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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.
Global Economic Update:
Inflation pressure continues to persist and Central Banks are moving between hawkish statements about reining in inflation and attempting to reassure the public that economies remain strong with low unemployment rates and lots of job openings. It is walking this tight rope that is making for large daily swings in stock markets and in the price of crude oil. It is expected that the Fed will tighten on July 27th by 75 BP and they will guide the next increase in September (September 21st) which will be data dependent but likely around 50 BP.
How strong the upcoming jobs data, inflation expectations (CPI and PPI data) in major economies, will determine the markets’ direction and magnitude of the market moves. The strong US dollar is a problem for US Exports which is likely to take down the GDP rate. This is also severely harming countries with US dollar debt as it is now more costly to fund as the US dollar has appreciated 13% so far this year (from 94.61 to 107.0).
We see persistent data pointing to recession gaining traction around the world. Consumers are facing tighter budgets and with food and energy costs still rising, discretionary spending is being cut back. The US may already be in a recession according to the Atlanta Fed data. Remember Q1/22 was adjusted downward to negative 1.6% and with a stronger dollar US exports will have difficulty growing. We go into this in some detail in our regular subscriber product.
As recession unfolds, global demand for energy will decline. This global demand destruction might be 4-5Mb/d (with the US over 1.5Mb/d of this decline and with a 1.1Mb/d decline so far) and turn the current tight supply situation into a clear inventory build. Crude prices are very vulnerable to the downside. We see WTI below US$90/b in Q3/22 and quite a bit lower if the recession has a hard landing, which we expect. This week’s EIA data supports this view.
EIA Weekly Oil Data: The EIA data of Thursday July 7th was quite bearish for oil prices. US Commercial Crude Stocks rose 8.2Mb to 423.8Mb. The forecast had been for a decline of 1.1Mb. The Strategic Petroleum Reserve (SPR) had a release of 5.8Mb last week. Motor Gasoline Inventories fell 2.5Mb while Distillate Fuel Oil Inventories fell 1.3Mb. Total Stocks excluding the SPR rose by 5.1Mb. Refinery Utilization fell 0.5% to 94.5% but is up from 92.2% last year. US Crude Production held steady at 12.1Mb/d.
Total Demand last week rose 467Kb/d to 20.5Mb/d due to the holiday long weekend. Motor Gasoline usage rose by 491Kb/d to 9.4Mb/d while Jet Fuel Consumption rose 321Kb/d to 1.8Mb/d. The key item to note was that this year’s data was 1.1Mb/d lower than last year on an overall basis and down by 630Kb/d for Gasoline Consumption. Cushing Crude Inventories were flat at 21.3Mb. Demand destruction is clearly being seen in the US as high prices lower consumption levels even though significant holiday travel occurred.
EIA Weekly Natural Gas Data: Natural gas storage is now being built up for winter 2022-2023. The data released today showed a build of 60 Bcf which compares with a build of 82 Bcf in the prior week. Storage is now at 2.311 Tcf. The biggest increase was in the Midwest (27 Bcf). The five-year average for last week was an injection of 60 Bcf while in 2021 it was an injection of 55 Bcf. Storage is now 12.2% below the five-year average of 2.63 Tcf. Today NYMEX is at US$6.20/mcf and AECO is trading at $4.61/mcf, both down over 50 cents from a week ago.
Baker Hughes Rig Data: In the data for the week ending July 1st, the US rig count fell three rigs (up 13 rigs last week) to 750 rigs. Of the total rigs working last week, 595 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 58% from 475 rigs working a year ago. The US oil rig count is up 58% from 376 rigs last year at this time. The natural gas rig count is up 55% from last year’s 99 rigs, now at 153 rigs. The industry has been responding to higher prices with more activity than last year which should lift overall US production further in the coming months.
In Canada there was an increase of 12 rigs last week versus a decline of two rigs in the prior week. The total count is now 166 rigs. Canadian activity is up 22% from 136 rigs last year. While rig and frack day rates are rising, costs are as well. In the coming months the Canadian rig count could grow to in excess of 200 rigs again (peak potentially 220-250 rigs).
We expect to see US crude oil production reaching 12.5Mb/d in the coming months (now 12.1Mb/d). The EIA recently forecasted US production reaching record highs over 13.1Mb/d in 2023.
Conclusion:
Bullish pressure on crude prices:
- Russia is halting flows of Kazakh oil to Europe through their pipelines, removing supplies from non-sanctioned Kazakhstan.
- The US and NATO are moving to restrict sales of Russian crude with a cap of US$40-60/b which will reduce supplies to Europe. Russia will look to Asian buyers if this occurs. The problem is logistics of moving the crude and the longer time to get this to markets in Asia versus via pipe to Europe. Russia could also slash production and drive crude prices higher. JP Morgan forecasts that crude prices could rise to $380/b if this occurred. This view is nuts in my opinion, as world wide depression would ensue which would decrease demand by over 10Mb/d and prices would plunge.
- Norway is facing a strike that may remove 341Kb/d of production.
- China is reopening and demand for crude energy is expected to recover in the coming months. China is buying large quantities of Russian crude at a significant discount to Brent ($US34/b) to rebuild their Strategic Reserve (SPR). Russia is now China’s largest crude supplier supplanting Saudi Arabia.
- India is sharply increasing imports of discounted oil as the Indian government requested state and private energy companies to take advantage of the cheaper oil from Russia.
- The US has given permission to Venezuela to sell crude to Europe. ENI, an Italian energy producer, and Repsol (Spanish) are producing crude in Venezuela and are shipping it to their own host countries and to their subsidiaries across Europe.
- OPEC has not met their monthly production supply hike targets as some of their members have had difficulty just keeping production flat.
Bearish pressure on crude prices:
- The EU, US, Japan, South Korea, Australia and Canada are heading into recessions which will lower demand for crude by 4-5Mb/d. Today’s US EIA data shows demand down 1.1Mb/d from a year ago.
- Europe is moving to reopen coal-fired power plants to meet their electricity demand. Rationing of crude, crude products and natural gas are being implemented as well.
- The high cost of energy is lowering consumers’ and industry’s capacity to handle the cost pressures.
CONCLUSION:
The Russian invasion of Ukraine and the resultant tough sanctions against Russian crude oil sales to Europe has spiked up crude prices. Higher energy costs are pushing economies into recession. This will drive down global crude demand by 4-5Mb/d.
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$102.42/b down US$10/b from a week ago due to recessionary fears. WTI fell as low as US$95.10/b in recent days due to this fear.
Energy Stock Market: The stock markets around the world are gyrating with larger daily price moves mostly to the downside. Earnings results for Q2/22 start coming out next week and if disappointing, will accelerate the overall stock markets’ decline.
The S&P/TSX Energy Index is at 220, down 16 points from a week ago. A breach of 202, the recent new low for 2022, could cause a sharp decline to the 145-150 area this fall.
We are holding our next quarterly webinar on Thursday August 18th. Become a subscriber to join this event. Go to https://bit.ly/3jjCPgH.
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). Hold cash for the next great buying opportunity expected during Q3/22. A breach of June 17th’s low of 29,889 (the closing 2022 low so far) would be very bearish for the market. Today the Dow is at 31,385.
Our 2022 ‘Catch The Energy’ conference is on Saturday October 22nd in Calgary at Mount Royal University. Our registration website will be opening in August. Please keep this date open and we will provide you with additional details as they become available.
I will be traveling next week so there will be no Eye on Energy report. Our next issue will be July 20, 2022.
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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