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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 plan for control of the east of Ukraine has made progress with most of the Donbas area in their control, gaining the land bridge from the Donbas to Crimea and full control of the Sea of Azov. After some rest and getting rekitted and rearmed, Russian troops are likely to go after Odessa, the last port in western Ukraine controlled by the Ukrainians. This battle may take months to conclude with massive casualties on both sides. Russia has given notice that they intend to gain all the ports in southern Ukraine. Russian military releases report that the Russian army is building plans to go all the way to Moldova. This would give Russia control of all the ports along the Black Sea and a stranglehold on the Ukrainian economy. Russia is in negotiations to allow sale of grain to Africa but needs Ukraine to remove their mines from the Odessa harbour, so grain ships can enter. Ukraine is balking as they see this as aiding Russia in capturing the city.
Russia has succeeded in getting over 50% of European natural gas buyers to pay in Roubles via an exchange in their banks for Euros. Italy, Hungary, Germany and Serbia have been the leading buyers of Russian natural gas. Countries not willing to abide by the payment terms like the Netherlands and Denmark have seen their shipments halted by Russia.
Regarding crude oil Russia has been able to continue daily sales in excess of 10.2Mb/d as it begins to restructure its supply system to move more oil from eastern Russia to Asian buyers.
EIA Weekly Oil Data: The EIA data of Wednesday June 8th was moderately bearish for US oil prices. US Commercial Crude Stocks rose 2.0Mb to 416.8Mb versus the forecast of a decline of 1.92Mb.The increase was due to the Strategic Petroleum Reserve (SPR) having a release of 7.3Mb last week and US Exports fell 1.76Mb/d or by 12.3Mb on the week. Motor Gasoline Inventories fell 0.8Mb while Distillate Fuel Oil Inventories increased 2.5Mb. Total Stocks excluding the SPR rose by 11.0Mb. Refinery Utilization increased 1.6 points to 94.2%. US Crude Production remained at 11.9Mb/d. Total Demand last week rose 714Kb/d to 20.2Mb/d as Propane demand rose by 746Kb/d. This week Motor Gasoline usage rose 222Kb/d to 9.20Mb/d. Jet Fuel Consumption fell 193Kb/d to 1.52Mb/d. Cushing Crude Inventories fell 1.6Mb last week to 23.4Mb.
EIA Weekly Natural Gas Data: This is the data from June 2nd – next release tomorrow. Natural gas storage is now being built for winter 2022-2023 but at a slower pace than normal due to the large amounts of gas being shipped overseas. The data released last week showed a build of 90 Bcf which compares with a build of 80 Bcf in the prior week. Storage is now 1.902 Tcf. The biggest increase was in the East (32 Bcf). There is concern that the US may not have sufficient natural gas in storage for the summer air-conditioning season and that the build into November for winter 2022-2023 will also be insufficient. President Biden’s approach to send LNG to Europe to aid them in cutting off Russian gas is having an unpleasant and expensive cost to US individual and business consumers.
The five-year average for last week was an injection of 104 Bcf and in 2021 it was an injection of 98 Bcf. Storage is now 15.1% below the five-year average of 2.239 Tcf. Today NYMEX is at US$9.49/mcf. AECO is trading at $7.88/mcf. These are fabulous prices for this time of year and it 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 are all 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 withholding export volumes as they push against the EU payment system. Russia wants to be paid in Roubles to lift their currency. Transactions are now being done in Euros with non-sanctioned Russian banks and then the banks pay Roubles to Gazprom.
Baker Hughes Rig Data: In the data for the week ending June 3rd, the US rig count was unchanged at 727 rigs. Of the total rigs working last week, 574 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 59% from 456 rigs working a year ago. The US oil rig count is up 60% from 359 rigs last year at this time. The natural gas rig count is up 56% from last year’s 97 rigs, now at 151 rigs. The industry is responding to higher prices with more activity which should 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 20% in Q4/22 and much higher in 2023 as utilization increases. However, cost increases are keeping pace so margin improvement is still not visible.
Spring break-up and road bans are over in more areas in Canada. Last week 14 more rigs were added to the operating fleet lifting the total to 117 rigs (up 15 the prior week). Canadian activity is up 52% from 77 rigs last year. There was a 17 rig increase for oil rigs and the count is now 72 oil rigs working. This is up from 43 working at this time last year. There are 45 rigs working on natural gas projects now, up from 34 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, costs are as well, so margin improvements are not what one would expect or what companies are forecasting. Service industry margins should rise starting in Q4/22. In the coming weeks we expect a rapid increase in Canadian rig activity drilling for both oil and natural gas and the rig count grows to in excess of 200 rigs again (peak potentially 220-250 rigs).
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 buyers in Europe the urgency to find alternatives has risen.
We expect to see US crude oil production reaching 12.5Mb/d in the coming months (now 11.9Mb/d). The EIA recently forecasted US production reaching record highs over 13.1Mb/d in 2023. 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:
- Norwegian oil workers are planning to strike on June 12th if they don’t get their wage demands met. Workers are demanding above inflation pay increases. Crude volumes would be impacted but not natural gas production according to the unions.
- China is beginning to reopen and demand for crude energy is expected to recover this summer.
- India is in talks with Russia to double its imports of discounted oil. Indian banks will finance the imports getting around EU sanctions. India imports 85% of its crude needs so the US$30-35/b discount on Russian crude oil is a big win for them.
- 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 may stay high due to the logistics challenges and longer shipping times to buyers until recessionary conditions lower demand materially.
- 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.
- The US is also in discussion with Venezuela to open the governing of the country to the opposition in return for removing sanctions on oil sales. So far sanctions have been removed for Italy and Spain and they are now receiving oil produced in the country by ENI and Repsol.
Bearish pressure on crude prices:
- China is in talks with Russia for purchases of large volumes of crude to restock their SPR. If so, this will take up all the Russian crude available. In doing so, they will not be buying for their SPR from other oil producers. China wants to take advantage of the large price discount this crude is being sold at. Russia will expand their ESPO pipeline which connects Russia’s Siberian oil fields to Chinese customers and has a current capacity of 1.64Mb/d.
- The likelihood of a worldwide recession is rising. TESLA’s CEO Elon Musk announced layoffs of 10% of employees as he sees a severe recession unfolding and demand for his cars waning.
- The high cost of energy is lowering consumers’ and industry’s capacity to handle the cost pressures. 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 Russian invasion of Ukraine and the resultant tough sanctions against Russia crude oil sales to Europe has spiked up crude prices. We expect that higher energy costs will push economies into recession and this will drive down crude demand by 4-5Mb/d in the coming months. The US demand alone is down by 1.3M/d according to recent EIA data. 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$120.49/b.
Energy Stock Market: The stock markets around the world are gyrating with larger daily price moves. Volatility is rising and large price swings are becoming the norm which is not good for the stability of markets. Earnings and outlook disappointments have led to the downside pressure for the US markets. Results for Q2/22 start coming out in a month.
The S&P/TSX Energy Index is at 286 today, a new 2022 high. Significant downside is ahead as the battle to rein in inflation is fought and crude prices falter pulling energy shares down. Warning: Insiders in the US are large sellors now. In Canada, NCIB buying activity and Institutional road shows are bolstering stock prices for now.
Our first June report comes out tomorrow Thursday June 9th. It will include a detailed review of the economic impact and likely difficult recession the world will be facing in the coming months. The issue will include a review of the last 10 companies on our Coverage List and how they did in Q1/22.
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 any remaining strength to lower your exposure and build cash reserves for the next great buying opportunity expected during Q3/22. Today the Dow is down 47 points at 33,133 as we write this report. A breach of the recent low of 30,636 would be very bearish for the market.
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Our 2022 ‘Catch The Energy’ conference is booked 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). We are working to have the full roster of Presenters completed by the end of this month. If you want to attend please keep this date open and in August when our conference website is up we can provide you with additional details.
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