold needed export volumes if new tougher sanctions are implemented. So far the data shows that Russia has met its contractual volumes but payment issues remain a challenge.
OPEC March Monthly: On April 12th OPEC released their April 2022 Monthly Forecast Report (March data). As repeated in the past few months they have not added the 400Kb/d (their stated monthly production increase). In March only 57Kb/d was added after adding 440Kb/d in February and making the markets happy. This was disappointing to markets and crude prices rose. Production rose to 28.56Mb/d but remains below the 29.368Mb/d produced in December 2019 before the pandemic hit. So they still have nearly 800Kb/d to bring on just to get back to pre-pandemic levels. Moral suasion by the US and the UK do not seem to be influencing OPEC’s production decisions. Saudi Arabia and the UAE alone could add 2.5Mb/d if they wanted to but are friendly to Russia, an OPEC+ member and are not happy with the US over its stance in the Middle East regarding Iran and Yemen.
The biggest increase came from Saudi Arabia at 54Kb/d followed by Kuwait at 25Kb/d and then by the UAE at 23Kb/d. Sanctioned Iran saw production rise by 7Kb/d to 2.55Mb/d. Venezuela saw a rise of 8Kb/d to 697Kb/d as they get more diluent this month. OPEC sees 2022 consumption at 100.5Mb/d, up 3.67Mb/d but down 480Kb/d from their prior forecast as they expect economic activity slowing globally. One important release was that demand in Q1/22 was 98.95Mb/d and that supplies exceeded demand by 120Kb/d. With OPEC adding modestly in the coming months but the US and the IEA adding 240Mb or 1.5Mb/d for the next six months, the balance of supply and demand has now moved from commercial stock storage withdrawals to inventory builds. OPEC forecasts demand at 99.12Mb/d in Q2/22 but we see this as too optimistic given the economic slowdown data seen around the world.
Baker Hughes Rig Data: The data for the week ending April 8th showed the US rig count up 16 rigs to 689 rigs (up three rigs last week). Of the total rigs working last week, 546 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 59% from 432 rigs working a year ago. The US oil rig count is up 62% from 337 rigs last year at this time. The natural gas rig count is up 52% from last year’s 93 rigs, now at 141 rigs. Texas saw an increase of 11 rigs to 342 rigs working up 79% from 209 rigs a year ago. The area with the largest rigs is the Permian with 332 rigs active, up nine over the last week and up 48% from 224 rigs working last year. The industry is responding to higher prices with more activity and this will lift overall US production significantly in the coming months.
Spring break-up and road bans continue in Canada. Last week 13 more rigs were removed from activity (down 16 rigs last week) to 111 rigs. Only rigs staying on location drilling pad wells will be active. Canadian activity however is up 91% from 58 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 11 rig decrease for oil rigs and the count is now 53 oil rigs working. However this is up from 19 working at this time last year. There are 58 rigs (down two on the week) working on natural gas projects now, but still up from 39 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 should expect as the industry activity picks up. Service industry margins need to rise materially in 2H/22 if drilling and completion activity is to rise. There are indications that the E&P companies are budgeting increases for drilling but much of their forecast is for higher steel tubular costs. 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 of President Biden. This, despite the Biden administration’s desire to rein in the worldwide use of fossil fuels. He pushed for the energy industry to move from a focus on dividend growth and share buybacks, to increased capex and lifting US oil and natural gas volumes to new record highs. Even our anti-energy industry Prime Minister has joined the security of supply band wagon.
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 continue to be difficult for the sector. The EIA forecasts US production reaching 12.5Mb/d by the end of this year. From a focus on paying down debt and then increasing shareholder returns, we see companies adding meaningful growth to their 2H/22 plans. The rally around the flag is now just as important to companies and shareholders as direct 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. So far the volumes expected to arrive in Europe are miniscule while the rhetoric seems to imply that it has been solved. Currently oil tankers owned by Russia, India and China can handle the trade that is being done. It appears that 2.5Mb of Russian crude is finding buyers in China and India, however 1Mb/d+ is not, even at significant discounts. India is working with Russia to pay for Russian crude in Rupees (or trade goods), Yuan or Roubles. Many of the global commodity trading houses are working around the sanction protocols to find ways to transact business with Russia. Historically this type of business is extremely lucrative. Recently the Rouble has strengthened in value to levels seen before the Ukraine invasion.
- The Biden administration continues talks with Iran to conclude a nuclear deal and then remove sanctions so that they can increase crude sales by 1.3-1.5 Mb/d in the near- term. So far no deal has been announced and many in the US, and allies in the Middle East (Israel, Saudi Arabia and Kuwait) are opposed to any deal as Iran is near to having nuclear weapons.
Bearish pressure on crude prices:
- China has locked down more cities and provinces due to the new strain of Covid outbreaks. The largest impact being on Shanghai, a city of 25M people which is under an extended lockdown. Overall China has locked down 60M people that produce 20% of its GDP. Demand for crude energy in the country was 14.5Mb/d (2021 data) and could decline by 1.5-2.0Mb/d during the lockdowns. Ports in China see gridlock with over 500 ships or 10% of the global fleet waiting but unable to load cargos.
- The US and allies are releasing additional oil from their strategic oil reserves. The US will supply 180Mb of those volumes. The IEA countries have disclosed that they will release a further 120Mb. This should add 1.5Mb/d to partially offset the 1-2Mb/d potential loss of Russian crude to the sanctioning countries.
- 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. Food costs are exploding! Russia and Ukraine produce one-third of global wheat and barley production. Ukraine provides European livestock farmers with corn and other grain additives. None of this is being shipped now from the Black Sea ports.
- Inflation has risen in the US to over 11% as the March PPI came in up 11.2% year over year. The Federal Reserve has been behind the eight ball and is being pushed to react by the unfolding bad inflation news. A global recession is now very possible this year due to the ongoing and persistent inflation pressure on food, transportation and shelter. 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. The Dallas Federal Reserve recently warned in a Fed report “The Russian Oil Shock of 2022” that “ongoing sanctions will lead to a global 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$107.85/b. WTI has fallen from the high at US$130.50/b in early March to US$104.09/b today.
Energy Stock Market: The stock markets around the world are gyrating with large daily price moves. Today the Dow is up 150 points at 34,370. The S&P/TSX Energy Index is at the high for the year at the 233 level due to the strong performance from the energy sector. Most natural gas stocks are up 2-3% on the day.
Our April SER Interim Report comes out tomorrow Thursday April 14th. It will include a detailed review of the economic impact and likely difficult recession the world will be facing in the coming months. A review of Q4/21 and 2021 annual results for the last two companies from our Coverage List will be included. Recessions, after parabolic energy and other commodity inflationary price spikes, have been severe and stock markets have been crushed. The current daily market declines are just the tip of the iceberg. Downside for the Dow Jones Industrials is towards the 24,000-25,000 range during Q3/22 (today 34,370 and 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 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. Meetings with corporate presenters are underway and we will start to release names once we have sign up documents completed. Our goal is to have 600+ attendees (up from 400 in 2019) and 35 companies presenting (up from 22 in 2019). Meetings have been wonderful with a large number committed to attend. We are looking to have both large and smaller entities present and the mix will likely include companies in the E&P (domestic and international), energy service, infrastructure and royalty and innovation technology.
With the expanded conference space we are open for applications for company presentation slots. We have only two Sponsorship opportunities left for corporations that service the energy sector. Inquiries should be sent to [email protected]. We appreciate any referrals.
I am tentatively scheduled to be on BNN/Bloomberg’s Market Call show on Wednesday April 20th at 10AM MDT. The show will be done virtually. I am hopeful that they return to studio shows soon as I enjoyed the repartee with the hosts which is not easy to do in the current virtual format.
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.
Share This:
