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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.
As we are getting into year-end and an expected BUY signal (any day now) for the energy sector, we have a special holiday season discount offer for new subscribers to the Schachter Energy report. By subscribing now you will receive our BUY recommendations when we issue our Action Alert BUYS in the coming days, and be able to join our first quarter, 90 minute webinar on February 23rd. This upcoming window should be the best buying opportunity since March 2020. Many of the energy ideas we cover are now down 50% or more from their 2022 highs. I expect to move from an underweight of the sector, which has been our stance for quite some time, to a full ownership weighting during Q1/23.
Global Economic, Political & Military Update:
With the reopening and halting of Covid testing in China, a rapid and debilitating new phase of Covid is tearing through China. It has been reported by China’s National Health Commission that China saw an increase of 250 million people with Covid during the first 20 days of December (with 37 million infected in one day). Hospitals are now overwhelmed with debilitating cases. Patients are not all in hospital patient rooms but stuck in hallways, lobbies, and in entrance ways and medical staff are insufficient to handle this torrid phase. Funeral parlors are packed with queues lined up for quick family turnaround ceremonies due to the large number of deaths. With low vaccination rates in China and the local vaccines not effective, this breakout new phase is slowing down the Chinese economy. People are staying at home and retail spending is plummeting. The consumption of energy for transportation is falling. Outside of energy for home heating and cooking, demand for crude oil especially is declining. Many countries including the US require passengers from China to have negative Covid tests if they want to enter the country. Italy has tested new arrivals from China and found 50% of them had Covid. The fear is that infected people will have new versions of the virus which may not be controlled by current vaccines and other medicines.
Russia in retaliation for the US$60/b price cap by the EU, has announced that Russia will not sell crude to any country involved in implementing this (maybe 7% of current sales). EU countries not implementing this sanction will be able to take advantage of the US$24/b discount for Urals crude. Urals is now trading at US$58/b versus Brent at US$82/b. While there are forecasts that Russia will lose 1.0 – 1.3Mb/d of crude sales, we don’t concur. First, the discount is significant at nearly 30% for buyers of Russian crude which will help smaller European countries not close to the war in Ukraine. Additionally Russia’s current buyers including China, India, Pakistan and many African countries have stepped up buying. With Urals trading under the US$60/b price cap, the access to UK insurers and to crude tankers is allowed. While China for example will consume less crude they are incentivized to buy Russian crude at a 30% lower price than Brent so Brent price crude will see less demand and importation into China. ExxonMobil announced yesterday that they are suing the EU Commission at the EU General Court. Their argument is that the EU does not have the authority to impose windfall or other taxes as this is now an individual EU member provision.
Stock markets around the world are reeling from higher interest rates imposed by Central Banks to rein in inflation. Most markets are down around 20% this year with the NASDAQ, the worst US Index, down 34% from the start of 2022. One of the last FAANG’s to feel the pressure is Apple (AAPL). It started the year at US$181.65 per share and fell to US$128.49 per share during the April-June market correction. It recovered to US$175.64 per share in August and since then has been plunging. It broke the low of US$128.49 per share yesterday and closed at US$126.04 per share. Lower highs and lower lows are bear market characteristics. The stock is bouncing back over the breakdown level today but if it declines below yesterday’s intraday low of US$125.87 then a rout to US$95-105 per share is possible. This could drag the overall market down 20-25% in Q1/23. Apple is a US$2T company that is over 6% of the S&P 500 weighting. It remains an expensive stock and is being hurt by the pandemic in China slowing sales.
Bullish pressure for crude prices continues with the production cutbacks by OPEC and cold winter weather demand for heating oil and propane. While OPEC+ did not cut back by their announced 2.0Mb/d, they are still having an impact on global inventories. OPEC now says the proposed cuts will be implemented over the next 12-14 months into 2024. The US plan to restock their SPR starting in February adds to the bullish picture this week.
Bearish pressure for crude comes from the slowdown in the economy in China as Covid-19 spreads. Demand destruction due to weakening economies could be in the range of 5-7 Mb/d during 2023, more than offsetting any supply cutbacks from OPEC.
EIA Weekly Oil Data: The EIA data of Wednesday December 23rd was moderately bullish for oil prices. US Commercial Crude Stocks rose by 0.7Mb (forecast was for a decline of 1.5Mb) to 419.0Mb. The SPR saw a release of 3.5Mb. Motor Gasoline inventories fell by 3.1Mb while Distillate Fuels rose by 0.3Mb. Refinery Utilization rose 1.1% to 92.0%. US production fell 100 K b/d to 12.0Mb/d. Cushing inventories fell 200K to 25.0Mb. US demand rose last week by 1.9 Mb/d as Other Oils demand rose by 1.78Mb/d to 6.32Mb/d. Motor Gasoline consumption rose by 613 Kb/d to 9.3Mb/d while Jet Fuel saw a decline of 191 Kb/d to 1.5Mb/d.
EIA Weekly Natural Gas Data: Extreme cold weather across North America caused a large drawdown last week. The EIA data released today showed a large decline of 213 Bcf for the week ending December 23rd. Storage is now at 3.11 Tcf, still sufficient to meet US needs this winter. The biggest decrease was in the Midwest (75 Bcf). The five-year average for last week was a withdrawal of 117 Bcf while in 2021 it was a withdrawal of 136 Bcf. The largest withdrawals occur in January and February of each year and the largest weekly withdrawal so far was 359 Bcf in January 2018. US Storage is now 4.1% below last year’s level of 3.25 Tcf. With warmer weather in the forecast NYMEX has retreated from US$7.10/mcf in mid-December to US$4.53/mcf today. AECO is at $6.07/mcf.
Baker Hughes Rig Data: In the data for the week ending December 22nd the US rig count was up three rigs to 779 rigs (down four in the prior week). Of the total rigs working last week, 622 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 33% from 579 rigs working a year ago. The US oil rig count is up 30% from 480 rigs last year at this time. The natural gas rig count is up 46% from last year’s 106 rigs, now at 155 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 upcoming quarters. Companies divulging their plans for 2023 plan to spend more in 2023 with capex plans showing growth in production as well as funds to offset higher drilling and completion costs.
In Canada, there was a decrease of 103 rigs (decrease of three rigs in the prior week) to 96 rigs as crews got holidays from Christmas to New Years. Canadian activity is down 28% from 133 rigs last year. Activity for oil fell 62% to 32 rigs versus 84 last year. Natural gas rigs were down 11 rigs to 64 rigs. Canadian data should decline further this week into year-end due (maybe down to 50 rigs or less in tomorrow’s data). Activity will pick up quickly in the New Year as many 2023 drilling budgets should be 10-15% higher than this year’s. Peak potential for staffed rigs is likely around 260+ this winter.
CONCLUSION:
As a global recession unfolds, crude prices typically 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 is priced now at US$77.90/b (unchanged from last week but down US$1.10/b on the day). Watch for a breach of three weeks ago’s low of US$70.08/b for the next (and probably last) decline phase. We expect the bottom should develop in the US$65-70/b area in the coming weeks.
Energy Stock Market: The traditional Santa Claus rally is underway and is lifting stock prices on low volume as many institutional investors have closed their books for the year. This may last into the first few days of January and then we expect a focus on Q4/22 earnings and negative guidance from companies to take hold of the market and push them lower. An inflation watch on food, shelter and wages will also be a focus of the markets. A breach of 30,000 on the Dow Jones Industrials Index (now 33,236) will change the current greed phase to a fear phase into Q1/23.
The upcoming weeks should see more pressure on the energy sector and we intend to take advantage of this to add ideas to our Action Alert BUY list. Many ideas we cover are down more than 50% and are entering our BUY ranges. We currently have eight ideas on our Action Alert BUY list and we expect to have over 20 names on this list in the coming weeks.
We now cover 33 companies and are working to add 3-4 new ideas during Q1/23. Stay tuned for the launch of these new ideas in our SER product.
The S&P/TSX Energy Index today is at 239, unchanged from last week. Late September’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. These BUY windows are infrequent so please decide what you want your energy weighting to be for the next major up-leg in this long energy super cycle. Our Coverage List includes ideas from the Pipeline & Infrastructure area, Canadian oil and natural gas ideas, energy service ideas and companies working internationally. Our list includes large Conservative ideas and large to small caps in our Growth and Entrepreneurial categories.
Please refer to our holiday season special subscriber offer information to those you see benefiting. We are extending this offer into January so that new subscribers will know that we have issued Action BUY Alerts and can have access to these ideas. We are having our first 90 minute quarterly webinar on Thursday February 23rd at 7PM MT. This should be a very important webinar for subscribers as we go over the new ideas on our BUY list and why they have been added.
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