CDN NEWS | 
US NEWS 
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:
Fed Chairman Powell testified before the US Senate yesterday and today before the House. He quickly sent all the markets into decline (Dow fell 575 points) when he mentioned “if the totality of the data were to indicate faster tightening is warranted, we would be prepared to increase the pace of rate hikes”. The hope that the Fed would be prepared to pivot to lower rates in 2H/23 is now off the table. The market had been expecting the Fed to raise the Fed Funds rate on March 22nd by 25 BP and now the consensus is for a 50 BP hike. As noted, he is data dependent and before the next FOMC meeting he will see data on jobs (the February jobs and unemployment stats this Friday – estimate up 224,000), the CPI (next Tuesday), and Retail Sales and PPI (next Wednesday), and Industrial Production (next Friday). If most of these are hotter than expected the Fed remains behind the curve and rates may need to go up to over 6%. The last Unit Labor Cost report came in at a hot +3.2% above the forecast of +1.6%. The 2-year US Treasury yield spiked up to 5.05% yesterday up from 4.09% in early February and near the highs just before the GFC (2007). If the Fed goes from the last increase of 25 BP to a 50BP increase this month, it would also mark the Fed as not being on top of the economy and increased fear of what comes next. An economic slowdown is now in the cards and the Fed does not plan to relent until they see inflation from the goods, wage and service sectors show some slack. The move to higher rates is lifting the US Dollar from its early February low of 100.68 to 105.59 at last night’s close.
Europe’s inflation problem is worse than in the US so if the Fed raises rates by 50 BP then the ECB can do no less. Italy now has CPI inflation year over year of +9.9% and the overall Eurozone has CPI inflation at 8.5% over the prior year. Food and heating costs are the two high profile rising items.
The Bank of Canada today left its overnight rate on hold at 4.5% as it sees a slowing economy at the end of 2022. This has affected the C$ which has fallen to US$0.7258 from US$0.7542 at the beginning of February 2023. It has taken quite the fall from the March 2022 high of US$0.8061.
Russia has commenced its 2023 winter offensive in eastern Ukraine, less than a year after the invasion started. They have more troops now than when they invaded a year ago 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. China is contemplating providing artillery munitions, drones and cruise missiles. China doing so would increase tensions with the US, but if a more successful Russia comes out of the fighting it will embolden China to move against Taiwan. The battle for Bakhmut has become critical for both sides. The Wagner group leading the Russian attack have had some success but are finding they are running out of munitions as the Russian army hoards the stockpiles for their own offensive when Putin orders the attack.
Bullish pressure for crude prices continues with the modest production cutbacks by OPEC and some early signs that China is reopening. The economic and energy bulls hope that if China reopens successfully crude demand would increase this year by over 1.0 Mb/d. Hong Kong ends its masking mandate for both indoors and outdoors this year after a three year requirement.
Bearish pressure for crude comes from the weakness in China’s export economy. Crude demand destruction due to weakening global 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 10.2% from 2022 levels according to today’s EIA Weekly Petroleum Report (see below).
EIA Weekly Oil Data: The EIA data of today (data from March 3rd) was mixed for oil prices. US Commercial Crude Stocks fell by 1.7 Mb to 478.5 Mb. Storage now is 67.0 Mb or 16.3% above a year ago. The SPR saw no release of crude again this week, the eighth week in a row. The US clearly has an adequate supply of crude.
Motor Gasoline inventories fell by 1.1 Mb while Distillate Fuels fell by 0.3 Mb. Refinery Utilization rose 0.2% to 86.0%. US production fell last week by 100 Kb/d to 12.2 Mb/d. Cushing inventories fell 900 Kb/d to 39.8 Mb. US total product demand fell 6.7% or by 1.36 Mb/d to 19.05 Mb/d. Motor Gasoline consumption fell 550 Kb/d or by 6% to 8.56 Mb/d while Jet Fuel saw a rise of 138 Kb/d to 1.65 Mb/d.
Demand destruction is real in the US. The numbers gyrate weekly but the important point is that demand has declined from last year. Last year’s consumption for this week was 21.2 Mb/d and is lower this year by 10.2% at 19.05 Mb/d as high prices and a weaker consumer purse use less. The largest component decline was in Distillates which fell 1.07 Mb/d due to the warmer weather. On a cumulative daily average for 2023 versus 2022, demand is down 8.8% (19.73 Mb/d versus 21.65 Mb/d).
EIA Weekly Natural Gas Data: The EIA data released last Thursday showed a decline of 81 Bcf for the week ending February 24th. Storage is now at 2.114 Tcf, more than sufficient to meet US needs for the last few weeks of winter. The biggest decrease was in the East (28 Bcf). This compares to the five-year withdrawal rate of 85 Bcf and the 2022 withdrawal of 139 Bcf. US Storage is now 27.1% above last year’s level of 1.66 Tcf and 19.3% above the five year average of 1.77 Tcf. With the warmer weather and the healthy storage position, NYMEX has retreated from US$7.10/mcf in mid-December to US$2.55/mcf today. AECO today is at $2.62/mcf. There are three 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 high 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 into April 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 March 3rd the US rig count was down four rigs to 749 rigs (down seven rigs last week). Of the total rigs working last week, 592 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 15% from 650 rigs working a year ago. The US oil rig count is up 14% from 519 rigs last year at this time. The natural gas rig count is up 18% from last year’s 130 rigs, now at 154 rigs. Recent lower crude and natural gas prices is the reason for the slowdown in drilling from the prior very active pace.
In Canada, there was an increase of two rigs (decrease of four rigs in the prior week) to 246 rigs. Canadian activity is up 13% from 217 rigs last year. Activity for oil rose 18% to 158 rigs versus 134 rigs last year. Natural gas rigs were up two to 88 rigs versus 82 last year. We are likely past the peak of drilling activity for Canada for winter 2022-2023 as spring and road bans start up over the month.
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. So far this war cycle of Russia invading Ukraine has lifted WTI to US$130.50/b in March 2022 (US$75/b at the beginning of the year) to a low so far of US$70.08/b or down by 46%.
WTI is priced today at US$76.21/b (slightly down 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. The inflation watch on food, shelter and wages will also be a focus of the markets.
Some technicians I respect see a level of 32,573 for the Dow Jones Industrials and 3,940 for the S&P 500 as critical for the markets to hold or a severe market plunge could ensue. The levels are close to being breached as the Dow is at 32,768 and the S&P is at 3,992 today. Keep an eye on these levels. If they breach then a quick decline should occur and our BUY signals we have been waiting for should be triggered and we will send out Action Alerts. 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 cover 37 companies and we added four new ideas (two E&P and two Energy Service) in our February 16th Report. Become a subscriber to follow the research coverage on our 37 companies going forward.
The S&P/TSX Energy Index today is at 246, up four points from last week due to optimism about China reopening and new sanctions against Russia on products. 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 our BUY ranges 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.
We are working on our next Report which will be out March 16th. In this issue we plan to cover 16 of the companies we cover that have recently reported their Q4/22 and 2022 annual results. In our last issue we covered the first five early reporters. If you are interested in access to these research reviews, become a subscriber and get timely BUY Action Alerts as well, go to https://bit.ly/2FRrp6k.
Our webinar held on February 23rd had record attendance and tremendous audience Q&A. If interested in listening to the Q1/23 webinar subscribers can access via the archives. A PDF of the presentation was sent to all paid subscribers.
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.
Share This:
