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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 for electricity, food and wages even though energy prices at the pump have retreated somewhat. With hurricane season arriving shortly, some offshore US energy production facilities may get shut in, which could spike prices again. Central Banks continue the dance between hawkish statements about reining in inflation to 2% and attempting to reassure the public that economies remain healthy with low unemployment rates and more job openings than employees looking for work. To really get a grasp on inflation we suspect that they will need to double the current Fed Funds rate to the 4-5% range in the coming months to contain inflationary expectations.
The US now has a second quarter of negative growth for GDP, down 0.9%. This is before the normal revisions for international trade and currency impacts that historically increase this number as it did in Q1/22. The US administration is downplaying this negative number pointing to the strong job situation. But the Jolts job report had a large decline in open jobs and Amazon just laid off 100K people – yes the number is correct at 100K of their 1.5M employees. TESLA, Ford Motor and RobinHood are making job layoffs highly visible while many more reticent companies are quietly laying off staff. When consumer spending softens even more, more job losses should be expected in lower paying service jobs. Uber’s CEO yesterday on CNBC said that they do not have problems finding drivers and delivery personnel as people need more funds to survive and are taking these part time jobs to supplement their incomes.
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 1.15Mb/d decline so far according to today’s EIA release).
EIA Weekly Oil Data: The EIA data of Wednesday August 3rd was quite bearish for oil prices. US Commercial Crude Stocks rose 4.5Mb to 426.6Mb. The forecast had been for a decline of 630Kb. The Strategic Petroleum Reserve (SPR) had a release of 4.7Mb last week. The big swing was due to US Exports falling by 1.036Mb/d or by 7.2Mb on the week. Motor Gasoline Inventories rose 0.2Mb while Distillate Fuel Oil Inventories fell 2.4Mb. Refinery Utilization fell 1.2% to 91.0%. US Crude Production was flat at 12.1Mb/d, the peak so far this year.
Total Demand last week fell 27Kb/d to 19.95Mb/d as Motor Gasoline demand fell 704Kb/d. Motor Gasoline usage was 8.54Mb/d down from 9.25Mb/d in the prior week. For the four weeks of 2022 compared to 2021, Total Demand is down 3.0% and Motor Gasoline is down 8.8%. Jet Fuel Consumption fell as well, down 331Kb/d to 1.44Mb/d due to bad weather and flight cancellations. Cushing inventories rose 1.0Mb to 24.5Mb on the week.
EIA Weekly Natural Gas Data: US Natural gas storage is being built up too slowly for winter 2022-2023. The US data released last Thursday showed a build of 15 Bcf which compares with a build of 32 Bcf in the prior week. The massive heat covering across the US was the reason for greater consumption as the natural gas was used to create electricity for air-conditioning usage. This would have been higher if not for the 2 Bcf/d LNG plant repair work and current shutdown. Storage is now at 2.416 Tcf and needs to get over 3.5Tcf by November 1st. The biggest increase was in the Midwest (17 Bcf). The five-year average for last week was an injection of 33 Bcf while in 2021 it was an injection of 13 Bcf. Storage is now 12.5% below the five-year average of 2.76 Tcf. Today NYMEX is at US$7.71/mcf due to the continuing extreme heat wave across the US. Some US electrical grid systems are running at capacity. Texas remains the most vulnerable to meet demand as hurricane season can disrupt operations. AECO is trading at $5.03/mcf.
The machinations over Russian exports to Europe during the current heat wave is pushing natural gas prices to the US$45-US$50/mcf level. The price is nearing the highs seen just after the Russian invasion of Ukraine started. This winter may see even higher natural gas prices depending on the allocation of natural gas volumes to Europe. Putin wants to force Europe to lower sanctions and is using food and natural gas as tools to get what he wants. Some countries in Europe already seem to be tired of the war and the demands on their military by Ukraine’s persistent demand for money and materials to fight Russia. Exasperated European nations could slow down support for Ukraine as they take care of their domestic needs. Italy is one country facing such pressure already.
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Baker Hughes Rig Data: In the data for the week ending July 29th the US rig count rose nine rigs to 767 rigs (up two rigs in the prior week). Of the total rigs working last week, 605 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 57% from 488 rigs working a year ago. The US oil rig count is up 57% from 385 rigs last year at this time. The natural gas rig count is up 52% from last year’s 103 rigs, now at 157 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 nine rigs this week (four rigs were added last week) and the total count is now 204 rigs. Canadian activity is up 33% from 153 rigs last year. While rig and frack day rates are rising, costs are as well. Peak potential for staffing rigs is likely around 225 so that may be the high rig count for this summer.. Activity for oil grew 47% to 137 rigs up from 93 last year and natural gas rigs rose by 14% to 67 rigs from 59 a year ago.
We expect to see US crude oil production reaching 12.5Mb/d before year-end (now 12.1Mb/d). The EIA recently forecasted US production reaching record highs over 13.1Mb/d during 2023. This could be higher if the Republicans gain control of Congress and reverse Biden’s anti-energy stance, remove bureaucratic delays, and give some supportive policies for the industry to make long term growth plans.
Conclusion:
Bullish pressure on crude prices:
- Russia has attacked the port of Odessa despite its agreement to allow the port to open and resume shipments of Ukrainian grain to countries in need. One ship has made it through so far.
- The US, Japan and NATO are working towards a deal to restrict sales of Russian crude with a cap of US$40-60/b which could 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.
- India is sharply increasing imports of discounted oil (now over 1Mb/d) as the Indian government requested state and private energy companies to take advantage of the cheaper oil from Russia. They are also importing record amounts of coal.
- OPEC’s production is now 2.84Mb/d, below their official target. Part is due to production difficulties in some countries but also due to the desire to keep supplies tight so that the members can maximize revenues. They announced today a miniscule increase of 100Kb/d but they have yet to meet one of their official quota levels. They are clearly enjoying the uncertainty that has kept crude prices high and did not kowtow to President Biden’s requests during his recent trip to the Middle East.
Bearish pressure on crude prices:
- Libya has been able to get production back up over 1.2Mb/d from 629Kb/d in June.
- The latest version of Covid (BA.2.75) is closing down some parts of China once again and Japan has also been hit hard.
- The EU, US, Japan, South Korea, Australia and Canada are heading into recessions which will lower demand for crude by 4-5Mb/d. Driving by US and Canadian consumers is down materially. It could see double digit declines once recession hits hard.
- Europe is moving to reopen coal-fired plants and delaying closure of nuclear power plants (Germany especially) to meet their electricity demand. Rationing of crude, crude products and natural gas are being implemented as well. Germany is implementing plans to cut back natural gas access to some industries and to large and important ones like chemicals they are talking of cutting back access by 50% which will be a job killer and add to the economic braking they are planning. How severe the recession will be is the question and this depends on what natural gas Russia does send to Germany this winter.
- The high cost of energy is lowering consumers’ and industry’s capacity to handle the cost pressures.
- India is importing record amounts of coal which is readily available (versus crude oil) and distances to move it are shorter.
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 should drive down global crude demand down by 4-5Mb/d over the next 3-4 quarters.
As global recession unfolds, crude prices should 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$92.28, down $2.14/b today and down US$5/b from last week. WTI fell as low as US$90.56/b in early July. A breach of US$90/b could start a major price decline to the US$70s.
Energy Stock Market: The stock markets around the world are gyrating with larger daily price moves. Earnings and economic data are swinging the markets around. Good days occur when economic data is supportive and down days when data shows recessionary trends.
The S&P/TSX Energy Index is at 228 A breach of 195.68, the low of early July and the new low for 2022 could cause a sharp decline to the 145-150 area this fall.
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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 32,197. We expect the next downleg in the market to start shortly.
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