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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 during the last two weeks from US$93.64/b (now US$85.10/b) aided by the OPEC+ announcement that they were planning to cut their November quota by 2.0Mb/d. Initially it caused a strong two week rally from US$76.25/b to the high, but as reality set in that this was quota allocations and not real barrel cuts for the most part, energy prices retreated. Practically, the quota system is meaningless as most OPEC countries have not been producing enough to reach their prior or new quotas. At best, maybe the Saudi’s may cut 500Kb/d but others will sell all they can to meet budget needs and subsidized food, energy and electricity in their countries.
US interest rates continue to rise as inflation persists and it is expected that the Fed will raise the Fed Funds rate by 75BP at their next meeting in early November. The 2-year Treasury yield has risen to 4.54%, lifting the US dollar to 112.73 and beating down the Euro and the Yen. US Housing Starts fell 6.1% in September due to the sharp rise in rates. Europe and Japan will be forced to raise interest rates to follow the US rate increases or they face economic ruin from their cost of funding US dollar loans. The three countries facing the most difficulty are Japan, the UK and now Switzerland. The Bank of Switzerland has borrowed US$6.3B from the US Fed via a liquidity swap and provided it to failing Credit Suisse which needs a huge US$8B injection of new capital if it is to survive. Its loan book is in trouble but its derivative book is the deathly hallows. A banking failure overseas of some significance would be the ‘Lehman’ event of this Global Financial Crisis (GFC).
Pressure on the upside to crude prices comes from the OPEC+ production cutback (Russia and Saudi collusion), the sabotage of the Nord Stream pipeline system (still undocumented as to who did this) and worries that other energy infrastructure could now be vulnerable to physical or cyber attacks. Ukraine this week lost 30% or more of its energy infrastructure due to drones provided to Russia by Iran. President Putin has now declared martial law in the annexed territories. Former German Chancellor Angela Merkel and other leaders are calling for peace talks with Russia that concede the expropriated lands but turn on the Russian energy pipelines for oil and natural gas back on before winter hits. The GOP leader and potential next Speaker of the House has added his displeasure with Ukraine and Biden’s largesse of money and weapons and stated “Ukraine aid will have a more difficult road in a Republican House.” He added ‘I think people are gonna be sitting in a recession and they’re not going to write a blank check to Ukraine.” After the US midterm elections the issue of Ukraine could become much more problematic for NATO without the US keeping its larder open.
China has now called for all its citizens to leave Ukraine. Has Russia told them something that caused this rash and speedy decision? China’s saber rattling about taking over Taiwan during the next five years of President Xi’s new term adds an energy risk premium. An Iran deal now looks less likely given the horrible protests and crackdowns occurring in the country.
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 has announced new Covid lockdowns. The strength of the US dollar makes imports of crude to countries with sharply falling currencies import less. World inflation came in at 10% year over year in September. The US demand picture is clearly downward and China’s imports are down 3-4Mb/d. In addition, China wants to move away from trading in the US dollar and are now settling with Russia and the Saudis in Yuan. Even overly bullish RBC in their various economic cases and crude forecasts now see a WTI plunge to US$60/b as possible if there is a deep recession in 2023. We see the data as showing a likely moderate to severe recession as the most likely path.
Late October historically has been the worst part of 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 late 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 during Q4/22. A waterfall plunge is expected shortly as significant fear drives climactic selling and produces a Table Pounding Buy window for the general stock market and particularly for the energy sector. Market bottoms occur due to fear not greed and are disorderly, not orderly as recent declines have been.
EIA Weekly Oil Data: The EIA data of Wednesday October 19th was mixed for oil prices. US Commercial Crude Stocks fell 1.7Mb to 437.4Mb but remained above last year’s level of 426.5Mb. The US Strategic Petroleum Reserve (SPR) had a release of 3.6Mb last week. Motor Gasoline Inventories fell a modest 0.1Mb while Distillate Fuel Oil Inventories rose 0.1Mb. Refinery Utilization fell 0.4% to 89.5% utilization. US Crude Production recovered 100Kb/d to 12.0Mb/d. The reason for the decline was a 1.27Mb/d of export growth build which lowered domestic supplies by 8.9Mb on the week.
Total Demand last week rose by 1.49Mb/d to 20.76Mb/d as demand for Propane and Other oils rose by 591Kb/d and 762Kb/d respectively. Gasoline demand rose by 401Kb/d to 8.68Mb/d while Jet Fuel Consumption fell 114Kb/d to 1.41Mb/d. Cushing inventories rose 600Kb to 26.2Mb on the week.
There clearly is US domestic demand destruction. US demand this week was 1.07Mb/d or down 5% from last year’s 21.83Mb/d. Motor Gasoline demand domestically was down 957Kb/d or nearly 10% from 9.63Mb/d last year.
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 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$5.53/mcf today while AECO is at $4.01/mcf.
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Baker Hughes Rig Data: In the data for the week ending October 14th the US rig count rose seven rigs to 769 rigs (down three rigs last week). Of the total rigs working last week, 610 were drilling for oil (up eight rigs) and the rest were focused on natural gas activity. The overall US rig count is up 42% from 543 rigs working a year ago. The US oil rig count is up 37% from 445 rigs last year at this time. The natural gas rig count is up 60% from last year’s 98 rigs, now at 157 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 one rig (last week an increase of two rigs) to 216 rigs. Canadian activity is up 29% from 168 rigs last year. Peak potential for staffed rigs is likely around 225 so we are near the high rig count potential for this year. Activity for oil grew 53% to 150 rigs up from 98 last year and natural gas rigs fell by one rig to 66 rigs from 70 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$85.10/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 Q4/22 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: Over the last two months the Dow Jones Industrials Index has fallen >5,600 points to a new intraday low of 28,661. The Dow is now following a normal bear market bounce and is nearly exhausted. Once the Dow reverses, 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 244. 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 in the next week or two depending upon the level of market downside pressure. Additional ideas are likely during tax loss selling season (late-November to mid-December). Become a subscriber to get these timely BUY Alerts. Go to https://bit.ly/2FRrp6k
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