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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:
The largest one day point decline (outside of the pandemic waterfall free fall days) for the Dow Jones Industrials occurred yesterday, falling 4% or down 1,276 points to 31,104. The S&P 500 fell 4.3% and the tech heavy NASDAQ fell 5.2% or 632 points to 11,634. The optimists were looking for a good CPI number as energy costs at the pump had been falling for months. This did occur with gasoline prices down 10.6%. However, most everything else was up. Core inflation, ex-food and energy, re-accelerated and came in at double the expectation, up 0.6% versus up 0.3%. Food at home rose 13.5% over the past year and veterinary care rose by 10% from a year ago. Monthly increases of 0.8% occurred for medical costs, shelter rose 0.7%, new cars and trucks by 0.8% and outdoor equipment by 1.2%. Overall the CPI rose 8.3% from a year ago. The US dollar shot upward and interest rates across the time spectrum took off on the expectation of a very hawkish Fed next week. They are expected to announce their rate decision at a press conference next Wednesday. The consensus is that the Fed will raise interest rates by 75BP but inflation hawks want the Fed to raise interest rates by 100BP as they remain behind the inflation data. Today core PPI came in at 0.4% up from 0.3% in the prior month and the forecast for this month.
A big concern is upward pressure on wage rates. This week two key railway unions in the US have the right to strike as of this Friday if no deal is struck. Seven thousand daily trains move 28% of total US freight (40% of long distance trade) impacting bulk commodities such as food, energy, chemicals, metals, wood products and especially automobiles and industrial equipment. This could cost the US economy around US$2B per day of lost GDP. Perishable goods would suffer the most severe near term impact.
Russia has now cut off exports of natural gas to Europe entirely forcing them to use up the storage supplies needed for this winter. This ‘tit for tat’ move does not appear to change Putin’s behavior nor help EU citizens which are facing large increases in heating bills this winter. The EU this week is talking about remote rationing of electricity. During peak usage hours home appliances may not be able to work or low priority businesses operate. Russia wants to see Europe use up a significant amount of their storage reserves making this winter more difficult if it is a cold one. Russia wants to divide Europe’s citizens from their governments’ support of Ukraine and a lack of natural gas during winter could trigger a large increase in domestic protests.
The recent success of Ukraine in eastern Ukraine has shocked the Russian military. A lot of territory was lost. What do the Russians do now? Do they escalate with new weapons and attacks on the west of Ukraine? Some military sources say this successful campaign in the east was supported by mercenary (special operations) volunteers from US and other NATO special forces using the latest NATO weapons. If so, it gives Biden deniability but shows Russia that NATO forces are fighting in Ukraine. Russia has upped the ante by now attacking power plants and other infrastructure sites across the country to destroy Ukraine’s economy. This likely will mean that the EU and US will increase funding to Ukraine though they are under pressure from local economic concerns. This sure looks like it will be a drawn out war of attrition.
EIA Weekly Oil Data: The EIA data of Thursday September 14th was mixed for oil prices. US Commercial Crude Stocks rose 2.4Mb to 429.6Mb. The US Strategic Petroleum Reserve (SPR) had a release of record setting 8.4Mb last week. Motor Gasoline Inventories fell 1.8Mb. Distillate Fuel Oil Inventories rose 4.2Mb. Refinery Utilization rose 0.6% to 91.5%. US Crude Production was flat at 12.1Mb/d.
Total Demand last week fell 578Kb/d to 19.3Mb/d as Propane demand fell 555Kb/d. Motor Gasoline demand fell 233Kb/d to 8.49Mb/d. Jet Fuel Consumption rose 54Kb/d to 1.49Mb/d. Cushing inventories fell 200Kb to 24.6Mb on the week.
The bearish part of the report was the sharp decline in consumption versus last year. Motor Gasoline consumption fell 398Kb/d from 8.89Mb/d and Total Demand fell 598Kb/d from the prior year. Demand destruction is clearly occurring in the US.
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 54 Bcf which compares with a build of 61 Bcf in the prior week. Storage is now at 2.694 Tcf but needs to get over 3.50Tcf by November 1st, which is unlikely in the nine weeks left before the withdrawal season starts. The biggest increase was in the Midwest (29 Bcf). The five-year average for last week was an injection of 79 Bcf while in 2021 it was an injection of 83 Bcf. So US storage is way behind what it needs for this winter. US Storage is now 11.5%, below the five-year average of 3,043 Tcf. Today NYMEX is at US$8.78/mcf. AECO traded yesterday at $2.14/mcf. At these low AECO prices Canada’s largest natural gas producer, Tourmaline (TOU-T) has shut in 100 Mmcf/d of production and delayed some of its planned pad drilling for a few months.
This winter Europe may see even higher natural gas prices depending on the allocation of natural gas volumes by Russia. Putin wants to force Europe to loosen sanctions and is using food and natural gas as tools to get what he wants. European leaders are complaining about the use of natural gas volumes as a ‘weapon of war’ but Putin points out that reducing access to the ‘SWIFT’ payment system was a similar weaponizing of the financial clearing system and an act of war against Russia. Some countries in Europe already seem to be tired of the war and the demands on their military by Ukraine’s persistent requirements for increasingly more money and weapons to fight Russia. Exasperated European nations could slow down support for Ukraine as they take care of their domestic needs. Italy and Germany are two countries facing such pressure already. The UK is planning on blackouts this winter as they set up an emergency energy plan. Cutbacks of around 20% of supplies are being planned for across Europe. This will surely throw the area into a hard landing recession.
OPEC Monthly Report:
While the recent OPEC meeting announced a decline of 100Kb/d starting in October due to their fear of a recession in Europe, the August data released September 13th showed a rise of 618Kb/d, with the surprise being that Libya was able to lift production to 1.123Mb/d, up 426Kb/d during the month as war strife settled down. The Saudis added 160Kb/d. Overall production rose to 29.65Mb/d compared to the call on OPEC of 28.1Mb/d.
OPEC economists are ignoring the recessionary view and see demand growing 3.1Mb/d this year to 100.3Mb/d and by 2.7Mb/d in 2023 to 102.7Mb/d. With global demand at 99.7Mb/d in Q3/22 and US demand clearly down from a year ago this optimistic view of global consumption will likely need to be adjusted downward sharply in the coming months. As Central Banks drive inflation down with sharply rising interest rates recession will take hold globally.
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Baker Hughes Rig Data: In the data for the week ending September 9th the US rig count fell one rig to 759 rigs (down five rigs last week). Of the total rigs working last week, 591 were drilling for oil (down five rigs) and the rest were focused on natural gas activity. The overall US rig count is up 51% from 503 rigs working a year ago. The US oil rig count is up 47% from 401 rigs last year at this time. The natural gas rig count is up 64% from last year’s 101 rigs, now at 166 rigs. The industry has been responding to higher 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 a decrease of three rigs (last week an increase of eight rigs) to 205 rigs. Canadian activity is up 43% from 143 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 for this year. Activity for oil grew 61% to 140 rigs up from 87 last year and natural gas rigs rose by 16% to 65 rigs from 56 a year ago. This minor increase in rig activity for natural gas likely relates to the low current 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 12.1Mb/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:
The Russian invasion of Ukraine and the resultant tough sanctions against Russian crude oil and now natural gas sales to Europe, has spiked up prices. Higher energy costs are pushing economies into recession. This should drive down global crude demand by 4-5Mb/d over the coming quarters. US, German and Chinese data clearly supports this view.
As a 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 priced at US$89.41/b as President Biden talks about rebuilding the SPR in the coming months and as the talks with Iran break down.
We expect more hawkish Central Bank action will result in a difficult recession and that crude demand will fall faster than consensus. If so, watch for a breach of US$80/b which we see happening in the next few weeks. WTI has fallen to as low as US$81.20/b last week.
The final corrective low for the ‘pause that refreshes’ this new nascent energy super cycle, should occur during October as WTI prices breach US$80/b and fall quickly below US$70/b. This upcoming climactic low should provide fabulous buying opportunities at great prices for energy stocks, much lower than current prices.
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 four plus weeks the Dow Jones Industrials Index has fallen 3,300 points. We are in the early part of a 10,000 point waterfall decline. A breach below 29,700 for the Dow (the mid-June low) should start the most painful phase of the decline down to the 24,000 – 25,000 area by late September or into October.
The S&P/TSX Energy Index today is at 244 on the positive OPEC report, the news that Iran will not be bringing on oil volumes in the near term and Biden’s plan to start rebuilding the SPR (adding to near term oil buying).
Downside for the Dow Jones Industrials is towards the 24,000-25,000 range in the coming months (down from the year high at 36,953). Continue to hold cash for the next great buying opportunity expected during October. Today the Dow is at 31,189. Once we see the market showing climatic bottom signals we intend to send out Action Alert BUY ideas to subscribers. To become a subscriber and get these timely Alerts Go to https://bit.ly/2FRrp6k
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