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 peaking after a nice run last month as the banking crisis contagion settled down. While many smaller banks continue to see some deposit outflow, the Central Banks and other lending institutions of governments have provided funds to calm things down for now. The problems in the global banking sector have not been resolved, just band-aided, so that panic does not spread.
We continue to see overall stock market weakness into late May as we expect many companies to report problems in their businesses and that Q1/23 earnings and guidance may be problematic. It is still very early in this reporting cycle but here are some of the highlights so far:
On the good side:
- Money Center banks like JPMorgan and Bank of America have reported strong earnings as interest rates rose and interest margins expanded profitability. These banks also reported large deposit inflows in March from their smaller regional rivals as the banking crisis unfolded.
On the bad side:
- Netflix shares are falling as its subscriber growth fell short of forecasts. New subscriber growth was 1.75M versus the forecast of 2.41M.
- Morgan Stanley and Goldman Sachs saw significant earnings declines. Goldman plans to shrink its consumer lending arm.
- TESLA is declining as it has lowered car prices once again (second time this month alone and sixth this year) due to increasing competition and its designs needing a refresh.
- More job cuts are coming at META and Disney.
- The American Trucking Association reported that tonnage fell 5.4% in March. For them this was a clear sign that the trucking sector is in a recession.
The Dow Jones Industrials lifted from 31,400 in mid-March to 34,100 on April 14th as the fear of the banking crisis waned. We think that this bounce is near its end, or even over, and that another pullback is likely into late May to reverse the current overbought condition. Today the Dow is at 33,860. 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 then 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 and 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.
OPEC enjoyed shafting the bearish energy futures traders with their April 2nd announcement that they would cut production by 1.2 Mb/d starting in May. This lifted crude oil prices by over US$10/b over the last few weeks to US$83.53/b. Today WTI is at US$79.09/b as fear of more Central Bank tightening to lower inflation and some slower economic data lean on the price. If we are right that the general stock market faces downside pressure into late May, the price of WTI could decline below US$75/b and give us the next low risk BUY window.
There is still concern about banks in the US and money continues to move to money market funds. Investors have taken their deposits from banks and have moved to money market funds which yield more than bank saving rates. There is now over US$5.1T tucked into money market funds, a record high. As a result banks have less funds to lend out which has made access to borrowing at banks more stringent and more difficult. Bank deposits are down nearly a trillion dollars from their peak, adding to the economic slowdown thesis as banks lower their risk profile. We think that either Europe or China may have the next round of bank difficulties.
We are officially in the bullish camp but markets can get overbought and oversold. We are waiting for the next oversold condition to add to our energy investments. However, for you our subscribers, consider all sectors you own and add to your favorite names at the end of the upcoming corrective phase. Of course have a decent allocation in the energy sector to take advantage of the ongoing energy super cycle. Many energy stocks are down over 50% from their 2022 highs. If you want to see what our subscribers are looking at (the 14 new ideas added on 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.
On the political and military side the stalemate in Ukraine continues with both sides running out of ordinance. The US is now taking munitions from its stockpiles in South Korea (50,000 rounds) to meet Ukrainian needs. New orders placed by the Pentagon with manufacturers are at much higher prices and with delivery delays. The shelves are bare from suppliers across NATO. Russia is leaning on North Korea, Iran and now China (denied by China) for needed munitions for the spring/summer offensives.
Russia is selling more crude and crude products today (10.8 Mb/d) than before the invasion of Ukraine commenced despite sanctions (CNN report). However revenues are down due to sanction pricing. Crude shipments from Russian ports topped 4 Mb/d, 45% over what it exported this way before the invasion and more than offset the pipeline shipments it sent to Europe before the sanctions kicked in. Even Gulf countries like Saudi Arabia are buying products from Russia at big discounts (Russian Urals crude sells at a 30% discount to Brent prices) and then selling their own at the current high prices. Nice profit expansion for ARAMCO. Russia has expanded its marketing reach and now is selling diesel and other products into Latin America. China is Russia’s biggest buyer taking in over 2 Mb/d which has lowered Saudi sales to China (down 29%).
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 6.1% from 2022 levels according to today’s EIA Weekly Petroleum Report (see below).
EIA Weekly Oil Data: The EIA data (data cut-off April 14th) was bearish for oil prices due to large Exports. US Commercial Crude Stocks fell 4.6 Mb to 466.0 Mb. This decline was due to Exports rising 1.84 Mb/d or by 12.9 Mb on the week. Commercial Crude Storage is now 52.2 Mb or 12.6% above a year ago. The SPR saw a release of 1.6 Mb of crude again due to the administration approval. Total Stocks (excluding SPR) are up 91.1 Mb from a year ago or up by 8.0%.
Total product demand rose last week by 263 Kb/d to 19.32 Mb/d from 19.0 Mb/d in 2022. Motor Gasoline inventories rose by 1.3 Mb while Distillate Fuels fell by 0.4 Mb. Refinery Utilization rose 1.7% to 91.0%. US production stayed at 12.3 Mb/d last week. Cushing inventories fell 1.0 Mb to 32.8 Mb. Motor Gasoline consumption fell by 416 Kb/d to 8.52 Mb/d while Jet Fuel saw a rise of 100 Kb/d to 1.62 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 5.7% (19.75 Mb/d versus 20.93 Mb/d).
EIA Weekly Natural Gas Data: The EIA data released last Thursday showed the first build of the new injection season with a 25 Bcf addition for the week ending April 7th. Storage is now at 1.86 Tcf. The biggest increase was in the East (up 10 Bcf). This compares to the five-year injection rate of 44 Bcf and the 2022 injection of 15 Bcf. US Storage is now 33.0% above last year’s level of 1.39 Tcf and 18.9% above the five year average of 1.56 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 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 14th the US rig count was down three rigs to 748 rigs (down four rigs in the prior week). Of the total rigs working last week, 588 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 8% from 693 rigs working a year ago. The US oil rig count is up 7% from 548 rigs last year at this time. The natural gas rig count is up 10% from last year’s 143 rigs, now at 157 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 (down 12 rigs last week) to 111 rigs as winter programs end and spring break-up road bans start up. Canadian activity is up 8% from 103 rigs last year. Activity for oil is lower by 8% or seven rigs to 45 rigs versus 49 rigs last year. Natural gas rigs were down nine rigs to 66 rigs but up from 54 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.
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 in 2023 of US$64.36/b or down by 51%. We see this low being the low for 2023 but we can back off from current higher prices as we see the first correction in this new bull phase. By late 2023 we see WTI breaching US$90/b and in 2024 US$100/b.
WTI is priced today at US$79.09/b down US$4.50/b from its recent high on April 14th. We expect crude to trade between US$70-US$84/b over the next few weeks with a breach of US$75/b likely 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 239 (down four 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. We cover four more companies in the upcoming report which comes out tomorrow Thursday April 20th. 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.
We have two more BUY indicators that usually occur when the fear level rises and intermarket liquidation occurs. If they trigger during May we plan to add an additional four to six new ideas to the Action BUY List, if the stocks reach our target BUY ranges.
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 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$80’s 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.
Our next SER Report comes out tomorrow April 20th. In this issue we cover four more of the companies that reported their Q4/22 and 2022 annual results. This SER issue will also include an update of our Insider Trading Report. 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.
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:
