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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.
I will be traveling next week so there will not be an issue next Wednesday. Our next Eye On Energy will come out on December 7th.
Global Economic, Political & Military Update:
China is facing an increasing level of Covid cases and has a worrying rising death toll. Beijing is now under lockdowns of malls and parks as Covid cases climb. The caseload is now reaching the highs of April and the increase in restrictions is impacting economic activity. Over 20% of China’s economy is now restricted. The addition of the lockdown of the capital of Beijing spooked markets on Monday and crude fell US$5/b to US$75/b before recovering. Part of this bounce back relates to a rumor that the Saudi’s had agreed to boost production by 500Kb/d at their next meeting but later this was retracted by Saudi authorities.
More problematic is that the US rail industry may see a strike starting in week two of December. The Biden administration negotiated a tentative deal in September which needed union ratification (to halt a strike before the midterms) and now the largest rail union with 37,000 members has rejected the deal over pay, work and lifestyle conditions. Other rail unions have since announced that if there was a strike called they would not cross the main union picket lines, shutting the whole rail system down. If no last minute agreement occurs then the union could strike as early as December 5th, according to Bloomberg. This would be a major disruption to the US economy with supply chain chaos as seen during the early part of the pandemic. It would also disrupt millions planning on traveling for the Christmas holidays on passenger trains that use freight controlled tracks. The last time the US faced a rail strike was in 1992. President Biden and the Democrats face a difficult decision. Do they pass legislation ordering the workers back to work and face opposition from an important part of their voter base or face a painful economic strike before the Christmas season and annoy large numbers of Americans? A strike would surely throw the US economy into a recession of some magnitude (and definitely not a mild recession).
China’s exports are falling, highlighting their slowing economy and lower demand for crude. Exports to the US shrank 12.6% in October and exports to Europe fell by 9%. Some examples by product were household goods down 20% and toys by 18%.
Two items we are watching:
- One that could have a major negative impact on the crude oil sector is the widespread move to install windfall taxes on energy companies. The UK is planning an expanded windfall tax to 35% from 25% previously and other countries are looking at other levels and some are also considering removing the write-off of royalties. Both would be very painful for energy companies.
- The second relates to the Russia/Ukraine war. There have been more bombings in the area of the largest nuclear plant in Europe at Zaporizhzhia in southeast Ukraine. It is currently under Russian control. The UN nuclear inspection group fears a meltdown or a radiation release could occur if the cooling system or electricity is cut off from the plant. Recent artillery attacks have been within 100 meters of the facility. If there was a radiation leak it would shut down many of the surrounding countries and there could be lots of injuries and likely deaths if the leak is large. With winds moving from west to east, Russia would be one of the worst impacted so hopefully they realize this and avert such a disaster.
Bullish pressure for crude prices continues due to the 2.0Mb/d cutback by OPEC starting shortly. Additionally, the low US SPR storage levels and the onset of winter should increase overall energy demand.
Bearish pressure for crude comes from the lockdowns in China and low imports of crude (down 6% year over year to 9.4Mb/d). China’s retail sales have gone negative and industrial activity is declining. The lockdown of Beijing now impacts 20% of the Chinese economy. Europe has filled up its storage of crude, natural gas and other products so it will not be a big buyer of additional energy until it uses up this winter what it has in onshore and offshore storage.
EIA Weekly Oil Data: The EIA data of Wednesday November 23rd was mostly bearish for oil prices. US Commercial Crude Stocks fell by 3.7Mb to 431.7Mb. The decline was due to Exports lifting 380Kb/d, or by 2.7Mb on the week. The SPR saw a release of a modest 1.6Mb. Motor Gasoline inventories rose by 3.1Mb and Distillate Fuels by 1.7Mb. US production remained flat at 12.1Mb/d. Refinery Utilization rose by 1.0% to 93.9% on the week. Cushing inventories fell 900K to 24.7Mb.
Overall US demand fell by 1.21Mb/d to 19.9Mb/d. Motor Gasoline saw a decline of 416Kb/d to 8.33Mb/d while Jet Fuel saw a decline of 134Kb/d to 1.51Mb/d.
Demand destruction in the US is real! Total consumption saw a decline of 9% or by 1.87Mb/d from last year’s 21.8Mb/d. Motor Gasoline demand fell 1.0Mb/d or by 11% from 9.33Mb/d. The nasty winter snow storms in the US Northeast was a big part of the usage decline.
EIA Weekly Natural Gas Data: US Natural gas storage has been built up for winter 2022-2023 and withdrawals should start next week as winter has commenced across the northern parts of the US. The US data released last Thursday showed a build for the week ending November 11th of 64 Bcf. This should be the last build of any consequence for this year. Storage is now at 3.644 Tcf sufficient to meet US needs this winter. The biggest increase was in the South Central (35 Bcf). The five-year average for last week was a withdrawal of 16 Bcf while in 2021 it was a withdrawal of 21 Bcf. US Storage is now 0.1% above last year’s level of 3.640 Tcf and 0.2% below the five-year average of 3.65 Tcf. NYMEX is trading at US$7.47/mcf today due to very cold conditions and lots of snow in the US NE. AECO is at $5.26/mcf.
Baker Hughes Rig Data: In the data for the week ending November 18th the US rig count rose three rigs to 782 rigs (up nine rigs last week). Of the total rigs working last week, 623 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 39% from 563 rigs working a year ago. The US oil rig count is up 35% from 461 rigs last year at this time. The natural gas rig count is up 54% from last year’s 102 rigs, now at 157 rigs. The industry this year has been responding to higher US and international natural gas prices with materially more activity than last year. This should continue to lift US natural gas production in coming quarters.
In Canada, there was an increase of one rig (last week a decrease of nine rigs) to 201 rigs. Canadian activity is up 20% from 167 rigs last year. Peak potential for staffed rigs is likely around 260+ this winter. Activity for oil grew 32% to 135 rigs up from 102 last year and natural gas rigs were down one rig to 66 rigs. Capex budgets for 2022 appear to have been spent so the Canadian data should decline into year end due to the holiday season for field staff. Activity will pick up quickly in the New Year as 2023 drilling budgets should be higher (10% -15%) than this year’s.
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$77.27/b (down >US$7/b from last week). Watch for a breach of US$76.25/b (the late September low) for the next onslaught to commence to below US$70/b.
The final overall stock market corrective low (the ‘pause that refreshes’) to new lows of the Dow Jones and other major US indices should coincide with WTI breaking US$70/b. This upcoming climactic low in mid-late December should provide a fabulous buying opportunity (Table Pounding BUY levels) for energy related stocks.
Energy Stock Market: Over the last few months the Dow Jones Industrials Index has fallen >5,600 points to a new intraday low of 28,661. The Dow is now completing a normal bear market short covering bounce and should back down shortly. Once the Dow reverses, we should start the next painful phase of the overall decline from the start of the year down to the 25,000 area. This bottom is likely to occur during the tax loss selling season into mid-December.
The S&P/TSX Energy Index today is at 263. 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 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 tomorrow Thursday November 24th at 7PM MT. We intend to cover the recent crypto collapse, the severe decline in crude prices and tax loss selling and the US and Canadian markets reaction to both. There will be two Q&A sessions. The main part of the webinar will be focused on the best BUYS to watch for in the coming weeks as the tax loss selling market pressure provides attractive BUY levels. We intend to add quite a few ideas to our Action Alert BUY list during this window into week two or three of December. One needs to be a subscriber to access the webinar live (or access the archive thereafter) and to receive the timely Action Alert BUYS in your inbox.
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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