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:
Global stocks markets are topping and rolling over after a nice run from mid-March to mid-April (Dow Jones lifted from 31,400 to 34,100). The bank contagion has now resurfaced with First Republic Bank of San Francisco (FRC-N) falling 49% yesterday and a further 21% today, down to US$6.40 per share from over US$147 per share in early February 2023 (down 96%). International banks with weak balance sheets and large derivative books are being dragged down in this new onslaught.
First Republic plunged as it announced a whopping US$100B outflow of deposits during Q1/23 (before the money center deposit support of US$30B). Due to the balance sheet stress they announced a plan to sell up to US$100B of assets. How big the haircut will be is part of the issue. Will the FDIC help the buyer to cover expected losses? Will the losses on the assets be US$10B or US$30B? The market fears the larger loss amount meaning the FDIC will have less capacity to help the next bank in trouble. Before the bank crisis started they had reserves of US$125B but this fund is now below US$100B due to the support given to the prior failed banks. The Fed and the FDIC are working 24/7 to find a merger/buyer, but the longer this takes the more damage is done to other weak banks. To remain independent, FRC may require new capital of US$25B according to the latest reporting in the financial media.
Banks in Europe like Deutsche Bank and Banco Santander are in the spotlight again due to bank deposit outflow or earnings drops. We watch the quote on Deutsche (DB-N) every day to see if the problems in Europe are getting better or worse. Overall they’re worse now!
Lending by banks is falling especially for smaller banks facing deposit outflows. This will mean a credit crunch is possible in the US which will weaken the economy in Q2 and Q3/23. Bankruptcies have picked up and 42,368 new filings occurred in March. Moody’s noted that half the total of Q1/23 bankruptcies occurred in March. The US Leading Economic Indicator fell for the 12th consecutive month. A softening economy means energy demand will soften and we see WTI falling to the US$70-72/b range over the next month. We do not see it plunging to the low of US$64/b seen in March but it should provide another low risk BUY window.
Weak earnings in important sectors such as delivery services (UPS) saw volumes plunge in March. Overall package delivery service fell 5.4% in Q1/23 according to the company. Revenues fell 6%. The decline they said was due to weaker retail sales. The stock fell 10% yesterday. Bed, Bath & Beyond has filed for bankruptcy closing 480 stores and leaving thousands of employees jobless. AT&T said its free cash flow fell 64% from a year ago and the stock plunged 13% after the release.
TESLA (TSLA – NASDAQ) is finding that it is building more cars than current demand warrants and it has cut prices to increase buyer interest. It has not worked. Buyers want a refresh on the cars. The only growth potential in 2023 is the truck coming onstream this year but volumes are expected to be low. With weaker sales volumes TSLA only has the pricing mechanism to move its excess inventory. The stock has fallen over the last two months 23% from US$217 per share to US$157 per share. It announced Q1/23 net income fell 20% from the prior year.
We continue to expect overall stock market weakness into late May as many companies report problems in their businesses and that Q1/23 earnings and guidance are disappointing to the markets. Today the Dow is at 33,452 (down 78 points on the day). Our expectation is that the Dow will fall to below 30,000 before the end of next month. If there are more bank problems in the US, Europe or China during this period, the downside could be more painful. In this scenario the Dow would fall below the low of October 2022 at 28,700.
So now we will wait to see if this unfolds. If it does, we may have the other two energy BUY signals triggered and we will add more ideas to our Action BUY List. The one I would love to see is the S&P Energy Bullish Percent Index falling below 5% which would trigger a Table Pounding BUY signal. The March 13th first BUY signal occurred when this Index fell to 8.7% (below 10% a BUY signal) from 43% just a week earlier.
We are officially in the bullish camp for the energy sector but overall stock markets are currently overbought. We are waiting for the next oversold condition to add to our energy investments. Many energy stocks are down over 50% from their 2022 highs. If you want to see what our subscribers are looking at (the seven new ideas added on each of March 13 and March 15th to the eight already there – now a total of 22 energy investment ideas), sign up now for access to the Schachter Energy Research reports at https://bit.ly/2FRrp6k. We expect to add additional ideas during this next decline phase especially if the S&P Energy Bullish Percent Index falls below 5% and triggers a Table Pounding BUY signal.
Bullish pressure for crude prices continues with the questionable production cutbacks by OPEC and increasing economic data that China has reopened. China exports are the brightest of the data. The economic and energy bulls hope China crude demand increases by over 1.5 Mb/d in 2023.
Bearish pressure for crude comes from the weakness in economies in the US, Europe and Japan and where the recent OPEC report showed declining consumptions. Crude demand destruction due to weakening global economies could be greater than any supply cutbacks from OPEC. The US alone has consumption down by 5.2% from 2022 levels according to today’s EIA Weekly Petroleum Report (see below).
EIA Weekly Oil Data: The EIA data (data cut-off April 21st) was modestly positive for oil prices. US Commercial Crude Stocks fell 5.1 Mb to 460.9 Mb. Commercial Crude Storage is now 46.5 Mb or 11.2% above a year ago. The SPR saw a release of 1.0 Mb of crude again due to the administration approval. Total Stocks (excluding SPR) are up 90.0 Mb from a year ago or up by 7.9%.
Total product demand rose last week by 891 Kb/d to 20.2 Mb/d from 19.3 Mb/d in the prior week and up 387 Kb/d from a year ago due to strong gasoline demand. Motor Gasoline inventories fell 1.0 Mb while Distillate Fuels fell by 0.6 Mb. Refinery Utilization rose 0.3% to 91.3%. US production fell 100 Kb/d to 12.2 Mb/d last week. Cushing inventories rose 300 Kb to 33.1 Mb. Motor Gasoline consumption rose by 992 Kb/d to 9.51 Mb/d while Jet Fuel saw a decline of 92 Kb/d to 1.53 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 5.2% (19.78 Mb/d versus 20.86 Mb/d).
EIA Weekly Natural Gas Data: The EIA data released last Thursday showed a build of 75 Bcf addition for the week ending April 14th. Storage is now at 1.93 Tcf. The biggest increase was in the Midwest (up 23 Bcf). This compares to the five-year injection rate of 56 Bcf and the 2022 injection of 53 Bcf. US Storage is now 33.8% above last year’s level of 1.44 Tcf and 20.5% above the five year average of 1.60 Tcf. With the warmer weather and the healthy storage position, NYMEX has retreated from US$7.10/mcf in mid-December to US$2.13/mcf today. AECO today hovers around C$2.62/mcf. Natural gas prices may remain weak for a while until the summer air-conditioning season increases demand.
Baker Hughes Rig Data: In the data for the week ending April 21st the US rig count was up five rigs to 753 rigs (down three rigs in the prior week). Of the total rigs working last week, 591 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 8% from 695 rigs working a year ago. The US oil rig count is up 8% from 549 rigs last year at this time. The natural gas rig count is up 10% from last year’s 144 rigs, now at 159 rigs.
In Canada, there was a decrease of six rigs (down 16 rigs last week) to 105 rigs as winter programs end and spring break-up road bans are in place. Canadian activity is up 4% from 101 rigs last year. Activity for oil is lower by 13% or three rigs to 42 rigs versus 48 rigs last year. Natural gas rigs were down three rigs to 63 rigs but up from 53 rigs last year. We are clearly past the peak of drilling activity for Canada for winter 2022-2023. After spring breakup is over we should see the rig count in Canada recover to over 200 rigs during the summer drilling season.
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 in 2023 of US$64.36/b or down by 51%.
CONCLUSION:
We see the March crude price decline to US$64/b as being the low for 2023 but we can back off from current prices as we see a correction in this new energy super cycle. By late 2023 we see WTI breaching US$90/b and in 2024 US$100/b.
WTI is priced today at US$74.36/b down >US$4.50/b from last week. We expect crude to trade between US$70-US$79/b over the next few weeks with the lower end of prices during May. Take advantage of the bargains in energy stock prices as this develops. I also expect at least one of the remaining two 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: The S&P/TSX Energy Index today is at 230 (down nine points from last week) as the market reacts to economic data and drops the focus on the OPEC rhetorical barrel cutback announcement.
The new stocks we recommended have done well since being added to the Action BUY List. Decide where 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. Add to your current ideas or add new ideas. Review the coverage of all our Coverage companies and their Q4/22 and 2022 results that have been released in recent issues. Starting in May we will be covering Q1/23 results so there will be more recent information for you to review.
We rejoined the bull camp on 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 added seven more ideas that day taking the Action BUY List to 22 ideas.
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 providing yields in excess of 10%). That’s not easy to beat in other market sectors. Many of the service companies are trading debt free or near 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 forecasted in recent months that WTI would lift into the US$80s during Q2/Q3 (now realized) and for trading in Q4/23 to reach above US$90/b. That should give the energy sector large capital appreciation potential.
If you are interested in access to the new BUY ideas and our research reviews, become a subscriber and get our timely BUY Action Alerts as well, go to https://bit.ly/2FRrp6k.
Our next SER quarterly Webinar will occur on Thursday May 11th at 7PM MT. To join this 90 minute timely update on the markets and the best BUY ideas that we have one needs to be a paid SER subscriber.
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:
