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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 inflation data was hotter than expected for the CPI and today’s retail sales data was buoyant. The market bulls looking for a moderation by the Fed are clearly disappointed. The CPI in January rose 6.4% versus the expected 6.2%. The CPI month over month came in 0.5% versus 0.1% in the prior month but in line with the forecast. Core CPI (ex food and energy) came in hotter than expected at 5.6% versus 5.5% as the forecast. Not up a lot but not the hoped for big decline of those wanting an interest rate pivot from the Fed. Shelter costs were the main problem with the data as 60% of the total increase in the core inflation by these unendingly increasing costs (rising contractor wage costs and input prices, mortgage rates and higher lumber prices). Higher readings show the persistent inflation pressures and this might force the Fed voters to raise rates much higher than the market is pricing in. Some talk of an over 6% Fed Funds rate or 125 BP above the current rate are getting discussed. Helping the data were medical services, airfares, and used vehicle prices and parts, but these were offset by higher food prices (up 10.1% year over year), hotels and car insurance. Energy prices rose 2% in a month adding to the inflation pressure. Inflation remains 3x the Federal Reserve’s target.
US Retail Sales out today were up 3% after two months of decline. Consumers spent on vehicles, furniture, clothing and dining out. Casual clothing did very well as the return to offices was allowed by management to be more casual. The problem is that households have low savings and have been using their credit cards to live like their ‘before pandemic’ lifestyle. A debt reckoning is coming.
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 as confirmed by the OPEC report which showed declining Saudi exports. Baltic shipments alone grew 50% in January.
Russia has commenced its winter offensive in eastern Ukraine and the fighting has been vicious. The NATO Secretary General, Jens Stoltenberg was warning earlier this week and begging the NATO allies to quickly ship munitions and new weapons systems to Ukraine as they were rapidly running out of weaponry to hold off the recently resupplied Russians. He called it a ‘race of logistics’ regarding ammo and arms supplies. If Russia is well supplied and Ukraine only gets limited new supplies a war of attrition could become a war of logistics that it could lose. The US in desperation is sending to Ukraine weapons seized from Iran that were earmarked for Iranian backed fighters in Yemen. The weaponry includes 5,000 assault rifles, 1.6M rounds of small arms ammunition, and a small number of anti-tank missiles. This is disturbing in that it may mean that US stockpiles have been run down and new US production is stalled. Is this occurring throughout the NATO alliance?
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. Now he can bring out the fear and the hardship of the Great Patriotic War to get support in his country for further mobilization of troops and move to an even greater war economy. There may soon be an escalation by Russia in the region with Moldova now a participant and another country wanting NATO membership (but was formerly part of the USSR). .
The US has told all 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.
Bullish pressure for crude prices continues with the modest production cutbacks by OPEC and optimism about the reopening in China. Russia is selling less oil and products to Europe via pipeline but China and India are taking up these barrels at US$26.73/b discounts to Brent (Brent today at US$84.40/b and Urals at US$57.67/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 view of growth in demand. Russia announced late last week that they were planning to cut 500,000 b/d of exports (5% of exports) to firm up Urals sales prices and tighten the discount so it is just under the NATO US$60/b price target. We think this is game playing to get the highest price possible. India and China may be willing to pay a few dollars more and still get great discounts.
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 3.43 Mb/d (down by 15.1%) 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 was 50% above December. India, the biggest buyer, is taking 1.7 Mb/d versus 1.0 Mb/d in December, according to Reuters. This blatant 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. This week the Biden administration announced that they will sell 26Mb of crude from the strategic reserve (SPR). This is nonsensical as there is sufficient crude oil in the system and Commercial Stocks are 14.6% above last year. Europe doesn’t need this new oil and the US surely does not. Is he planning to sell this to China? He did before! Biden does not mind selling oil and food products to China but halts at high tech for their military. The recent balloon invasion and shoot downs is making Biden more hawkish on China and may embolden China to blockade Taiwan and halt shipments of high tech products to the US. Tit for Tat!
EIA Weekly Oil Data: The EIA data of Wednesday February 15th (data from February 10th) was very bearish for oil prices. US Commercial Crude Stocks rose by 16.3 Mb to 471.4 Mb, the sixth week of increases in stocks. This compares to 411.5 Mb last year, so storage is up by 59.9 Mb or 14.6% from a year ago. The SPR saw no release of crude this week, the fifth week in a row. Commercial Stocks would have grown by 7.5Mb more if not for net Imports falling by 1.072 Mb/d or by 7.5Mb on the week. Total US Stocks this week are up 19.2Mb (excluding SPR) or up 97.2Mb or 8.4% above the prior year. The US clearly has an adequate supply of crude.
Motor Gasoline inventories rose by 2.3 Mb while Distillate Fuels fell by 1.3 Mb. Refinery Utilization fell 1.4% to 86.5%. US production was flat this week at 12.3 Mb/d. Cushing inventories rose 600 Kb/d to 39.7 Mb. US total product demand fell 6% or 1.23 Mb/d last week to 19.3 Mb/d as Propane demand fell by 821 Kb/d. Motor Gasoline consumption fell 154 Kb/d to 8.43 Mb/d while Jet Fuel saw a decline of 100 Kb/d to 1.44 Mb/d.
Demand destruction is real in the US. Total consumption fell by 3.43 Mb/d from 22.74 Mb/d or down by 15.1% 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 10.2% (19.54 Mb/d versus 21.89 Mb/d).
EIA Weekly Natural Gas Data: The EIA data released last Thursday showed a decline of 217 Bcf for the week ending February 3rd. Storage is now at 2.378 Tcf, more than sufficient to meet US needs this winter. The biggest decrease was in the South Central (74 Bcf) and the Midwest (67 Bcf). The five-year average for last week was a withdrawal of 197 Bcf and in 2022 was 222 Bcf. US Storage is now 10.9% above last year’s level of 2.13 Tcf and 5.2% above the five year average of 2.25 Tcf. With the warmer weather and the healthy storage position, NYMEX has retreated from US$7.10/mcf in mid-December to US$2.57/mcf today. AECO today is at $2.62/mcf due to the warming spell. The US price remains weak as the Freeport LNG plant slowly ramps back up. This large exporter (2.1 Bcf/d) is restarting the plant at 25% of capacity 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. 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 10th the US rig count was up two rigs at 761 rigs (down 12 rigs last week). Of the total rigs working last week, 609 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 20% from 635 rigs working a year ago. The US oil rig count is up 21% from 516 rigs last year at this time. The natural gas rig count is up 27% from last year’s 118 rigs, now at 150 rigs. The industry continues to respond to higher international natural gas prices with more activity than last year as gas is needed to fill high priced LNG contracts. For domestic natural gas sales some rigs are ending their drilling run with eight leaving last week due to the weaker prices domestically. 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 one rig (increase of two rigs in the prior week) to 250 rigs. Canadian activity is up 14% from 219 rigs last year. Activity for oil rose 18% to 161 rigs versus 137 rigs last year. Natural gas rigs were up 9% or to 89 rigs from 82 rigs last year but were down one rig this week due to low domestic prices. 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.
OPEC Monthly Report:
The February 2023 report was released on Tuesday and showed that in January OPEC decreased production by 49 Kb/d to 28.88 Mb/d. The decline was mainly from Saudi Arabia with a cut of 156 Kb/d to 10.32 Mb/d. OPEC cuts were made by Iraq (46 Kb/d) Iran (22 Kb/d), Libya (10 Kb/d) and Gabon (10 Kb/d). Increases came from Angola (47 Kb/d), Kuwait (45 Kb/d) Nigeria (65 Kb/d) and Venezuela (20 Kb/d). The issue going forward is whether there will be a recession or not. The bullish, no recession view, is that demand will rise this year by 2.2 Mb/d to a record 103.5 Mb/d in Q4/23 as China recovers. If there is a global slowdown or recession, which we deem as likely, there should be a build in supplies in 2023 and demand may be flat for the year.
OPEC sees global demand in Q1/23 of 101.3 Mb/d and that the call on OPEC is 29.10 Mb/d, so with production at 28.88 Mb/d in January they see a tight market. The key is what can Russia sell to India, China and its other buyers and does this lower the amount needed by OPEC to meet customer needs? With slowing economic growth worldwide, current US supply builds and demand destruction we see OPEC making a big mistake in assuming that there will be sufficient demand to take what they want to export this year.
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$77.46/b (up US$0.30/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 are showing meaningful decline. 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 37 companies as we are adding four new ideas (two E&P and two Energy Service). Introduction of these new ideas will occur in our February Interim Report due out on February 16th. Become a subscriber to follow our research coverage of our 37 companies going forward.
The S&P/TSX Energy Index today is at 246, down 2.0% or 5.01 points (but unchanged from last week’s level). 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 NEXT THURSDAY EVE (IN PERSON OR BY ARCHIVE)
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 any 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. For our many new subscribers we will spend time walking them through how to best benefit from our 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.
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