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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:
After the forced merger of Credit Suisse (CS) into UBS at a takeunder price of US$3.2B (US$5B less the stock was trading at last Friday), markets are very wary and are wondering who is next? Will it be a bank in Europe that is undercapitalized and facing a bank run of deposits? Will it be a bank with large AT-1 notes (Additional Tier 1 capital notes). The Swiss bank was forced to wipe out holders of Credit Suisse US$17B of these bonds and yet gave a small amount of UBS stock to get shareholder approval. The legal suits will be coming out on that governmental breach of contract and bankruptcy laws. The Swiss government and the Swiss National Bank forced a reluctant UBS to do the deal despite its lower risk culture with support of a 100B franc liquidity support program and that the Swiss government would eat the first 9B francs of losses from the merger. These losses could be much bigger as CS was involved in the derivative markets and how big the problem is there is unknown and will take time to unwind. What a fall from US$52 per share to the market valuing the deal now at $0.92 per share.
These AT1 bonds were issued by HSBC, UBS, CS, Barclay’s Societe Generale, BNP Paribas, Deutsche Bank, Santander and many others. So any more pressures on these banks’ deposits could cause severe runs and pressure to merge or go under. In 2008-2009 after Bear Stearns was forcibly merged into a reluctant JPMorgan, the next to go was Lehman which did not get support and went under and the GFC stock market meltdown ensued. This is the sword hanging over the banking world now. How far will Central banks and Governments go to bail out banks that took on too much risk? How much is the blame for Central Banks having gone to negative interest rates which severely injured the profitability and capital positions of the banks?
With bank runs continuing, and social media speeding up the pace of runs, who’s next is a global problem. Will it be a European bank (Germany, Spain and Italy have weak banks) or some regional or local US bank? Moody’s has downgraded the US bank sector to negative. At a minimum, banks slow lending and push weaker borrowers to find a way to pay back their loans fast. If banks retrench lending then an economic slowdown is inevitable.
Today is Fed day and the FOMC approved a 25 BP rise in the Fed Funds rate to 4.75% – 5.00%. The wording of the statement mentioned room for one more rate rise this year. Inflation, they say, remains elevated and there is a lot of uncertainty in the financial markets. So now, investors wait for Chairman Powell’s press conference, the Q&A, and the after effects. The Fed is blamed for too low rates for too long and now for too fast rate hikes. The market will be looking for any signs of more support for regional banks and if stress tests will be expanded across the banking sector and not just for the big money center ones.
One disconcerting comment came from US Treasury Secretary, Janet Yellin, yesterday when she said the administration is still baffled by the historic bank collapses. What nonsense. SVB’s approach to asset mismanagement was well known and the large loans to officers just before the collapse is clearly wrong. Add on top of that, the insider stock sales and paying of bonuses days before the end, are unconscionable. The San Francisco Fed was asleep. Their duty was to watch regional banks while the Federal Reserve watched the big money center banks.
What worries me is that the dike is being breached today at two US regional banks and so the carnage is starting up again. PacWest BanCorp is down over 10% today to US$10.93 (year high US$46.76) as depositors have taken out 20% of total deposits. A larger and more noticeable bank that is under severe scrutiny is First Republic Bank of San Francisco. After a US$30B deposit rescue by large money center banks last week, the stock is still melting down as are its deposits. The stock was at US$147.68 per share in early February and fell to US$11.52 last week. Today it is down 4.8% to $15.01 per share but had a daily low so far of US$14.51 per share. Can the Fed find a buyer for this troubled institution? Can Warren Buffett come to the rescue like he did for Bank of America and Goldman Sachs during the GFC?
For those annoyed, disgusted or worried about this situation, remember markets discount travails quickly. Look at the charts of 2008-2009 and 2020 and you can see painful declines in the stock markets but soon they overly discounted the problems and recovered quickly. This is the scenario I am looking to see happen in the coming weeks. One more shakeout and there will be bargains in all market sectors. So please consider all sectors you own and add to your favorite names. Of course have a decent allocation to the energy sector to take advantage of the ongoing energy super cycle. Many energy stocks are down over 50% from their 2022 highs. I am a chocolate lover especially of chocolate truffles and I feel like the bargains today are like getting half off at Teuschers. I love champagne truffles, espresso truffles, and all of their other choices. So what do I fill my box with when there are dozens of flavors? A variety! Same with the attractive choices in the energy sector on recent down days. If you want to see what our subscribers are looking at, sign up now for access to the Schachter Energy Research reports at https://bit.ly/2FRrp6k
Inflation is not going away and is still at multiples of the Fed’s targets. The UK announced today the February inflation came in at 10.4% versus January’s 10.0%. Food costs were the main culprit at up 18%. So we see why the ECB raised its rates by 50 BP. The Fed may see tamer PPI data but President Biden is adding to the inflation pressure in the future with a budget proposal of a 5.2% hike for all Federal Government employees. This sure makes it tough to keep price stability of 2%.
Bullish pressure for crude prices continues with the modest production cutbacks by OPEC and some increasing 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 8.4% from 2022 levels according to today’s EIA Weekly Petroleum Report (see below).
EIA Weekly Oil Data: The EIA data released today (data cut-off March 17th) was mixed for oil prices. US Commercial Crude Stocks rose by 1.1 Mb to 481.2 Mb. Storage now is 67.8 Mb or 16.4% above a year ago. The SPR saw no release of crude again this week. The US clearly has an adequate supply of crude.
Motor Gasoline inventories fell by 8.4 Mb while Distillate Fuels fell by 3.3 Mb. Refinery Utilization rose 0.4% to 88.6%. US production rose last week by 100 Kb/d to 12.3 Mb/d. Cushing inventories fell 1.1 Mb to 36.8 Mb. Motor Gasoline consumption rose by 366 Kb/d to 8.96 Mb/d while Jet Fuel saw a small decline of 37 Kb/d to 1.60 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 21.1 Mb/d and is lower this year by 5.2% at 20.0 Mb/d as high prices and a weaker consumer purse uses less. On a cumulative daily average for 2023 versus 2022, demand is down 8.4% (19.7 Mb/d versus 21.5 Mb/d).
EIA Weekly Natural Gas Data: The EIA data released last Thursday showed a decline of 58 Bcf for the week ending March 10th. Storage is now at 1.97 Tcf, more than sufficient to meet US needs for the last few weeks of winter. The biggest decrease was in the East and Midwest both at (25 Bcf consumption). This compares to the five-year withdrawal rate of 94 Bcf and the 2022 withdrawal of 79 Bcf. US Storage is now 35.9% above last year’s level of 1.45 Tcf and 23.7% above the five year average of 1.59 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 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 17th the US rig count was up eight rigs to 754 rigs (down three rigs last week). Of the total rigs working last week, 589 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 14% from 663 rigs working a year ago. The US oil rig count is up 12% from 524 rigs last year at this time. The natural gas rig count is up 18% from last year’s 137 rigs, now at 162 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 16 rigs (decrease of 23 rigs in the prior week) to 207 rigs as winter programs end and spring break-up road bans start up. Canadian activity is up 18% from 176 rigs last year. Activity for oil is higher by 18% to 122 rigs versus 103 rigs last year. Natural gas rigs were up one to 85 rigs versus 73 last year. We are clearly past the peak of drilling activity for Canada for winter 2022-2023.
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 in 2023 of US$64.36/b or down by 51%.
WTI is priced today at US$70.54/b (up US$6/b from Monday’s US$64.36/b low). We expect crude to trade between US$64 to US$73/b over the next few weeks and on down days take advantage of the bargains in stock prices and be a buyer. I also expect at least one of the remaining BUY signals to be triggered and more ideas added to the SER Action BUY List. Subscribers, keep an eye in your in-basket when you see big down market days. These down market days are the best days to build your positions for the lengthy energy super cycle I see lasting into the end of the decade.
Energy Stock Market: For the overall stock market we expect a focus on Q1/23 earnings and negative guidance from companies to take hold of the market and see further erosion with the Dow Jones Industrials declining below 29,000 (now 32,475). Any further bank failures (which we expect) would cause this decline to be precipitous. Our technician market forecasters have been right on the downside for the overall market and the painful moves in the sector under attack (global banking).
The S&P/TSX Energy Index today is at 226 as the market gets a reprieve due to the bandaids put on by the Central Banks and Treasury Departments to halt the bank runs. 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 fully rejoined the bull camp last Monday March 13th when the first of our four BUY indicators kicked in. We added seven great ideas to the original eight. This took us to 15 great BUY ideas. On March 15th crude busted US$70/b (dropping to US$65.65/b) as fear of a global recession due to the financial crisis woke up memories of 2008-2009. The market got hit that day by the problems and later forced merger of Credit Suisse by UBS in a take-under that reminded investors of the forced merger of Bear Stearns into JPMorgan, another takeunder. where Crude fell over US$5/b that day.
We have two more BUY indicators that usually join when the fear level rises and intermarket liquidation occurs. If they trigger in the coming weeks we plan to add additional ideas to the Action BUY List if the stocks reach our target BUY ranges. The two remaining indicators are 1) the Bullish Percent Indicator falls below 5% – a Table Pounding BUY Indicator (bounced in the last few days with the market rally to 13% from 8.7%) and the S&P/TSX Energy Index falling below 200 (today 226 and recent low 209). If any one of these other two BUY signals are triggered we will be sending out a third Action BUY List with 6-8 additional attractively priced ideas across the spectrum of our coverage: natural gas, liquids, energy service and pipeline & infrastructure stocks.
We have nearly completed our review of all 37 companies that we cover and bargains are everywhere. Many E&P companies now trade below their PDP levels (proved developed producing reserves). You get the proved non-producing, the probables, land and tax pools for free and with some you are being paid dividends (regular and specials of over 10%). That’s not easy to beat in other market sectors. Many of the service companies are trading with debt free or net debt free balance sheets and some are now paying dividends. And on the pipeline and infrastructure side you have companies trading with 6-7% yields and are trading 20-25% below their 2022 highs. In a recovery they should see 15%+ capital gains for total upside returns in this conservative sector of over 20% in the next twelve months. For E&P and Energy service stocks we see 50%+ upsides from capital gain potential and dividends for those that pay them. Why such upside? We see WTI lifting into the US$70s during Q2/23, US$80’s into Q3/Q4 and for trading in Q4/23 to reach above US$90/b that gives the sector the large capital appreciation potential.
If we have one more meaningful general market decline into early April, many of our Coverage List ideas should reach the lower end of our BUY ranges and be tremendous bargains for investors. Be ready to invest during this next general market pressured decline.
We are working on our next SER Report which will be out March 30th. In this issue we plan to cover 13 more of the companies we cover that have recently reported their Q4/22 and 2022 annual results by our report cut-off date. In our last issue we covered 16 companies and in the issue before the first five early reporters. If you are interested in access to these research reviews, become a subscriber and get our timely BUY Action Alerts as well, 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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