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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 closer to year-end and an expected BUY signal for the energy sector we have a special holiday season discount SER service subscription offer. 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. This upcoming window should be the best buying opportunity since March 2020. Many of the 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:
WTI Crude prices have bounced off last Friday’s intraday low of US$70.08/b. A short term recovery off the US$70/b level was expected. The fundamental reasons being the closure of the 622 Kb/d Keystone oil pipeline due to an oil spill (not seen by TC Energy as sabotage) and China lifting some Covid restrictions due to citizen protests. WTI today is over US$77/b. The Keystone line may be out for a few more weeks as they need a restart plan approved by US regulatory authorities (the US Pipeline and Hazardous Materials Safety Administration) after the clean up is completed. Shipment to the US of Canadian heavy oil has been affected and differentials have reached US$30/b.
The US Federal Reserve raised interest rates (its Fed Funds rate) by 50BP to continue to fight inflation. The comments have a hawkish tone with interest rates expected to rise further in 2023 and at rates higher than the market had been discounting. The data for November for PPI was up (7.4% from the prior year) and the CPI (up 7.1% from the prior year) moderated somewhat, but still remained more than three times higher than the 2% goal of the Fed. The softness in the data was due to the decline in crude and product prices (gasoline particularly) and a reduction in used car prices. Offsetting this was the persistent rise in wages and in shelter costs (rising mortgage payments due to the doubling of mortgage rates this year and resulting rising rental rates for renters). One shocking statistic from the Bureau of Labor Statistics was that vegetable costs had risen 38.1% in November. This was just for this one month. Year over year the cost is up an astonishing 80.6%. The strong job market is something the Fed wants to see soften which would end the wage increase pressure. Further Fed Funds increases are expected in Q1/23 to cudgel demand so that price increases do not get embedded. The Fed wants to see the labour market loosen up and this may take into Q2/23. The US Government’s income statement doesn’t get much press due to how bad it is and the media and politicians don’t want the largess to be halted. Revenues for November came in at US$252B down 10.3% from the prior year while spending came in at a whopping US$501B, for a record-setting federal deficit of US$249B for the month! Nice if one is able to spend twice their revenues. The debt service cost due to the rise in interest rates saw a 53% increase. J P Morgan’s CEO Jamie Dimon is now calling for a ‘mild to hard recession’ in 2023.
China announced last week 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. US Manufacturing Orders are down 40% due to an unrelenting demand collapse (CNBC report). Retail sales have been sluggish due to the lockdowns. Many Chinese factories are shutting down two weeks earlier than usual ahead of the Chinese New Year due to the economic woes. Today China announced the scrapping of the tracking app they were requiring citizens to use. This is just another of the changes to reduce protests in the country. The offset is that an increase in caseloads and hospitalizations will not be reported to the public. Most Chinese are not vaccinated and the homegrown vaccines do not appear to be as effective as international ones. Bloomberg reported today that in chats with hospitals in the country, they have been ordered not to do more swab tests and they are to refer to the Omicron as a normal flu from now on.
Bullish pressure for crude prices continues with the production cutbacks by OPEC. While not 2.0Mb/d they are still having an impact on global inventories. OPEC now says the cuts will be implemented over the next 12-14 months into 2024. Also the EU sanction caps on Russian oil sales have now been implemented.
Bearish pressure for crude comes from the slowdown in the economy in China. 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. See US demand destruction data in the next section.
EIA Weekly Oil Data: The EIA data of Wednesday December 9th was very bearish for oil prices. US Commercial Crude Stocks rose by 10.2Mb (forecast was for a decline of 3.6Mb) to 424.1Mb. The SPR saw a release of 4.7Mb. Motor Gasoline inventories rose by 4.5Mb while Distillate Fuels rose by 1.4Mb. These increases occurred despite Refinery Utilization falling 3.7% to 91.4% from 95.1% in the prior week. US production fell 100 Kb/d to 12.1Mb/d. Cushing inventories rose 500K to 24.4Mb. Overall US Total Stocks (excluding the SPR) rose by a whopping 14.0Mb on the week. US demand rose last week by 330 Kb/d to 19.96Mb/d. Motor Gasoline saw a decline of 103 Kb/d to 8.26Mb/d while Jet Fuel saw an increase of 377 Kb/d to 1.76Mb/d.
Demand destruction in the US is real!
Total consumption saw a decline of 14% or 3.24Mb/d from last year’s 23.2Mb/d. Motor Gasoline demand fell 1.21Mb/d or by 13% from 9.47Mb/d last year. Only Jet Fuel saw an increase, one of 10% or 157 Kb/d above 1.61Mb/d last year.
EIA Weekly Natural Gas Data: Winter drawdowns are occurring as colder weather has arrived and in the coming winter weeks, should exceed 100 Bcf. The EIA data released last Thursday showed a small decline of 21Bcf for the week ending December 2nd. Storage is now at 3.46 Tcf, sufficient to meet US needs this winter. The biggest decrease was in the Midwest (12 Bcf). The five-year average for last week was a withdrawal of 83 Bcf while in 2021 it was a withdrawal of 88 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 1.5% below last year’s level of 3.51 Tcf. NYMEX is trading at US$6.60/mcf today. AECO is at $5.82/mcf.
Baker Hughes Rig Data: In the data for the week ending December 9th the US rig count was down four rigs to 780 rigs (unchanged the prior week). Of the total rigs working last week, 625 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 35% from 576 rigs working a year ago. The US oil rig count is up 33% from 471 rigs last year at this time. The natural gas rig count is up 46% from last year’s 105 rigs, now at 153 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 seven rigs (up one rig in the prior week) to 202 rigs. Canadian activity is up 14% from 177 rigs last year. Peak potential for staffed rigs is likely around 260+ this winter. Activity for oil grew 19% to 131 rigs up from 110 last year and natural gas rigs were up four rigs to 71 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.
OPEC Monthly Report:
The December 2022 report was released yesterday and showed that in November OPEC cut production by 744 Kb/d to 28.8Mb/d. This was below their announced 2.0Mb/d official cut. The biggest reduction came from the Saudis with a cut of 404 Kb/d to 10.47Mb/d. Others cutting production included UAE (149 Kb/d), Kuwait (121 Kb/d) and Iraq (117 Kb/d). Lifting production were Angola (38 Kb/d) and Nigeria (92 Kb/d) which both are producing way below their new quota levels due to production problems and lack of capital investment. OPEC lowered their demand for 2023 but still sees no global recession. They forecast demand growing by 2.25Mb/d to 101.8Mb/d in 2023.
OPEC expects 2023 production growth coming from the US, Canada, Russia, Brazil and Argentina and declines from Azerbaijan, Norway, Kazakhstan and the UK. Total non-OPEC liquids are forecast by them to rise by 1.54Mb/d. In their forecast Canada is expected to show growth of 200Kb/d to 5.8Mb/d. Russia is producing 11.1Mb/d which is a 160 Kb/d increase over 2021 according to the IEA. They forecast it will drop in 2023 by 1.4Mb/d in 2023 as EU demands end due to the price caps but with Urals trading below US$60 for Brent, the price cap is meaningless. Buyers love the current discount. China, India, Pakistan and many African buyers have jumped in to buy the crude and can have access to the insurance and shipping services of EU countries due to the price being below the imposed cap.
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$77.30/b (up >US$4/b from last week). Watch for a breach of last Friday’s low of US$70.08/b for the next onslaught. We expect the correction bottom should be in the US$65-70/b area in the next few weeks.
Energy Stock Market: Tax loss selling is hitting the already 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 2022 highs but are still up more than five times from the March 2020 lows. The next few 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 down > 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 four points over the last week to 17% from a high of 78% in mid-November. It is likely to decline below 10% in the near term. 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 in the coming weeks.
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 242, up four points from last week as crude rebounded. 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.
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COMMENTARY: Taxes and Regulations Will Increase the Cost of Producing New Energy In Alberta, Making it Less Competitive Than the US – Jack Mintz