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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 (starting February 16th this rises to 37 companies being covered). We also hold quarterly webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more.
Global Economic, Political & Military Update:
After the FOMC lifted rates last week by 25 BP for the Fed Funds rate to a range of 4.5 – 4.75%, the ECB raised their rates by 50 BP to 2.5%, as they catch up to the US. The Bank of Canada raised its overnight lending rate to 4.5%. While most countries plan further rate hikes in the coming months, Canada plans to pause rate hikes and allow the rate shock of the last ten months to work its way through the economy. The US has a more difficult problem as a slackening in the job market is not occurring. In January 517K new jobs were created (consensus was for only 185K new jobs) and the unemployment rate fell to a 54-year low of 3.4% (1969). Average hourly earnings year over year rose 4.4% in the month above the 4.3% expected. Most of the jobs created were low paying entry jobs as more and more people take part time jobs to meet household expenses. For example, leisure and hospitality added 128K jobs in January.
Prior to the FOMC press conference and yesterday’s visit by Chairman Powell to the Economics Club of NYC the market was expecting a ‘pivot’ in rates in 2H/23. Powell yesterday made it very clear that he was data dependent and that the current path ‘says no rate cuts this year’. That dichotomy is at the heart of the divergent views of the bond and stock markets. If there is a meaningful recession then bond investors are right and if there is no recession and we get growth in earnings in 2023 then stock investors are right. Powell mentioned that the hiring surge in January ‘shows why inflation fight could be difficult’. He also said that borrowing costs may reach a higher peak than traders and policymakers anticipate in order to knock down inflation to the Fed’s two percent target. Most Fed officials have dot-plotted a Fed Funds peak at 5.1% in December and now Federal Reserve Minneapolis President Neel Kashkari has forecast the peak at 5.4%. Some outside economists now see the rate rising to 6% if the data continues to show inflation holding in the 6% range (now 6.5%). The Fed will be watching wage agreements, food and shelter inflation to see if it can recede to the 2% level over time. It is now over 3x that rate.
Front and center for the US Congress 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, the risk of a government shutdown this summer remains.
Russia continues to gain customers for its energy as prices remain below the NATO price cap of US$60/b. Last month 4.4 Mb/d were shipped by sea from the Baltic and Black Sea to buyers in China, India, Turkey and Belgrade. As a result, India (buyer of 70% of Baltic crudes) has cut back Saudi purchases forcing the Saudis to discount their crude in Asia. Baltic shipments alone grew 50% in January.
On the war front, the west is announcing new shipments of tanks and munitions daily to Ukraine with training in nearby NATO nations. Russia is calling this arms race as ‘extremely dangerous’ and is planning a new offensive and is building up for this when field conditions are conducive. They recently introduced a robot tank in the Donbas to counter the US, German and UK tanks being sent to Ukraine. The ‘Marker’ is a new robot tank designed to destroy western tanks. This is on top of their equivalent of the Javelin anti-tank weapon that Ukraine used effectively in the early phase of the Russian invasion. It is Russia’s newest weapon as it uses an artificial intelligence system and has machine learning technology. If they have a large number of these robot tanks then the next battle phase may be the key to who may win the war.
The German Foreign Minister, Annalena Baerbook bluntly stated that they (Germany) are fighting a war against Russia. These remarks came during a debate at the Parliamentary Assembly of the Council of Europe. This has been broadcast into Russia and has emboldened Putin who has been saying this for some time and now can bring out the fear, hardship of the Great Patriotic War to get support in his country for further mobilization of troops and move to even a greater war economy.
Bullish pressure for crude prices continues with the proposed, but not initiated, production cutbacks by OPEC and winter weather demand for heating oil and propane. Russia is selling less oil and products to Europe via pipeline but China and India are taking up these barrels at US$26.11/b discounts to Brent (Brent today at US$83.72/b and Urals at US$57.61/b). The economic and energy bulls hope that If China does reopen this would increase crude demand this year by over 1.0 Mb/d. However, the data so far does not support this growth in demand view.
Bearish pressure for crude comes from the weakness in China’s manufacturing economy. Crude 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 1.34 Mb/d (down by 6.1%) according to the latest EIA Weekly Petroleum Report (see below). Nigeria seems to be making progress in getting its production back up. 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. The sanction busting that is going on is crazy. 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 the US itself imposed. Russia is now seeing record exports from the Baltic Sea and the Black Sea as they are selling crude below the imposed price cap of US$60/b.
EIA Weekly Oil Data: The EIA data of Wednesday February 8th (data from February 3rd) was bearish for oil prices. US Commercial Crude Stocks rose by 2.4 Mb to 455.1 Mb, the fifth week of increases in stocks. This compares to 410.4 Mb last year, so storage is up by 44.7 Mb or 10.9% from a year ago. The SPR saw no release of crude this week, the fourth week in a row.
Motor Gasoline inventories rose by 2.4 Mb while Distillate Fuels rose 2.9 Mb. Refinery Utilization rose 2.2% to 87.9%. US production rose 100 Kb/d to 12.3 Mb/d. Cushing inventories rose 1.1 Mb to 39.1 Mb. US total product demand rose last week by 430 Kb/d to 20.54 Mb/d as Propane demand rose by 371 Kb/d and Other Oils by 296 Kb/d. Motor Gasoline consumption fell 62 Kb/d to 8.43 Mb/d while Jet Fuel saw a decline of 44 Kb/d to 1.54 Mb/d.
Demand destruction is real in the US. Total consumption fell by 1.34 Mb/d from 20.5 Mb/d or down by 6.1% from last year. These numbers gyrate weekly but the important point is that demand has declined from last year. On a cumulative daily average 2023 versus 2022, demand is down 9.2% (19.73 Mb/d versus 21.72 Mb/d).
EIA Weekly Natural Gas Data: The EIA data released last Thursday showed a decline of 151 Bcf for the week ending January 27th. Storage is now at 2.58 Tcf, more than sufficient to meet US needs this winter. The biggest decrease was in the Midwest (46 Bcf) and the East (46 Bcf). The five-year average for last week was a withdrawal of 197 Bcf and in 2022 was 268 Bcf. US Storage is now 9.4% above last year’s level of 2.36 Tcf and 6.7% above the five year average of 2.42 Tcf. With the warmer weather and the healthy storage position, NYMEX has retreated from US$7.10/mcf in mid-December to US$2.43/mcf today. AECO today is at $2.62/mcf ($1/mcf below last week) due to the warming spell. The weaker US 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.
Baker Hughes Rig Data: In the data for the week ending February 3rd the US rig count was down 12 rigs at 759 rigs (unchanged in the prior week). Of the total rigs working last week, 599 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 24% from 613 rigs working a year ago. The US oil rig count is up 21% from 497 rigs last year at this time. The natural gas rig count is up 36% from last year’s 116 rigs, now at 158 rigs. The industry continues to respond to higher international natural gas prices with 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 two rigs (increase of six rigs in the prior week) to 249 rigs. Canadian activity is up 14% from 218 rigs last year. Activity for oil rose 17% to 159 rigs versus 136 rigs last year. Natural gas rigs were up 10% or two rigs to 90 rigs from 82 rigs last year. Peak potential for staffed rigs is likely around 260 this winter and we are effectively there. The industry is having a quick start in 2023 and is very close to full capacity. Trained manpower is the issue for this number to rise further and there is concern of injuries on rigs where crews are not the most experienced.
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 today at US$77.17/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. 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. Today, GOOGL – Alphabet Inc. showed disappointing guidance and the stock is down by 8.1% to US$98.94 per share.
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 (two E&P and two Energy Service). Coverage introduction of these new ideas should occur in our February Interim Report due out on February 16th. Become a subscriber to follow our research coverage of 37 companies going forward.
The S&P/TSX Energy Index today is at 246 (up four points from last week’s level of 242) on continuing China reopening optimism and the strong US jobs report. 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 small to large 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 (two E&P and two energy service ideas) we are adding to our Coverage List on February 16,2023.
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, our Fearless Forecasts for 2023 and our four new investment ideas coming out in our next Interim Report. 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.
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