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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:
Fed Chairman Powell testified before the US Congress last week and quickly sent all the markets into decline (Dow fell 575 points on Tuesday March 7th) 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 market had been expecting the Fed to raise the Fed Funds rate on March 22nd by 25 BP and the consensus after his testimony was for a 50 BP hike.
And then last Thursday a run started at regional banks. The hardest hit was Silicon Valley Bank (SVB), which at its peak had US$209B of assets. Historically bank runs had people standing outside of banks to get in and take their funds out. This digital age now allows a keystroke to move money between banks. SVB which supported Venture Capitalists and the companies they fund did not have a large retail deposit base but had over 90% uninsured deposits. Social media in the area talked about their funding mismatch and then the outflow took off. In 48 hours withdrawals had reached over US$45B and the bank was unable to make the transfers. On Friday the bank could not open. The fall from grace happened quickly and funds were pulled out so quickly it was impossible for the bank to find new equity funds or a merger partner. Three US banks have been taken over by the FDIC over recent days. In 2008, when Bear Stearns got in trouble it was merged into JPMorgan Chase in a take-under deal. No such support arose this time. Financial markets panicked and most financial stocks got hit hard last Friday. Depositors in the failed banks took the funds when offered by the FDIC and large money centre banks like Bank of America gained very large deposit inflows. The rush to safety and safer assets like Treasuries drove yields down with the two-year US Treasury yield falling from 5.05% to 4.03%. The market consensus then changed from a 50 BP increase back to a 25 BP increase as the Fed still needs to arrest inflation pressures.
On Monday the President came on TV before the markets opened and said that they had come up with a plan to backstop all deposits and that it would be paid for with depositor insurance. This helped to stabilize the markets’ fears. Depositors would be saved but for banks that failed it would see debt holders, preferred holders and stockholders wiped out and senior management fired. In the case of SVB bonuses paid out to managers the day before the failure are being claimed back. There now are plans to tighten regulation of regional and smaller banks to ensure this does not happen again. It should not have happened as after the Global Financial Crisis (GFC) rules were put in place to evaluate all banks. However, during the Trump administration, the Republicans weakened the standards to give regional banks some less onerous regulation. The difficulty will be that the House is in control of the Republicans and election season is nearly here again.
Today things changed again with the financial crisis moving to Europe and fear that the large Swiss multinational bank, Credit Suisse was next. The stock fell nearly 30% to start the day and that triggered a world wide market plunge. Some stock markets are down over 3% today.
We are now in uncharted waters as to how the world will resolve this challenge. The key is that this too will pass and that investors should look to great companies that have been knocked down and will thrive as things return to some normalcy. Next week the Fed may ignore the economic data and leave rates unchanged until stability returns to financial markets. Any new wild card problem will cause the current fear and some panic to become a full fledged market panic with a quick and deep plunge for the problematic sector. However, all areas of the market could face liquidation as investors move to cash or short-term Treasuries to ride out the crisis. We are in a market plunge phase that is painful but is short in duration and there have been many of these instances throughout history. We see this global banking crisis as providing the best buying window for energy stock since March 2020. On Monday and then again today we have sent out Action Alert BUYS to subscribers with 14 new ideas (seven each time) that are at bargain levels. Some of the ideas have strong balance sheets and have dividend yields over 10%.
This week coverage of economic data and military events in Europe are not the driving force of the current malaise. When we get back to rational and steady markets, we will cover these issues again. For now, the markets should gyrate as new events unfold. Our forecast of the stock markets having more downside is unfolding. The October low for the Dow Jones Industrials of 28,700 is a likely target into late March. The Dow as we write this is down 570 points to 31,585 so there is still nearly 2,900 points of downside risk. The Dow has fallen 2,715 points since February 2023 so there is still a lot of downside risk potential in the coming weeks.
EIA Weekly Oil Data: The EIA data of today (data from March 10th) was mixed for oil prices. US Commercial Crude Stocks rose by 1.6 Mb to 480.1 Mb. Storage now is 64.2 Mb or 15.4% above a year ago. The SPR saw no release of crude again this week, the ninth week in a row. The US clearly has an adequate supply of crude.
Motor Gasoline inventories fell by 2.1 Mb while Distillate Fuels fell by 2.5 Mb. There would have been a rise in inventories if not for Exports rising by 1.67Mb/d or by 11.7Mb on the week. Refinery Utilization rose 2.2% to 88.2%. US production was flat at 12.2 Mb/d. Cushing inventories fell 1.9 Mb to 37.9 Mb. US total product demand fell 7.5% from last year or by 1.54 Mb/d to 19.11 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 20.7 Mb/d and is lower this year by 7.5% at 19.11 Mb/d as high prices and a weaker consumer purse buys less. On a cumulative daily average for 2023 versus 2022, demand is down 8.7% (19.67 Mb/d versus 21.04 Mb/d).
EIA Weekly Natural Gas Data: The EIA data released last Thursday showed a decline of 84 Bcf for the week ending March 3rd. Storage is now at 2.03 Tcf, more than sufficient to meet US needs for the last few weeks of winter. The biggest decrease was in the East (35 Bcf). This compares to the five-year withdrawal rate of 94 Bcf and the 2022 withdrawal of 124 Bcf. US Storage is now 32.1% above last year’s level of 1.54 Tcf and 21.5% above the five year average of 1.67 Tcf. NYMEX has retreated from US$7.10/mcf in mid-December to US$2.43/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) has restarted the plant and it may take 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 10th the US rig count was down three rigs to 746 rigs (down four rigs last week). Of the total rigs working last week, 590 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 13% from 663 rigs working a year ago. The US oil rig count is up 12% from 527 rigs last year at this time. The natural gas rig count is up 13% from last year’s 135 rigs, now at 153 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 a decrease of 23 rigs (decrease of two rigs in the prior week) to 223 rigs. Canadian activity is up 8% from 206 rigs last year. Activity for oil is 9% above last year at 139 rigs versus 127 rigs in 2022. Natural gas rigs were down four rigs at 84 rigs versus 79 last year. We are past the peak of drilling activity in Canada for winter 2022-2023, as spring road bans start up over the month.
OPEC Monthly Report:
The March 2023 report was released on Tuesday and showed that in February OPEC increased production by 117 Kb/d to 28.93 Mb/d. The surprise increase was due mainly to Nigeria recovering from production difficulties. Both OPEC and the IEA now see Q1/23 demand and production in balance. The issue going forward is whether there will be a recession or not. If not, then the view is that demand will rise this year by 2.3 Mb/d to a record 103.4 Mb/d during Q4/23. If there is a slowdown or recession, which we think is likely, there should be a build in supplies in 2023.
The biggest reduction came from Angola with a cut of 52 Kb/d to 1.08 Mb/d. Others cutting production included Iraq (25 Kb/d) and Kuwait (11 Kb/d). Lifting production were Congo (21 Kb/d), Iran (17 Kb//d), Libya (16 Kb/d) Saudi Arabia (59 Kb/d) and Venezuela (4 Kb/d).
The supply cut program of 2.0 Mb/d seems to be off the table even though demand is falling as economies weaken. The current banking crisis will have some drag on economies as lending will be impacted as banks focus on building reserves.
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$65.65/b or down by 50%.
WTI is priced as I write this at US$65.93/b (down >US$10/b from last week). We had forecasted a panic spike bottom in the US$65-70/b area, and this has now occurred. Today we are down over US$5/b. We are now fully back into the BULL camp on crude oil and the sector.
Energy Stock Market:
We sent our subscribers two Action Alert BUY lists this week. Each had seven attractively priced ideas with many having significant capital appreciation and secure dividends. We now have 22 BUY ideas on our Action BUY list up from eight ideas at the beginning of this month. We expect to add 4-6 additional ideas in the coming days.
When buying stocks during market plunges one needs to know that they will not get the absolute low but a bargain price that will look very attractive 6-12 months down the road. This may be a ‘V’ shaped bottom, or a ‘U’ shaped one but the bargains we see now are why we are laddering in energy ideas for you to consider for your portfolios.
The S&P/TSX Energy Index today is at 209 down 36 points 15% from a week ago as the energy sector has been smacked down during this financial crisis. Our Action BUY 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.
Our next SER Report will be out tomorrow March 16th. In the issue we cover 16 of the companies that have reported their Q4/22 and 2022 annual results. In our next issue we cover the remainder of the ideas on our Coverage List. If you are interested in access to these research reviews and the Action BUY Ideas issued this week, become a subscriber! 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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