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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:
Central Banks continue to be buffeted by both economic slowdown news (which they want to see) and continued and persistent rising inflation in food, shelter and wages.
In Europe: France’s inflation rate reached a record high of 7.2% in February, up from 7% in January as soaring food and service costs pushed prices up. Spain saw its inflation rate rise to 6.1% (from 5.9% in January). Germany today reported consumer prices rose 9.3% from a year ago driven by higher food and service costs. In Q4/22, Sweden’s GDP fell 0.9% versus the forecast of a decline of 0.6%. The ECB is in a quandary and some forecasters expect them to raise rates by 50 BP when they meet on March 16th, versus a prior forecast of just 25 BP. Across the Euro-area inflation was 8.6% in January and while down from the record peak of 10.6% last year, the problem is that core inflation was at a high of 5.3% even when you take out the volatile food and energy components.
In the US: The US Durable Goods report came in with a decline of 4.5% in January versus the minus 4.0% expected. The manufacturing sector continues to show weakness with the Dallas Fed Manufacturing report dropping from minus 8.4 to minus 13.5, highlighting the contraction in output. One last data point from today’s data releases came from the US Conference Board that showed Consumer Confidence falling to 102.9 from an expectation of 108.5. Some Fed watchers like the Bank of America see the Fed raising its policy rate all the way up to 6% to contain food, wage and shelter pressures. US market rates are expecting a hawkish Fed. Yields on 2-Year Treasuries have broken out to a new high this decade at 4.81% (up from the 2022 high of 4.72%) and up from the ludicrous low level of 0.09% of early 2021. The FOMC meets on March 21-22 and the consensus expectation is for a 25 BP rise. If the data up to the meeting is now sanguine then a surprise of a 50 BP increase would negatively impact stock markets.
Canada: The Canadian economy stalled at the end of 2022 with a 0.1% contraction in December and was flat for Q4/22.
In Asia: Japan’s Industrial Production fell 4.6% in January versus a forecast of a decline of only 2.9%. Hong Kong, impacted by the China slowdown, saw exports fall 36.7% in January which was lower than the previous low of a decline of 22% seen during the Global Financial Crisis (GFC). China today posted its first decent manufacturing PMI which showed growth as it was over 50 and came in at 52.6. However, consumer spending in China is still very sluggish and exports are weak. China is benefiting from increased trade with Russia due to the NATO sanctions.
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. China is contemplating providing artillery munitions, drone 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.
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 hoping to break their support of Ukraine. The emboldened and expanded Russian military in the Bakhmut area may finally have surrounded the city and could force the 20,000 or so Ukrainian and foreign volunteers to surrender. If so, this would be their first victory in their 2023 winter offensive one year after the invasion commenced.
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 this would increase crude demand this year by over 1.0 Mb/d. Hong Kong this month ends its masking mandate for both indoors and outdoors 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 8.7% 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 24th) was bearish for oil prices. US Commercial Crude Stocks rose by 1.2 Mb to 480.2 Mb, the eighth week of increases in stocks. It would have been 8.05 Mb higher if not for Net Imports falling by 1.15 Mb/d. Storage now is 66.8 Mb or 16.2% above a year ago. The SPR saw no release of crude again this week, the seventh week in a row. The US clearly has an adequate supply of crude.
Motor Gasoline inventories fell by 0.9 Mb while Distillate Fuels rose by 0.2 Mb. Refinery Utilization fell 0.1% to 85.8%. US production was flat this week at 12.3 Mb/d. Cushing inventories rose 300 Kb/d to 40.7 Mb. US total product demand rose by 195 Kb/d to 20.41 Mb/d. Motor Gasoline consumption rose 202 Kb/d to 9.11 Mb/d while Jet Fuel saw a rise of 189 Kb/d to 1.51 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. On a cumulative daily average for 2023 versus 2022, demand is down 8.7% (19.82 Mb/d versus 21.70 Mb/d).
EIA Weekly Natural Gas Data: The EIA data released last Thursday 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$2.72/mcf today. AECO today is at $2.62/mcf. There are four 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 24th the US rig count was down seven rigs to 753 rigs (down one rig last week). Of the total rigs working last week, 600 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 16% from 650 rigs working a year ago. The US oil rig count is up 15% from 522 rigs last year at this time. The natural gas rig count is up 19% from last year’s 127 rigs, now at 151 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 four rigs (decrease of two rigs in the prior week) to 244 rigs. Canadian activity is up 9% from 224 rigs last year. Activity for oil rose 14% to 158 rigs versus 138 rigs last year. Natural gas rigs were up one at 86 rigs versus 85 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.
WTI is priced today at US$76.64/b (up US$1.50/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 declines. 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 32,673 and the S&P is at 3,965. 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 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 242 up 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.
Our March 2 SER Report will be out tomorrow and will start the review of Q4/22 and 2022 annual results. We have an analysis of the five earliest reporters that came before our production cut-off period. In the next issue we expect to cover over 12 companies as they report before our cut-off date of March 9th. If interested in access to these research reviews become a subscriber to get these timely BUY Action Alerts. 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.
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