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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 for the energy sector we have a special holiday season discount to the Schachter Energy report offer for new subscribers. 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 in early 2023.
Global Economic, Political & Military Update:
President Zelensky of Ukraine is in the US today to talk to Congress and the President. He needs to get the current Democratic Congress to approve the US$45B aid package that President Biden wants to give his country and also get the agreement signed to obtain Patriot air defense systems. He needs this done now as the incoming Republican House does not seem so supportive of Ukraine and the largess US taxpayers have been giving to his country. This is his first foreign trip since the invasion started and highlights its critical nature for Ukraine. The incoming Republican group wants Europe to cover more of the costs as they are not yet spending the 2% of GDP for defense purposes that has been a requirement of NATO. Objectors to this deal worry that Ukraine will use these weapons offensively against Russia versus their need to defend Ukraine’s airspace from Russian cruise missiles destroying their infrastructure, particularly their energy infrastructure as winter takes hold.
Japan increased its key interest rates this week to stabilize its currency. This puts upward pressure on interest rates around the world. Japan has been unloading its US Treasury holdings. This is problematic as they were the largest foreign holder of these securities. The sales have increased the US Dollar as bond prices fall and market rates rise.
China is facing a record wave of Covid cases. The country’s leadership started to reopen their economy after widespread protests by its citizens. What is disconcerting is that it appears that the current version is a new one and hospitalizations are taking hospital capacity to the limit. If this spreads from China as the first version did then this could again be a global concern. Use of masks is picking up worldwide.
Bullish pressure for crude prices continues with the production cutbacks by OPEC, declining global inventories, 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 added to the bullish picture this week.
Bearish pressure for crude comes from the slowdown in the economy in China and the US. Europe has filled up its storage of crude, natural gas and other products for the winter season so it will not be a big buyer of additional energy until it uses up what it has in onshore and offshore storage. Demand destruction due to weakening economies could rise to 5-7 Mb/d in 2023, more than offsetting any supply cutbacks from OPEC.
EIA Weekly Oil Data: The EIA data of Wednesday December 16th was moderately bullish for oil prices. US Commercial Crude Stocks fell by 5.9Mb (forecast was for a decline of 1.7Mb) to 418.2Mb. The SPR saw a release of 3.6Mb. The decline was due to Net Imports falling by 1.05Mb/d or by 7.6Mb last week. Motor Gasoline inventories rose by 2.5Mb while Distillate Fuels fell 0.2Mb. These results occurred despite Refinery Utilization falling 1.3% to 90.9% from 92.2% in the prior week. US production remained at 12.1Mb/d. Cushing inventories rose 800K to 25.2Mb. US demand rose last week by 968 Kb/d to 20.9Mb/d as Propane demand for heading rose by 610 Kb/d to 1.73Mb/d. Motor Gasoline consumption rose by 459 Kb/d to 8.71Mb/d while Jet Fuel saw a decline of 52 Kb/d to 1.71Mb/d.
EIA Weekly Natural Gas Data: Winter drawdowns are occurring as colder weather has arrived. Starting this week and in the coming winter weeks withdrawals should exceed 100 Bcf. The EIA data released last Thursday showed a small decline of 50 Bcf for the week ending December 9th. Storage is now at 3.41 Tcf, sufficient to meet US needs this winter. The biggest decrease was in the Midwest (26 Bcf). The five-year average for last week was a withdrawal of 76 Bcf while in 2021 it was a withdrawal of 55 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 0.5% below last year’s level of 3.43 Tcf. NYMEX is trading at US$5.49/mcf today. AECO is at $5.95/mcf.
Baker Hughes Rig Data: In the data for the week ending December 16th the US rig count was down four rigs to 776 rigs (down four in the prior week). Of the total rigs working last week, 620 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 34% from 579 rigs working a year ago. The US oil rig count is up 31% from 45 rigs last year at this time. The natural gas rig count is up 48% from last year’s 104 rigs, now at 154 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 three rigs (up seven rigs in the prior week) to 199 rigs. Canadian activity is up 19% from 167 rigs last year. Peak potential for staffed rigs is likely around 260+ this winter. Activity for oil grew 19% to 124 rigs up from 104 last year and natural gas rigs were up four rigs to 75 rigs. Canadian data should decline shortly into year-end due to the holiday season for field staff (maybe down to 50 rigs or less). Activity will pick up quickly in the New Year as many 2023 drilling budgets should be 10-15% higher 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 is priced now at US$77.92/b (up less than US$1/b from last week). Watch for a breach of two 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 normal Santa Claus rally is underway and lifting stock prices on low volume as many institutional investors have closed their books for the year. This may last a few more days and then we expect a focus on Q4/22 earnings and negative guidance from companies to take hold of the market and push it 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 33,380) will change the current greed phase to a fear phase into Q1/23.
The next few 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 into our BUY range, but we see the breach of US$70/b providing the low risk entry point. The S&P Energy Sector Bullish Percent Index has fallen four points over the last week to 13% from a high of 78% in mid-November and 17% in the prior week. It is likely to decline below 10% in the next week or so. If we are fortunate to see the Index fall below 5% then we will have a Table Pounding BUY signal as we had in March 2020. 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, down three points from last week and up from 229 just a few days ago. 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 this holiday season special subscriber offer information to those you see benefiting.
Once we see the market showing climatic bottom signals we intend to send out Action Alert BUY ideas to subscribers. Become a subscriber to get these timely BUY Action Alerts. Take advantage of this holiday season special pricing offer for new subscribers. Go to https://bit.ly/2FRrp6k.
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. Our next Eye on Energy will be released on Thursday December 29th due to the holiday on Monday
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