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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:
The market continues to face the conflict between the bulls, seeing the China reopening as very positive for world economic growth in 2023, and the data coming out showing weakening economic data around the world, especially in the US.
The reopening view lifted stock markets in early January with the Dow Jones rising by 1,500 points and WTI lifting US$10/b from US$72.46/b to US$82.64/b. China’s reopening has lifted optimism as both domestic and international travel has picked up sharply. The question will be what impact this will have on China at the end of the holiday season if Covid cases explode upward again. The country is seeing record levels of new cases and hospitals are running over capacity as are the country’s crematoria. The manufacturing and housing sectors remain depressed.
Weak economic data from around the world for December 2022 is now being released and is disconcerting.
Some of the recent world negative economic data include:
- The US Conference Board Leading Economic Index fell 1.0% in December.
- The US Manufacturing level fell to 46.8 in December (above 50 signals growth – below 50 declines).
- Canadian Retail Sales fell 0.1% in December with Retail Sales (ex-motor vehicles) down 0.6%. Unit sales of goods was down due to inflation in most goods categories.
- Japan Manufacturing Index fell to 48.9.
- The German Manufacturing PMI fell to 47.0.
Front and center for the US is the contentious fight over the debt limit (US$31.4T). Getting it extended may take some time and the Republicans want significant spending cuts on discretionary spending. Democrats don’t want any social spending cuts, so partisan warfare may occur over the coming months and could destabilize markets. While the Treasury Secretary has some leeway to fund the government for a few months, a government shutdown risk this summer remains.
Labour is fighting around the world for wage increases above inflation. In the UK 500,000 workers plan to go on strike. Unions representing civil servants, teachers, university staff, ambulance workers and train drivers have said their members will strike on Feb 1st. In France workers in various sectors plan to strike again. These include over 1.0M railway workers, schools, hospitals and air-traffic controllers who plan to strike against the government plan to raise the pension retirement age to 64 from 62. If these strikes last for any length of time this will surely add to the recession pressures.
US layoffs are spreading from technology to mainstream companies. Ford Motor, Spotify, TESLA and McDonalds have all announced plans to slash jobs. Bed Bath & Beyond is in big trouble and has hired advisors to consider restructuring, selling assets or going through bankruptcy.
US companies’ Q4/22 earnings releases and 2023 guidance for the most part have been disappointing and show companies are perplexed about the future. Some of the results are:
- Boeing reported that rising costs had thrown their Q4/22 to a loss of US$1.75 per share and a loss of US$8.30 per share for the year. This compares to a 2021 loss of US$7.15 per share, this despite rising orders and deliveries.
- Texas Instruments saw sales drop for the first time since the pandemic. It mentioned that customers are focused on reducing inventories.
- Microsoft is forecasting a gloomy tech environment into Q3/23. It said a slowdown in new business occurred in December across it’s commercial businesses.
We think that a recession in the US is inevitable as the bond market is forecasting falling rates despite the Fed’s plans to raise short term interest rates to cool inflation and to increase the supply of labour. The next FOMC meeting is next Tuesday and Wednesday and we expect a 25 BP increase in the Fed Funds rate to be announced on Wednesday February 1st. What Chairman Powell says in the Q&A will be watched closely by markets. Will he signal a potential ‘pivot’ in upcoming meetings or stick with a hawkish view into and maybe through 2H/23. With the US unemployment rate at 3.5% (a 50-year low) the Fed hawks want to see it rise above 5% to provide slack in the labour market. They see a recession of some kind as a prerequisite to get to this level. Their view is that the peak Fed Funds rate may need to rise over 5%, or 100 BP higher, than the current official rate to get the needed labour slack.
One problem for the Federal Reserve is companies are raising wages quickly to meet their staffing needs. Recently, Walmart raised their starting wage by 17% from US$12/hour to US$14/hour as they have 30,000 job vacancies and want to meet staff needs at stores. Walmart has 1.6M workers, 94% of them hourly employees. Such a big increase in pay is what worries the Fed. If other wage deals are as large this could accelerate inflation. The Fed would need to keep their hawkish posture longer to get the slack needed in labour.
A note on the recent moves by NATO to help Ukraine defeat Russia’s invasion include receiving first line tanks. The US will be sending its main-line M1 Abram tanks, Britain its Challenger tanks and the German’s directly and indirectly its Leopard 2 tanks. All this equipment will be ready for the spring/summer battle season that Ukraine wants to use to retake eastern Ukraine and the Crimea from Russia. Russia’s Duma sees German tanks in Ukraine as a NATO attack plan and expects a general Russian mobilization as German tanks in Ukraine are seen as a violation of the WWII demilitarization agreed to after the war ended. An escalation with more advanced Russian weapons and retrained troops is likely.
Bullish pressure for crude prices continues with the production cutbacks by OPEC and winter weather demand for heating oil and propane. Russia is selling less oil to Europe but China and India are taking up these barrels at US$25/b discounts to Brent. If China does fully reopen this would increase demand this year by over 1.0 Mb/d. The data so far does not support this growth in demand view. OPEC+ meets next week on Wednesday February 1st and is expected to leave their production rate flat as they wait to see how China’s economy reopens.
Bearish pressure for crude comes from the slowdown in China’s economy 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. The US alone has consumption down by 2.97 Mb/d according to the latest EIA Weekly Petroleum Report (see below). Nigeria seems to be making progress in getting its production back up and Venezuela is seeing production rising as Chevron and ConocoPhillips have US government permission to restart fields. Lastly Russia is having great success selling crude and products from its Baltic ports. Asian demand in January is 50% above December. India, the biggest buyer, is taking 1.7 Mb/d versus 1.0 Mb/d in December, according to Reuters. What is crazy is the sanction busting that’s going on. The US is buying from Reliance (India’s biggest refiner) 200,000 b/d of finished product which is made from Russian crude, going around the sanctions it has imposed.
EIA Weekly Oil Data: The EIA data of Wednesday January 25th (data from January 20th) was quite bearish for oil prices. US Commercial Crude Stocks rose by 0.5 Mb to 448.5 Mb, the third week of increases in stocks. This compares to 416.2 Mb last year, so storage is up by 32.4 Mb from a year ago. The SPR saw no release of crude this week, the second week in a row. The storage level would have grown much higher if not for Net Imports falling by 1.79 Mb/d or by 12.5 Mb on the week. Total Stocks, excluding the SPR, grew, by 4.0 Mb last week.
Motor Gasoline inventories rose by 1.85 Mb while Distillate Fuels fell 0.5 Mb. Refinery Utilization rose 0.8% to 86.1%. US production was flat at 12.2 Mb/d. Cushing inventories rose 4.3 Mb to 35.7 Mb. US total product demand fell last week by 866 Kb/d to 19.45 Mb/d as Propane demand fell by 466 Kb/d and Other Oils by 195 Kb/d. Motor Gasoline consumption rose 88 Kb/d to 8.14 Mb/d while Jet Fuel saw a decline of 85 Kb/d to 1.41 Mb/d.
Demand destruction is real in the US. Total consumption fell by 2.97 Mb/d from 22.42 Mb/d to 19.45 Mb/d or down by 13.2% from last year while Motor Gasoline demand fell by 362 Kb/d to 8.1 Mb/d from 8.51 Mb/d or down by 4.2% from a year ago. These numbers gyrate weekly but the important point is that demand has declined versus 2022.
EIA Weekly Natural Gas Data: The EIA data released last Thursday showed a decline of 82 Bcf for the week ending January 13th. Storage is now at 2.82 Tcf, still sufficient to meet US needs this winter. The biggest decrease was in the East (38 Bcf) and Midwest (38 Bcf). The five-year average for last week was a withdrawal of 120 Bcf. The largest withdrawals typically 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 only 0.7% below last year’s level of 2.84 Tcf and 1.2% above the five year average of 2.79 Tcf. With the recent warmer weather and the healthy storage position, NYMEX has retreated from US$7.10/mcf in mid-December to US$3.12/mcf today. AECO today is at $3.64/mcf. The weaker price is also due to the delay in getting the Freeport LNG plant back online. This large exporter (2.1 Bcf/d) needs to get regulatory approval to restart production and exports. Concern about the operational challenges the facility has had may delay the start-up for a few months according to some concerned buyers of this facility’s LNG.
European prices have also declined due to warmer weather across the continent and sufficient storage. Germany has opened its first LNG import facility and has more coming online in the coming months. Energy stocks worldwide are in retreat with natural gas stocks under the most pressure (down 2.5-3.0% today).
Baker Hughes Rig Data: In the data for the week ending January 20th the US rig count fell four rigs to 771 rigs (rise of three rigs in the prior week). Of the total rigs working last week, 613 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 28% from 601 rigs working a year ago. The US oil rig count is up 25% from 491 rigs last year at this time. The natural gas rig count is up 38% from last year’s 113 rigs, now at 156 rigs. The industry continues to respond to higher international natural gas prices with materially more activity than last year. This should continue to lift US natural gas production in upcoming quarters as more LNG exports are expected. Companies divulging their plans for 2023 plan to spend more, 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 14 rigs (increase of 38 rigs in the prior week) to 241 rigs as crews returned from holidays. Canadian activity is up 14% from 212 rigs last year. Activity for oil rose 14% to 153 rigs versus 134 rigs last year. Natural gas rigs were up 15% or two rigs to 88 rigs from 78 rigs last year. Peak potential for staffed rigs is likely around 260 this winter. The industry is having a quick start in this New Year and is nearing full capacity.
CONCLUSION:
Historically, 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$79.84/b unchanged from last week. Watch for a breach of early December’s low of US$70.08/b for the next (and probably last) decline phase of this correction/bear market phase. We continue to expect a panic spike bottom in the US$65-70/b area in the coming weeks. Below US$70/b we become bullish again.
Energy Stock Market: For the overall stock market we expect a focus on Q4/22 earnings and negative guidance from companies to take hold of the market and see significant erosion. Poor earnings and guidance from Boeing and Microsoft have hit the market. Overall US results Q4/22 are expected to decline by 7-9%.
The inflation watch on food, shelter and wages will also be a focus of the markets. A breach of December 2022 low of 32,600 on the Dow Jones Industrials Index should speed up the fear phase and generate an important bottom in Q1/23.
The upcoming weeks should see further 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% from their 2022 highs 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 four new ideas. Coverage introduction of these new ideas should occur in our February Interim Report due out on February 16th.
The S&P/TSX Energy Index today is at 245 (up 3 points from last week’s level of 242) on the China reopening optimism. Early 2023’s low of 223 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 that will set up the 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.
We are having our Q1/23, 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 Action BUY list and why they have been added as well as discuss the four new ideas we are adding to our Coverage List.
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 and our Fearless Forecasts for 2023. Go to https://bit.ly/2FRrp6k.
I will be speaking next week at Michael Campbell’s World Outlook Financial Conference in Vancouver to be held on February 3-4 at the Bayshore Hotel. My keynote topic will be the ‘Energy Super Cycle Pause Is Nearly Over – Significant Upside For Investors In 2023. To learn more go to https://mikesmoneytalks.ca/wofc-2023-event-info/ for details.
Five Canadian E&P companies and two energy service providers will be in attendance and will present their stories during the breakout sessions and will also be available for discussion with interested investors at their booths.
The Schachter Energy Report will also have a booth at the conference so if you are attending please come by and say hello.
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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