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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:
US two-year Treasury yields are above 4% today and The Federal Reserve raised the Fed Funds rate by 75BP to a range of 3.00 – 3.25%, as they continue their hawkish moves to restrain the forty-year high in inflation. While lower energy prices have muted the recent inflation data, the ongoing sharp rises in the cost of food, shelter and wage costs continue. US retailers are seeing lower purchases of non-food items as people are just buying essentials. Retailers are now canceling prior orders. Walmart sees the consumer better than any other retailer and has canceled billions of dollars of orders as they see a severe economic downturn arising and don’t want to be saddled with excess inventories. After last week’s Federal Express warning, this just adds to the data highlighting how quickly the US economy is faltering. Large employers announcing layoffs include: FedEx, Ford Motor, Gap, Goldman Sachs, Google, Meta, T-Mobile and Wayfair.
Germany released shocking August PPI data yesterday. The expectation was for a painful increase of 36.8% for August but it came in at 45.8%. The rise was led by higher electricity prices which rose by 175% while food inflation rose by 23.2%. Many German companies are closing as they cannot afford the rapidly rising power costs. Power companies using natural gas are failing and the German government has nationalized the largest company, Uniper SE, and will inject 8 billion euros so it can meet the country’s winter needs. An example of the painful impact of the rise in power prices is Vatter’s bakery. It was paying 5,586 euros per month and just got a 330,000 monthly euro bill as the energy provider terminated their lower priced guaranteed deal which was supposed to end at the end of 2023. The increase of 1,200% will likely force the bakery to close. The government has announced help for small and medium sized businesses and they will decide what to do as they see what support they get. Millions of German pensioners also await this outcome as the government talks of giving them one time payments so they can heat their homes this winter. This is a horrible and worsening situation for the German people and the German economy. Their Central Bank, the Bundesbank recently announced that the German economy will “shrink markedly in the autumn and winter months” and that there were mounting signs that the economy was headed into “a clear broad-based and prolonged decline in economic output”.
Food shortages and sharp price spikes are getting worse. India has banned wheat flour exports and exports of broken rice. Rice farmers around the world have faced either water shortages or drought conditions. Indian rice is shipped to 150 nations (more rice than the next four largest exporters: Thailand, Vietnam, Pakistan and the US). Italy, the largest EU producer, expects the harvest this year to be down 30% due to the endless drought the country has faced.
The situation in Ukraine may be heading to a more dire phase as President Putin has called up 300,000 Russian reservists in the first such mobilization since WWII. He needs more troops to hold the lands currently occupied and to gain control of the areas in the east recently taken back by Ukrainian forces. Putin also mentioned that he wasn’t bluffing when he would use “all means at his disposal to protect Russian territory”. With his plan to have four referendums in Russian controlled areas in (Donetsk, Luhansk, Kherson and Zaporizhia) to vote to formally join with Russia. This then extends Russia deep into eastern Ukraine and puts this protection of Russian territory into play. He plans to hold these votes as early as possible. His threat to use nuclear weapons against Ukraine and NATO forces (even low yield tactical ones) is very dangerous for the planet. The more the US and NATO push against Russia (more deadlier and longer reach weapons, as well as more military trainers and volunteers for the fighting) the more likely such an event could occur.
EIA Weekly Oil Data: The EIA data of Wednesday September 21st was bearish for oil prices. US Commercial Crude Stocks rose 1.1Mb to 430.8Mb. The US Strategic Petroleum Reserve (SPR) had a release of record setting 6.9Mb last week. Motor Gasoline Inventories rose 1.6Mb. Distillate Fuel Oil Inventories rose 1.2Mb. Refinery Utilization rose 2.1% to 93.6%. US Crude Production was flat at 12.1Mb/d.
Total Demand last week fell 376Kb/d to 18.9Mb/d as Other Oils demand fell 472Kb/d. Motor Gasoline demand fell 172Kb/d to 8.32Mb/d. Jet Fuel Consumption fell 245Kb/d to 1.24Mb/d. Cushing inventories rose 400Kb to 25.0Mb on the week.
The most bearish part of the report was the sharp decline in consumption versus last year. Motor Gasoline consumption fell 6.5% or 575Kb/d from 8.896Mb/d, Jet Fuel consumption fell 16.5% or down by 245Kb/d from 1.487Mb/d and Total Demand is down 2,208Kb/d, or 10.4% from 21.145Mb/d last 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 77 Bcf. Storage is now at 2.771 Tcf but needs to get over 3.50Tcf by November 1st, which is unlikely in the seven weeks left before the withdrawal season starts. The biggest increase was in the Midwest (33 Bcf). The five-year average for last week was an injection of 74 Bcf while in 2021 it was an injection of 76 Bcf. So US storage is way behind what it needs for this winter. US Storage is now 11.3%, below the five-year average of 3.125 Tcf. Today NYMEX is at US$7.70/mcf. AECO traded today at $4.88/mcf.
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We expect to complete our full conference Presenter line-up of 35 companies this month. We recently added Arrow Exploration Corp. (AXL-V) and Tenaz Energy Corp (TNZ-T) to our Presenter line-up.
Baker Hughes Rig Data: In the data for the week ending September 16th the US rig count rose four rigs to 763 rigs (down one rig last week). Of the total rigs working last week, 599 were drilling for oil (up eight rigs) and the rest were focused on natural gas activity. The overall US rig count is up 49% from 512 rigs working a year ago. The US oil rig count is up 46% from 411 rigs last year at this time. The natural gas rig count is up 62% from last year’s 100 rigs, now at 162 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 six rigs (last week a decline of three rigs) to 211 rigs. Canadian activity is up 37% from 154 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 54% to 146 rigs up from 95 last year and natural gas rigs rose by 10% to 65 rigs from 59 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 12.1Mb/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:
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$83.39/b, down US$6/b from last week on the US demand destruction. Watch for a breach of US$80/b which we see happening shortly. WTI has fallen to as low as US$81.20/b two weeks ago. We expect a breach of US$80/b in the coming days.
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$80/b and fall quickly below US$70/b. This upcoming climactic low should provide fabulous buying opportunities at great prices 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 four plus weeks the Dow Jones Industrials Index has fallen 3,800 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 231 (down 13 points from last week) as crude oil demand destruction spreads around the world.
Our second report for September comes out tomorrow and we are introducing coverage on three E&P ideas for our subscribers’ consideration. Two are oil focused and one natural gas. This takes our research coverage to 33 companies from 30. In the coming months we intend to add other new energy investment ideas after we see their Q3/22 results and can incorporate the data into our models. You need to become a subscriber to access this information.
Downside for the Dow Jones Industrials is towards the 24,000-25,000 range in the coming month (down from the early 2022 high at 36,953). Continue to hold cash for the next great buying opportunity expected during October. Today the Dow is at 30,184. 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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