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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 33 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:
The breach of US$80 for WTI occurred last week as global recession fears spread. The price fell as low as US$76.25/b. WTI has rebounded in the last few days on the sabotage of the Nord Stream natural gas pipelines and as ‘risk on trade’ returns. Was this a warning by Russia that energy infrastructure assets are vulnerable and now war targets? No entity is taking credit for the sabotage. As it was near the path of the new Norwegian natural gas pipeline (Baltic Pipe project) to Poland & Germany, it is quite likely an escalation by President Putin who has momentum due to the sham votes in occupied Ukraine and his reserve call up. This Friday it is expected that he will announce the annexation of these territories as he did with Crimea. Winter 2022-2023 is now even more precarious for Europe if there is a colder than normal winter.
Rising US interest rates have lifted the US dollar by 21% from the beginning of the year. At the beginning of 2022 the US dollar traded at 94.61 and with the record pace of the Fed raising the Fed Funds rate, the dollar recently reached 114.44. With most borrowing, commodity and trade activity being done in US dollars this makes debt obligations of borrowers of US dollars more problematic. For example the Euro is now below 1 to 1 with the US dollar, the Yuan above 7.2 to the dollar and the British pound has gone to a new low against the dollar (105 area). To stabilize currencies higher interest rates are needed which just adds to the recessionary pressures. Consumer confidence data around the world is below the pandemic low and in many cases below the Global Financial Crisis (GFC) low of 2009. Banks in Europe are in trouble as they hold large amounts of government debt as part of their liquidity requirements. Most of these are severely under water. Results for the banking sector in Q3/22 could be deleterious.
The key issue going forward is when will inflation reverse its upward movement. While energy and some food items have retreated, others are still going up. Most food, shelter, electricity, insurance, taxes and wage pressure remain in ascendance. Inflation around the world appears to be holding in the 7-8% range as the upward pressure mix changes. To reverse and get down to the 2% targeted Central Bank range, it may still take a severe recession globally. Many countries are already in recession. Last week the Federal Reserve of Atlanta forecast that the Q3/22 GDP for the US would be negative. This would then result in three quarters of negative GDP. Housing is getting hit hard as mortgage rates have more than doubled. Fixed 30-year rates are now at 7.08% up from 3.07% at the beginning of 2022. A housing rout like during the GFC now is gaining as a risk for the US economy.
October historically has been the worst month of the year for market plunges. With all the difficulties on the economic, war and inflation fronts we may see next month join the record books of 1929, 1987 and 2020. Our downside target for the Dow Jones Industrials Index of 24,000 – 25,000 remains. With a final waterfall plunge and fear drives climactic selling a Table Pounding Buy window for the general stock market and particularly for the energy sector will emerge.
EIA Weekly Oil Data: The EIA data of Wednesday September 29th was somewhat bullish for oil prices. US Commercial Crude Stocks fell 0.2Mb to 430.6Mb. The US Strategic Petroleum Reserve (SPR) had a release of 4.6Mb last week. Motor Gasoline Inventories fell 2.4Mb and Distillate Fuel Oil Inventories fell 2.9Mb. These declines were due to Refinery Utilization falling 3.0% to 90.6% utilization. The declines were due to US Exports (mainly to Europe) rising by 1.1Mb/d (7.7Mb on the week) which lowered US inventories. US Crude Production declined 100Kb/d to 12.0Mb/d as hurricane activity required offshore production near the hurricane route to be shut in.
Total Demand last week rose 1.832Mb/d to 20.77Mb as Distillate demand rose 768Kb/d. Motor Gasoline demand rose 504Kb/d to 8.83Mb/d. Jet Fuel Consumption rose 661Kb/d to 1.90Mb/d. Cushing inventories rose 700Kb to 25.7Mb on the week.
EIA Weekly Natural Gas Data: US Natural gas storage is being built up for winter 2022-2023. The US data released last Thursday showed a build of 103 Bcf. Storage is now at 2.874 Tcf but needs to get over 3.50Tcf by November 1st, which is unlikely in the six weeks left before the withdrawal season starts. The biggest increase was in the Midwest (35 Bcf). The five-year average for last week was an injection of 89 Bcf while in 2021 it was an injection of 88 Bcf. So US storage is behind what it needs for this winter. US Storage is now 10.4%, below the five-year average of 3.206 Tcf. Today NYMEX is at US$6.88/mcf. AECO traded today at $4.19/mcf.
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Baker Hughes Rig Data: In the data for the week ending September 23rd the US rig count rose one rig to 764 rigs (up four rigs last week). Of the total rigs working last week, 602 were drilling for oil (up three rigs) and the rest were focused on natural gas activity. The overall US rig count is up 47% from 521 rigs working a year ago. The US oil rig count is up 43% from 421 rigs last year at this time. The natural gas rig count is up 62% from last year’s 99 rigs, now at 160 rigs. The industry has been responding to higher US and international natural gas prices with more activity than last year which should continue to lift overall US production even further in the coming months.
In Canada, there was an increase of four rigs (last week a rise of six rigs) to 211 rigs. Canadian activity is up 33% from 162 rigs last year. While rig and frack day rates are rising, peak potential for staffed rigs is likely around 225 so we are nearing the high rig count potential for this year. Activity for oil grew 54% to 148 rigs up from 96 last year and natural gas rigs rose by 3% to 67 rigs from 65 a year ago. This minor increase in rig activity for natural gas likely relates to the low current natural gas prices in Alberta. Once we get closer to winter, activity should pick up as prices strengthen once the drawdown season starts.
We expect to see US crude oil production reaching 12.5Mb/d during winter 2020-2023 (now 12.0Mb/d). The EIA has forecasted US production reaching record highs, over 13.1Mb/d during 2023. This could rise even 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:
As a global recession unfolds, 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 priced at US$82.01. We got the breach of US$80/b last week and we see this directional move downward recommencing shortly. Watch for a breach of US$76.25/b (last week’s low) for the next onslaught to commence.
The final overall stock market corrective low (the ‘pause that refreshes’) for this new nascent energy super cycle, should occur during October as WTI prices breach US$70/b. This upcoming climactic low should provide fabulous buying opportunities at great prices (Table Pounding BUY levels) for energy related stocks.
Energy Stock Market: The stock markets around the world are getting hit as the inflation pressures are not subsiding, forcing more aggressive Central Bank tightening. Over the last six plus weeks the Dow Jones Industrials Index has fallen 5,300 points. We are within the forecasted 10,000 point waterfall decline. A breach below 28,958 for the Dow (the low of earlier this week) should start the most painful phase of the decline down to the 24,000 – 25,000 area by late September or into October. The Dow as we write this is at 29,684.
The S&P/TSX Energy Index today is at 215 (down 16 points or 7% over the last week) as crude oil demand destruction spreads around the world. The low this week was 200.97. A bust of this level in the coming days should drive the Index below 200 and get us into the climactic bottom liquidation that will set up a fabulous buying opportunity. Some energy stocks have reached our BUY ranges but we await this next painful decline to send out Action Alert BUY emails.
Downside for the Dow Jones Industrials is towards the 24,000-25,000 range in October (down from the early 2022 high of 36,953). Get your BUY lists ready!
Once we see the market showing climatic bottom signals we intend to send out Action Alert BUY ideas to subscribers. There may be one or two in the next week or so and then additional ideas during tax loss selling season (mid-November to mid-December). Become a subscriber to get these timely BUY Alerts. Go to https://bit.ly/2FRrp6k
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