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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, Political & Military Update:
WTI Crude prices have fallen over US$8/b in the last week to an intra-day low today of US$85.56/b as higher than expected CPI data shattered expectations that the Federal Reserve would not be so aggressive with interest rate hikes to tame inflation. The CPI rose by 0.4% in the month (double the 0.2% expected) to 8.2%. Core CPI rose 0.6% to an annual rate of 6.6% (the biggest increase since August 1982). These are far higher than the Fed needs in order to change their upward push in interest rates. A 75BP rise is expected at their next meeting in early November. The key components of the inflation rise were shelter, food and medical costs. This was offset by a 5% decline in gasoline costs which are now reversing to the upside across the US due to the OPEC+ announcement of a 2.0Mb/d cut in quotas. This was the final inflation report ahead of the November midterm elections. US Interest rates (and rates around the world) have risen across the maturity schedule as a result of the US inflation data.
Pressure on the upside to crude prices comes from the OPEC+ production cutback (Russia and Saudi collusion), a recent Russian crude pipeline rupture in Poland (Druzhba pipeline), the sabotage of the Nord Stream pipeline system (still undocumented as to who did this) and worries that other energy infrastructure is now vulnerable to physical or cyber attacks.
Pressure to the downside for WTI comes from Central Banks moves to rein in inflation which likely means a more severe economic downturn and lower crude demand, China announcing new Covid lockdowns and the stronger US dollar which makes imports of crude to countries with sharply falling currencies looking to import less.
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 year’s October 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 quite a few countertrend bounces but the main trend is down. Our downside target for the Dow Jones Industrials Index remains at 24,000 – 25,000. A final waterfall plunge is expected this month as significant fear drives climactic selling and produces a Table Pounding Buy window for the general stock market and particularly for the energy sector. Today’s intraday low for the Dow Jones Industrials at 28,661 was a new low for 2022. A sharp bear market short covering rally has now ensued but should be short lived.
EIA Weekly Oil Data: The EIA data of Wednesday October 13th was mixed for oil prices. US Commercial Crude Stocks rose 9.9Mb to 439.1Mb and above last year’s level of 427.0Mb. The US Strategic Petroleum Reserve (SPR) had a release of 7.7Mb last week. Motor Gasoline Inventories rose 2.0Mb while Distillate Fuel Oil Inventories fell 4.9Mb. Refinery Utilization fell 1.4% to 89.9% utilization. US Crude Production fell 100Kb/d to 11.9Mb/d. The reason for the build was due to imports rising by 1.795Mb/d or by 12.6Mb on the week.
Total Demand last week fell by 1.56Mb/d to 19.27Mb/d as Gasoline demand fell 1.19Mb/d to 8.28Mb/d and Other Oils consumption fell 591Kb/d. Jet Fuel Consumption rose 52Kb/d to 1.53Mb/d. Cushing inventories fell 400Kb to 25.6Mb on the week.
There is clearly US domestic demand destruction. US demand this week was 604Kb/d down 3% from last year’s 19.875Mb/d and Motor Gasoline demand domestically was down 909Kb/d or nearly 10% from 9.19Mb/d last year. Of course some of this gasoline decline was due to the recent hurricane activity.
OPEC Monthly Report:
The October 2022 report was released yesterday and showed that in September OPEC lifted production by 146Kb/d to 29.8Mb/d. The biggest increase came from the Saudis with a lift of 82Kb/d to 10.99Mb/d. While the recent OPEC meeting announced a cut in production of 2.0Mb/d starting in November due to their fear of a recession in Europe and a global slowdown, the quota cuts likely mean only 500Kb/d of real production cuts because most members are not using their current quota allocations.
OPEC sees a call on their production of 29.43Mb/d in Q4/22 so there is sufficient supply even before SPR releases by OECD members. In 2023 they see average demand from OPEC at the same number so their cut in official quota is meaningless if they only remove 500Kb/d of real production and if there is a global recession which means their consumption forecast is too high. OPEC forecasts that demand this year will be 99.7Mb/d (down 350Kb/d from their prior forecast) and they see demand in 2023 at 102.0Mb/d (down 710Kb/d from their prior forecast). If the global recession is mild or severe then consumption is likely to decline from this year’s level and an inventory build will occur making restocking of inventories easier.
EIA Weekly Natural Gas Data: US Natural gas storage is being built up for winter 2022-2023. The US data released today showed a build for the week ending October 7th of 125 Bcf. Storage is now at 3.231 Tcf. The biggest increase was in the South Central (55 Bcf). Cooler weather helped to make this a big injection week. The five-year average for last week was an injection of 75 Bcf while in 2021 it was an injection of 92 Bcf. US Storage is now 6.4%, below the five-year average of 3.452 Tcf. NYMEX is trading today at US$6.50/mcf today while AECO is at $4.47/mcf.
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Baker Hughes Rig Data: In the data for the week ending October 7th the US rig count fell three rigs to 762 rigs (up one rig last week). Of the total rigs working last week, 602 were drilling for oil (down two rigs) and the rest were focused on natural gas activity. The overall US rig count is up 43% from 533 rigs working a year ago. The US oil rig count is up 39% from 433 rigs last year at this time. The natural gas rig count is up 60% from last year’s 99 rigs, now at 158 rigs. The industry has been responding to higher US and international natural gas prices with more activity than last year which should lift overall US production even further in the coming months.
In Canada, there was an increase of two rigs (last week a decrease of two rigs) to 215 rigs. Canadian activity is up 29% from 167 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 56% to 148 rigs up from 95 last year and natural gas rigs fell by two rigs to 67 rigs from 72 a year ago. This 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.
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$88.52/b. Watch for a breach of US$76.25/b (the late September 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 late 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 two months the Dow Jones Industrials Index has fallen >5,600 points. An oversold bounce is now underway today. We did breach the previous low of 28,700 for the Dow today at 28,661 and after this oversold bounce is over we should start the next painful phase of the decline down to the 24,000 – 25,000 area.
The S&P/TSX Energy Index today is at 245 (up 2 points from last week) as energy bulls were enthused by the sabotaged pipelines and today’s stock market rally. Last month’s low of 200.97 is now the support level to watch. A bust of this level should drive the Index below 200 and get us into the climactic bottom liquidation area of 160-180 during Q4/22 that will set up a fabulous buying opportunity.
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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COMMENTARY: Taxes and Regulations Will Increase the Cost of Producing New Energy In Alberta, Making it Less Competitive Than the US – Jack Mintz