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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:
Tension is building that an escalation of the war in Ukraine could lead to the use of weapons of mass destruction by Russia as they currently are destroying most of the energy and electricity capacity of the country. A major dam near Kherson is of great concern. If it is blown up it would flood large parts of southern Ukraine. The US has moved significant ground and air force personnel and significant military assets to Romania and Poland in the event that President Biden decides to reinforce Ukraine despite it not being a NATO country. Any mistake from here could broaden the war with the US at its heart just before Biden loses control of Congress. This just seems to get messier and messier. Russia has its back to the wall and is using Iranian troops and Iranian killer drones, and the US is moving forces to NATO countries abuttting Ukraine and Russia.
While Europe has nearly full natural gas storage and many ships offshore waiting to unload, the lack of ports to unload and regasification facilities does not change the situation that winter 2022 – 2023 could be very difficult for many countries in Europe. Blackouts and brownouts are being prepared for and coal will increasingly be used to meet electricity and heating demand.
President XI has taken control of China’s ruling party by adding in his loyalists and removing opposition groups, which means that China will now be more forceful in its objective of taking Taiwan. It may not start with a formal attack but a blockade with the world’s largest navy is likely. In war games, the US admits that it would not be able to aid Taiwan and defeat China.
So can the US handle confrontation with both Russia and China at the same time? This will likely be the most severe test of the Biden Presidency after the midterm elections.
The US Dollar has retreated over the last two weeks from 113.85 to 109.76 today providing some respite. The two year yield has backed off from 4.60% to 4.41% today. Thursday the ECB is expected to announce a 75 BP increase in rates as the Bank Of Canada raised its policy rate by 50BP to 3.75%, a 14-year high today. Then next Wednesday the Federal Reserve meets and is likely to add 75BP as well. What they say about future interest rate moves and the concern about inflation will be the tell for the next move in the US dollar and stock markets. Earnings and guidance in the US has been mixed. Companies like Pepsi and Coke have been able to raise prices faster than inflation and have reported nice profit increases and so far consumers are not balking at the price inflation. On the other hand GOOGLE (Alphabet) and Microsoft missed on revenues, profits and had negative guidance and GOOGL is down 7.5% today and MSFT is down by 6.4% today.
Bullish pressure on crude prices has lifted prices to US$88.30/b (up almost US$3/b on the week) on the weakness in the US Dollar and the expected interest rate increases around the world in the coming days. Inflation data will be viewed extensively going forward to see if it is peaking and the Central Banks can make a pivot from their sharp interest rates increases. So far the data does not support reversing tightening, but the market over the last two weeks is running with this hope. Our offset view is that food and shelter inflation are not subsiding and until it does, the hope of central banks reversing course is just market speculation and noise. How much OPEC+ does cut in reality next month will be a key for the bulls.
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. World CPI inflation came in at 10% year-over-year in September. Canada reported food grocery inflation up 11.4% up 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. Emperor XI now has the power to continue to fight covid at home, increase pressure on Taiwan, expand his military and continue to reign in the capitalistic business community to genuflect to the political masters in Beijing. Russia is not having problems finding new buyers for its oil and getting tankers to take the crude to its buyers. China (paying in Yuan) and India (paying in Rupees) are easy to supply now but new buyers like Pakistan and Afghanistan are taking advantage of the steep discounts. Russia may not see any decline in production once it has the new logistics for delivery set up. It is even thinking of making a port on Turkey’s Mediterranean as a shipping hub for natural gas.
EIA Weekly Oil Data: The EIA data of Wednesday October 26th was mixed for oil prices. US Commercial Crude Stocks rose 2.6Mb to 439.9Mb and were above last year’s level of 430.8Mb. The US Strategic Petroleum Reserve (SPR) had a release of 3.4Mb last week. Motor Gasoline Inventories fell 1.5Mb while Distillate Fuel Oil Inventories rose 0.1Mb. Refinery Utilization fell 0.6% to 88.9% utilization. US Crude Production remained at 12.0Mb/d.
Total Demand last week fell by 174Kb/d to 20.59Mb/d as demand for Other oils rose by 465Kb/d offset by a Propane drop of 766Kb/d. Gasoline demand rose by 253Kb/d to 8.93Mb/d while Jet Fuel Consumption rose 271Kb/d to 1.68Mb/d. Cushing inventories rose 700Kb to 26.9Mb on the week.
There clearly is US domestic energy demand destruction. US Motor Gasoline demand domestically was down 393Kb/d from 9.32Mb/d last year.
EIA Weekly Natural Gas Data: US Natural gas storage is being built up for winter 2022-2023 with withdrawals starting in November. The US data released last Thursday showed a build for the week ending October 14th of 111 Bcf. Storage is now at 3.34 Tcf. The biggest increase was in the South Central (41 Bcf). Cooler weather helped to make this a big injection week. The five-year average for last week was an injection of 68 Bcf while in 2021 it was an injection of 87 Bcf. US Storage is now 5.2%, below the five-year average of 3.53 Tcf. NYMEX is trading today at US$5.47/mcf today while AECO is at $3.82/mcf.
There are a number of places in the US with negative natural gas prices (mainly Permian basin) as there is insufficient natural gas takeaway capacity. To produce the oil they get negative prices to take away the natural gas. The slow approval processes by the Biden administration continues to hamper the growth of the US oil and natural gas business. SPR sales and begging OPEC to produce more is chosen instead of incentivizing domestic US growth. It is sure nice that November 8th’s midterms are closing in and the Biden anti-US Energy agenda can be stopped by a divided Congress.
CATCH THE ENERGY CONFERENCE: We had an amazing and record turnout at the Schachter Catch the Energy conference this past Saturday. Thank you to our major sponsor, TMX, for having us open the Toronto Stock Exchange Friday morning.
We started the day with my plenary speech which included a general market overview and its implications for the energy sector and why I see that a new energy super cycle started in March 2020. Afterwards we had 34 companies presenting their stories. The exhibitor rooms were very popular as individual investors had a chance to speak to each company that presented. Many rooms reached capacity quickly. The booth areas were very well attended and extensive discussions with management occurred. Investors were very pleased to have in person access to management after the two year pandemic hiatus. The wonderful food prepared by Great Events Catering throughout the day received a WOW from attendees. Thank you to our Sponsors for their support to make this a very high quality event.
Overall we are very happy with how the day turned out and we hope you were too. Save the date for next year’s conference on October 14, 2023.
For those that could not attend we videoed my plenary session and the 10 companies in the two large Ross Glen Hall rooms. Access to this on demand service will be available next week and we will provide access information then.
Thank you to our Sponsors and Presenters!
Baker Hughes Rig Data: In the data for the week ending October 21st the US rig count rose two rigs to 771 rigs (up seven rigs last week). Of the total rigs working last week, 612 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 42% from 542 rigs working a year ago. The US oil rig count is up 38% from 443 rigs last year at this time. The natural gas rig count is up 59% from last year’s 99 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 a decrease of six rigs (last week an increase of one rig) to 210 rigs. Canadian activity is up 28% from 168 rigs last year. Peak potential for staffed rigs is likely around 260 – 280 this winter. Activity for oil grew 53% to 144 rigs up from 93 last year and natural gas rigs 7% to 66 rigs from 71 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 picks up as prices strengthen once the winter 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$88.30/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 260. 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. 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
Our Q3/22 90-minute webinar takes place on Thursday November 24th at 7PM MT. We intend to cover the Q3/22 reports of the companies we cover with specific detail on those that beat expectations and those that underperformed. There will be two Q&A sessions. If stocks retreat materially by then we will cover the additions to the Action Alert BUY lists as well. One needs to be a subscriber to access the webinar live or access the archive thereafter.
Please feel free to forward our weekly ‘Eye on Energy’ to friends and colleagues. We always welcome new subscribers to our complimentary energy overview newsletter.
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