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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.
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Global Economic Update:
Crude prices have risen US$10/b over the last week to US$86.34/b as OPEC+ talks about cutting production quotas by 2 Mb/d in order to keep Brent prices over US$100/b. They want high revenues (and Russia could get more money from the volumes it does sell to fight the war in Ukraine and against NATO). OPEC+ sees a moderate global slowdown in demand so cutting production would give them what they want in pricing and continued high revenues. Russia will go along and take a quote reduction as they cannot produce and sell all their 11.0MB/d any more due to sanctions. They can sell lost volumes to China, India, other parts of Asia and to African but not all of the sanctioned oil. Accepting a cut just helps the rhetoric to keep prices high. As quotas are given out it may mean only 500Kb/d of real production loss as many OPEC members are producing below their quotas and any cut to them is meaningless from a volume standpoint. Russia likely cannot find buyers for 500K/b so this is also meaningless if they take a quota cut of such magnitude.
More information and speculation is coming out about the sabotage of the Nord Stream pipelines. Russia is getting the most blame but reports out of Poland and the US speculate that the CIA may have sent special forces to blast the pipelines to ensure Germany does not back down from fully supporting Ukraine during the ongoing war. Germany has been reluctant to supply advanced weaponry as their own stocks are getting below defensive levels. The only countries with the underwater bombing skills are the UK and the US and President Biden seems to be more of the war hawk and Britain is having a leadership crisis. It appears there is an email trail of the CIA warning Europe that such an event was possible. The sabotage now keeps Germany in line if they want international LNG and other energy support this winter. Biden must be worried about what Putin will do next and had the US State Department issue a dire warning to Americans to “Leave Russia Immediately”.
President Biden will get to his bully pulpit and condemn this announcement as he is not liking the recent increase in gasoline prices over the last three weeks. With just a month before the midterm elections gasoline prices were going in his and the DNC’s favour and now its in the RNC’s favour. Will the voters decide inflation and the economy is the main issue and vote Republican or is Abortion rights and democracy their key voting concern. Today’s event by OPEC+ must be energizing Republicans who now gain momentum into the last few weeks of campaigning.
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 this month join the record books of 1929, 1987 and 2020. Large painful declines and rapid oversold rallies that trap short sellers are normal. We may see a bit more recovery during this countertrend bounce but the main trend is down. The onslaught should start anew shortly. Our downside target for the Dow Jones Industrials Index remains at 24,000 – 25,000. A final waterfall plunge is expected this month with significant fear that drives climactic selling and produces a Table Pounding Buy window for the general stock market and particularly for the energy sector.
EIA Weekly Oil Data: The EIA data of Wednesday October 5th was mixed for oil prices. US Commercial Crude Stocks fell 1.4Mb to 429.2Mb but are above the level of 420.9Mb last year at this time. The US Strategic Petroleum Reserve (SPR) had a release of 6.2Mb last week. Motor Gasoline Inventories fell 4.7Mb and Distillate Fuel Oil Inventories fell 3.4Mb. Refinery Utilization rose 0.7% to 91.3% utilization. US Crude Production held steady at 12.0Mb/d as hurricane activity required some offshore production to be shut in.
Total Demand last week rose 61Kb/d to 20.83Mb/d as Gasoline demand rose 640Kb/d to 9.47Mb/d. Jet Fuel Consumption fell 429Kb/d to 1.47Mb/d. Cushing inventories rose 300Kb to 26.0Mb on the week.
The main thing to keep in mind is that the US has been exporting record amounts of crude and crude products to Europe to meet their needs during this winter and due to the sanctions cut-off of Russia which gets more impactful in December. Exports have risen to 4.55Mb/d up from 2.11Mb/d last year so here alone is demand destruction in the US off 2.44Mb/d or 17Mb/week, larger than the SPR release. Add to this the comparable demand this year versus last year which includes export demand, the US is consuming 695Kb/d (4.9Mb/week) less. So there is a total US domestic decline in demand of 3.1Mb/d already in the US. There is clearly US domestic demand destruction masked by saving Europe. China imports are down 3-4Mb/d below pre-Covid imports so we are facing demand destruction just in these two countries of 6-7Mb/d. Add in Europe and the rest of the globe and these are seriously large numbers. OPEC beware!
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 2.977 Tcf but needs to get over 3.50Tcf by November 1st, which is unlikely in the five 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 99 Bcf while in 2021 it was an injection of118 Bcf. So US storage is behind what it needs for this winter. US Storage is now 9.3%, below the five-year average of 3.283 Tcf. Today NYMEX is at US$6.948/mcf. AECO traded today at $4.45/mcf.
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Baker Hughes Rig Data: In the data for the week ending September 30th the US rig count rose one rig to 765 rigs (up one rig last week). Of the total rigs working last week, 604 were drilling for oil (up two rigs) and the rest were focused on natural gas activity. The overall US rig count is up 45% from 528 rigs working a year ago. The US oil rig count is up 41% from 428 rigs last year at this time. The natural gas rig count is up 61% from last year’s 99 rigs, now at 159 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 a decrease of two rigs (last week a rise of four rigs) to 213 rigs. Canadian activity is up 29% from 165 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 48% to 144 rigs up from 97 last year and natural gas rigs rose by 1% to 69 rigs from 68 a year ago. This minor decline in rig activity for natural gas likely relates to the lower 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$88.01/b. We got the breach of US$80/b last week but it reversed due to the sabotage on the Nord Stream pipelines and today’s OPEC+ price gouging attempt. The downside directional move should recommence shortly as bad inflation data and hawkish Central Banks continue to shrink money supply and raise interest rates. We are seeing the politicians giving fiscal stimulus to stay elected and Central Bankers fighting to rein in inflation with monetary policy. It will make for whipsaw markets as each move affects prices and will cause large market swings. Yesterday was an up day for the markets, today down. Near-term there is more downside.
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 seven weeks the Dow Jones Industrials Index has fallen 5,600 points. An oversold bounce is now underway. Once this is over another 5,000+ point decline should occur. A breach below 28,700 for the Dow (the low of later last week) should start the most painful phase of the decline down to the 24,000 – 25,000 area. The Dow as we write this is at 30,274.
The S&P/TSX Energy Index today is at 243 (up 28 points from last week) as energy bulls were enthused by the sabotaged pipelines and today’s OPEC maneuver. The low a week and a half ago was 200.97 so quite the rally over the last week. A bust of this level should drive the Index below 200 and get us into the climactic bottom liquidation area of 160-180 that will set up a fabulous buying opportunity.
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 climactic 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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