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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:
Crude prices are falling as demand wanes and concerns about inflation and Central Bank tightening moves (interest rate rises and QT) make for a cloudy outlook. More and more US CEOs are planning for recession in 2023 and layoff announcements are coming out daily. Today WTI fell to an intraday low of US$72.75/b. Our long standing forecast of a breach of US$70/b during December is at hand. On the energy stock side many have fallen over 50% from their 2022 highs and are reaching our BUY target levels. We expect to send out quite a few Action Alert BUYS in the coming weeks. A fabulous buying opportunity is close at hand! At the bottom of this report we have a special holiday season offering for new subscribers. With the best buy window since March 2020 coming, having our subscriber product covering 33 companies should be of great value to energy investors.
The EU and the G7 have finally come to an agreement (six months before reviewing implementation) to cap seabourne Russian crude exports that can use western shipping and insurance at US$60/b (Brent pricing). Brent today is at US$79.90/b. So this would mean sales by Russia would be around US$20/b lower than other sellors at Brent pricing. Historically Russia has received within US$2/b of the Brent price but after the invasion of Ukraine this widened to around US$50/b when Brent was US$115/b. The discount is now around US$33/b. Russia has shifted its European sales to China, India, Turkey, Pakistan and to African countries, so the EU/G7 forecast of a drop in Russian sales of 1.0-1.5Mb/d is nonsensical. Their production remains near all time highs (November 10.91Mb/d – Reuters report) In fact with the current discount they are below the current cap just implemented. So sales by Russia to some European countries will continue. Of note, the Canadian WCS heavy oil blend today is around US$28/b below WTI. Still very profitable for Canadian producers given the weak Canadian dollar.
We see this cap on Russian crude sales as backfiring if the global recession is more than soft. This cap could become the floor for Brent pricing in 1H/23.
China announced today that it is reopening their economy with less testing as a result of the protests by their citizens whether this is just a temporary valve release before a return to their zero Covid approach is uncertain. Their economic data has been very weak and export industries are being heavily impacted. Exports to the US shrank 12.6% in October and exports to Europe fell by 9%.
A US rail industry strike has been averted as Congress passed legislation (signed by President Biden) precluding a strike just before the busy holiday season, even though unions approved the strike action. The sticking point remains sick leave days. They are one of the few without this benefit and they wanted five days per year. Biden could not get this in the agreement as Senate Republicans and Democratic Senator Joe Manchin would not go along. This issue has not gone away and may come back with the union moving to work to rule or local work stoppages. Any stoppage would be problematic for the US economy.
Bullish pressure for crude prices continues due to the announced 2.0Mb/d cutback by OPEC. It was to start in November 2022 but OPEC is now saying the cuts will be implemented over the next 12-14 months into 2024. Additionally, with winter here energy demand increases seasonally.
Bearish pressure for crude comes from the slowdown in the economy 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. 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. Demand destruction due to weakening economies could rise to 5-7 Mb/d in 2023, more than offsetting any supply declines from OPEC.
EIA Weekly Oil Data: The EIA data of Wednesday December 2nd was mostly bearish for oil prices. US Commercial Crude Stocks fell by 5.2Mb (forecast decline of 3.3Mb) to 413.9Mb. The SPR saw a release of a modest 2.1Mb. Motor Gasoline inventories rose by 5.3Mb and Distillate Fuels by 6.2Mb as Refinery Utilization rose 0.3% to 95.5% and is sharply higher than the 89.8% seen at this time last year. US production rose back by 100 Kb/d to 12.2Mb/d. Cushing inventories fell 400K to 23.9Mb. Overall US Total Stocks (excluding the SPR) rose by 5.9M. US demand fell by 91 Kb/d to 19.6Mb/d. Motor Gasoline saw a rise of 41 Kb/d to 8.36Mb/d while Jet Fuel saw a decline of 344 Kb/d to 1.39Mb/d.
Demand destruction in the US is real! Total consumption saw a decline of 211 Kb/d from last year’s 19.8Mb/d. More significantly Motor Gasoline demand fell 605 Kb/d or by 7% from 8.96Mb/d last year.
EIA Weekly Natural Gas Data: Winter drawdowns are picking up and in the coming winter weeks should exceed 100 Bcf. The EIA data released last Thursday showed a decline of 81Bcf for the week ending November 25th. Storage is now at 3.48 Tcf, sufficient to meet US needs this winter. The biggest decrease was in the East (26 Bcf). The five-year average for last week was a withdrawal of 39 Bcf while in 2021 it was a withdrawal of 59 Bcf. The very cold weather in the northeast was the reason for the large withdrawal. 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 2.5% below last year’s level of 3.57 Tcf. NYMEX is trading at US$5.57/mcf today. AECO is at $5.90/mcf.
Baker Hughes Rig Data: In the data for the week ending December 2nd the US rig count was unchanged at 784 rigs. Of the total rigs working last week, 627 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 38% from 569 rigs working a year ago. The US oil rig count is up 34% from 467 rigs last year at this time. The natural gas rig count is up 52% from last year’s 102 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 an increase of one rig to 195 rigs. Canadian activity is up 8% from 180 rigs last year. Peak potential for staffed rigs is likely around 260+ this winter. Activity for oil grew 13% to 128 rigs up from 113 last year and natural gas rigs were up two rigs to 67 rigs. Canadian data should decline 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 2023 many 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 is priced now at US$72.98/b (down >US$5/b over the last two weeks). Watch for a breach of today’s low of US$72.24/b for the next onslaught. We expect the bottom this month should be in the US$66-70/b area.
The final overall stock market low (the ‘pause that refreshes’) should coincide with WTI breaking US$70/b. This upcoming climactic low in late December should provide a fabulous buying opportunity (Table Pounding BUY levels) for energy related stocks.
Energy Stock Market: Tax loss selling is hitting the hardest hit sectors. Worst off are the technology names and the FAANG and MEME stocks. To offset these losses investors are harvesting the gains that they have in materials and energy. Some high profile names are down only 10-20% from their 2023 highs but are still up more than five times from the March 2020 lows. The next two weeks will see more pressure on the sector and we intend to take advantage of this pressure to add ideas to our Action Alert BUY list. Many are already down over 50% and are into our BUY range but we see the breach of US$70/b adding materially to the downside for the sector. The S&P Energy Sector Bullish Percent Index has fallen to 22% from a high of 78% in mid-November. It is likely to decline below 10% in the next week or two. If it falls to 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 before year end.
We now cover 33 companies and are working to add 3-4 new ideas in Q1/23. Stay tuned for the launch of these new ideas in our SER product.
The S&P/TSX Energy Index today is at 238, down 25 points or 9.5% over the last two weeks. 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 check out 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 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.
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