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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 37 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 Federal Reserve is being forced to stay hawkish as PPI inflation data was hotter than expected, coming in at +0.7% for January or at a 8.4% annual rate. The market bulls looking for a moderation by the Fed are clearly disappointed. Interest rates are rising quickly and the market is pricing in 2-3 more rate rises at the 25 BP level. Some key Fed officials have suggested a 50 BP rise is necessary. This is not priced into the market. March 22nd is the date of the next press conference after the FOMC meeting ends and the Fed will be very data dependent to decide between 25 or a 50 BP increase in the Fed Funds rate.
Russia has commenced its 2023 winter offensive in eastern Ukraine, less than a year after the invasion started. They have more troops now and have concentrated them in the east in one major focus versus the two pronged approach which failed last year. New field hospitals have been built just over the Russian border as Russia has prepared for a lengthy and high casualty offensive. Regarding munitions, Russia is now getting them via train from North Korea, adding to their arsenal from their own factories running now at a war rate.
Russia is also increasing tension by exiting a nuclear treaty (the last one still in place) and have started a new race to bring on new nuclear weapons. Recently they have activated some of their mobile nuclear weapons units in their saber rattling against NATO to break their support of Ukraine.
President Biden did a brave thing by going to Kiev to show solidarity with Ukraine at the one year mark of the invasion. He traveled by air to Poland and then by train to Kiev. The security was very tight and Russia was informed so that no attacks occurred in the areas Biden was going to be in. So far the US has been the biggest supporter of Ukraine with nearly US$200B of aid. The funds have been used to keep the country functioning, for munitions and to pay for foreign fighters who have joined the Ukrainian military. With the carnage and destruction of infrastructure, the aid and rebuilding cost may exceed US$1T. One major problem for the US and its NATO allies is that the inventories they hold of munitions are now bare in many countries and take time to rebuild munition stocks. One example, the Scranton Army Ammunition plant churns out 11,000 artillery shells a month but Ukraine fires that many shells over just a few days. That is why other military hardware is being given to Ukraine as the allies have munitions for the new equipment (until they run out of those).
The US government has told its citizens in Russia to leave immediately. This is not something normally done except in extraordinary situations. Some reports say they want citizens out so that more are not wrongfully detained as Russia finds new ways to escalate against the US. This may be in light of the US now being accused of being behind the destruction of the Nord 2 pipeline. New York Times reporter Seymour Hersh recently confirmed this from an investigative report that found that the US military and the CIA, with the help of Norway, were behind the bombing. Russia wants Sweden to release their investigation which should confirm this. The US wanted Europe removed from the addiction to Russian natural gas and supplant it with US and other suppliers. As well, the US wanted to move Germany firmly into supporting Ukraine as they were still not in full support at that time due to their reliance on trade and energy from Russia.
Bullish pressure for crude prices continues with the modest production cutbacks by OPEC and optimism about the reopening in China. 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 view of growth in demand.
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 1.27 Mb/d (down by 5.9% from 2022 levels) according to today’s EIA Weekly Petroleum Report (see below).
EIA Weekly Oil Data: The EIA data of today (data from February 17th) was very bearish for oil prices. US Commercial Crude Stocks rose by 7.6 Mb to 479.0 Mb, the seventh week of increases in stocks. This compares to 416.0 Mb last year, so storage is up by 63.0 Mb or 15.1% from a year ago. The SPR saw no release of crude this week, the sixth week in a row. Commercial Stocks would have grown by 9.5Mb more if not for net Imports falling by 1.36 Mb/d (9.5 Mb on the week). Total US Stocks this week are up 3.3Mb (excluding SPR) or up 102.3 or 8.8% above the prior year. The US clearly has an adequate supply of crude.
Motor Gasoline inventories fell by 1.9 Mb while Distillate Fuels rose by 2.7 Mb. Refinery Utilization fell 0.6% to 85.9%. US production was flat this week at 12.3 Mb/d. Cushing inventories rose 700 Kb/d to 40.4 Mb. US total product demand rose by 916 Kb/d to 20.22 as Other Oils demand rose by 575 Kb/d. Motor Gasoline consumption rose 636 Kb/d to 8.91 Mb/d while Jet Fuel saw a decline of 117 Kb/d to 1.32 Mb/d.
Demand destruction is real in the US. Total consumption fell by 1.27 Mb/d from 21.48 Mb/d or down by 5.9% 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 9.6% (19.74 Mb/d versus 21.83 Mb/d).
EIA Weekly Natural Gas Data: The EIA data released today showed a decline of 71 Bcf for the week ending February 17th. Storage is now at 2.195 Tcf, more than sufficient to meet US needs for the remainder of this winter. The biggest decrease was in the Midwest (26 Bcf). This compares to the five-year withdrawal rate of 173 Bcf and the 2022 withdrawal of 129 Bcf. US Storage is now 21.9% above last year’s level of 1.80 Tcf and 15.2% above the five year average of 1.91 Tcf. With the warmer weather and the healthy storage position, NYMEX has retreated from US$7.10/mcf in mid-December to US$2.25/mcf today. AECO today is at $2.62/mcf. There are five more weeks in the withdrawal season so storage will be very full as we enter the injection season again. Storage may exceed the historic five-year average by the time we reach April 1st. The US price remains weak even though the Freeport LNG plant is ramping back up. This large exporter (2.1 Bcf/d) is restarting the plant and may require a month to get back to its full export capability. European prices have declined due to warmer weather across the continent and very high natural gas storage levels. Natural gas prices may remain weak for a while until the summer air-conditioning season adds to demand.
Baker Hughes Rig Data: In the data for the week ending February 17th the US rig count was down one rig at 760 rigs (up two rigs last week). Of the total rigs working last week, 607 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 18% from 645 rigs working a year ago. The US oil rig count is up 17% from 520 rigs last year at this time. The natural gas rig count is up 22% from last year’s 124 rigs, now at 151 rigs. Companies divulging their plans for 2023 plan to spend more, with capex plans showing growth in liquids production as well as funds to offset higher drilling and completion costs.
In Canada, there was a decrease of two rigs (increase of one rig in the prior week) to 248 rigs. Canadian activity is up 13% from 220 rigs last year. Activity for oil rose 21% to 163 rigs versus 135 rigs last year. Natural gas rigs were flat at 85 due to recent lower natural gas prices. Peak potential for staffed rigs is likely around 260 this winter and we are effectively there. 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$74.90/b (down US$3.00/b 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 and Q1/23 earnings and negative guidance from companies to take hold of the market and see significant erosion. Overall US results Q4/22 have shown meaningful declines. 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 (today 32,817) 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 37 companies as we added four new ideas (two E&P and two Energy Service) in our February Interim Report which came out on February 16th. Become a subscriber to follow our research coverage on our 37 companies going forward.
The S&P/TSX Energy Index today is at 234 down 12 points or nearly 5% over the last week. 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.
More and more of the stocks we cover have entered the BUY ranges we have for them but are at the top of these ranges. If we are right and we have one more meaningful general market decline many of our Coverage List ideas should reach the lower end of our BUY ranges and be tremendous BUYS. Be ready to invest when we get this market breach and have a list of your BUY ideas ready to purchase when the market gets irrational and the bargains stand out.
JOIN OUR WEBINAR TONIGHT (IN PERSON OR LATER BY ARCHIVE)
We are having our Q1/23, 90 minute quarterly webinar, tonight Thursday February 23rd at 7PM MT. This should be a very important webinar for subscribers as we go over our current Action BUY list and other ideas close to being added, as well as discuss the four new ideas (two E&P and two energy service ideas) we added to our Coverage List on February 16,2023. For our many new subscribers we will spend time walking them through how to best benefit from our research product. Please join us for this important walk through so you can get the most out of our reports and efforts.
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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