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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:
The US Debt Limit and spending cuts battle is heating up more as the June default deadline approaches. Both the Speaker and the President say a deal will be done within the next week and that there will be no default. However, the drama of the negotiations and rhetoric along the way could be disturbing to the bond and stock markets. President Biden is now off to the G7 meeting in Japan but is expected back thereafter. He has cut out trips to other Asian countries so he can be back in the US to get a debt limit deal over the finish line.
Republicans want material cuts in future growth of government spending, with a cap of 1% growth. They want government spending to slow the growth of total US debt (now at US$31T) or at 130% of US GDP. With interest rates rising the cost of the debt is now larger than the defense budget. The US deficit this year is looking like a shocking US$2T shortfall. This when the US is not fighting Covid or in a recession but is fighting an expensive war in Europe.
The Federal Reserve remains challenged by sectoral forces of economic slowdown and general forces of inflation pressure. While the markets are forecasting that a pause in rate hikes is likely at their next FOMC meeting on June 13-14, the data will be the determining factor of what they do and recent data may require them to make another hike. Some Fed watchers now see that there could be a further 25 BP rise in the Fed Funds rate before the Fed pauses.
The banking and lending crisis in the US for Regional Banks is not over. With four bank failures so far and US$54B of losses for equity and debt holders, regional and smaller banks are still facing loss of deposits. The worry going forward is that regional and smaller local banks have large exposure to commercial real estate lending (landlords struggling to fill office buildings and shopping centers) which is a trouble area due to rate rises and lack of affordability. Additionally people are using their credit cards more to make ends meet. Loans were up US$85.8B in Q1/23. Lending standards have tightened and are at levels which have indicated recession in the past. Real estate is now seeing more problems as households miss rent or mortgage payments. Auto repossessions are rising as more Americans fall behind in their car payments. Some high profile business leaders such as Jamie Dimon of JPMorgan have proposed banning short selling of bank stocks to stop hedge funds attacking the sector.
Canada had surprisingly high CPI data for April with a rise of 0.7% month over month versus a forecast of 0.4%. Core inflation in Canada was 4.1%. The Bank of Canada may need to raise rates if these kinds of numbers persist.
On the global political and military scene, the Ukrainian major offensive has not yet started. How effective it is and how long they can move aggressively will tell the tale of which side has more men and more munitions. Some reports indicate that a Russian strike with two glide-equipped FAB-500 1,200 lb. bombs may have wiped out some of Ukraine’s senior military leadership and some of their NATO advisors at the front lines as they were planning to kick off the offensive. The Commander of the Ukrainian Armed forces is one thought to have been killed in the attack.
The US is worrying more about China moving against Taiwan and has sent a second US carrier group to the South China Sea. The US military has stationed marines in Taiwan to train local forces and the US military have increased their presence in the Philippines and Guam.
We are officially in the bullish camp for the energy sector but overall stock markets are currently overbought due to strong lifts in the FAANG tech names. 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 production cutbacks proposed by OPEC and demand increases expected from China and India in 2H/23.
Bearish pressure for crude comes from the weakness in economies in the US, Europe and Japan. Crude demand destruction due to weakening global economies could be greater than any supply cutbacks from OPEC. The US alone has consumption down by 4.1% from 2022 levels according to today’s EIA Weekly Petroleum Report (see below).
EIA Weekly Oil Data: The EIA data (data cut-off May 12h) was bearish for oil prices. US Commercial Crude Stocks rose 5.0 Mb to 467.6 Mb versus a forecast of a decline of 920 Kb. Commercial Crude Storage is now at 46.8 Mb or 11.1% above a year ago. The SPR saw a release of 2.4 Mb of crude again due to the administration approval even though it is not needed by the market. Total Stocks (excluding SPR) are up 89.0 Mb from a year ago or up by 7.7% to 1,153.4 Mb.
Total product demand fell last week by 606 Kb/d to 19.6 Mb/d from 20.28 Mb/d in the prior week. Motor Gasoline inventories fell 1.4 Mb while Distillate Fuels fell by 0.1 Mb. Refinery Utilization rose 1.0% to 92.0%. US production fell 100 Kb/d to 12.2 Mb/d last week. Cushing inventories rose 1.5 Mb to 35.5 Mb. Motor Gasoline consumption fell by 395 Kb/d to 8.9 Mb/d while Jet Fuel saw a decline of 540 Kb/d to 1.38 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 4.1% (19.8 Mb/d versus 20.6 Mb/d).
OPEC Monthly Report:
The May 2023 report released May 11th showed that in April OPEC saw a decline in production of 191 Kb/d to 28.6 Mb/d. The decline was due to Iraq halting sales from Kurdistan which lowered the country’s production by 203 Kb/d to 4.14 Mb/d. The issue going forward is whether there will be a recession and will OPEC cut the 1.2 Mb/d starting in May? If OPEC does not cut production materially and demand grows materially in China in 2H/23 (not a given) then OPEC sees demand this year rising by 2.3 Mb/d to a record 103.3 Mb/d during Q4/23.
The biggest reduction after Iraq came from Nigeria with a cut of 170 Kb/d to 1.18 Mb/d. Lifting production were Saudi Arabia (95 Kb/d to 10.5 Mb/d), Angola (79 Kb/d to 1.09 Mb/d), Iran (48 Kb/d to 2.63 Mb/d) and Venezuela (24 Kb/d to 724 Kb/d). Venezuela is moving to increase production to 1.0 Mb/d by year end with the help of US and European majors now that the Biden administration has granted approval for this support and new production which would go to the US and Europe.
OPEC sees demand rising in Q3/23 to 102.0 Mb/d and to 103.3 Mb/d in Q4/23, if there is no global recession. This would mean the call on OPEC would be 30.4 Mb/d versus the 28.6 Mb/d they produced in April and would imply a shortage situation. We are not so optimistic but see demand exceeding supply in Q4/23 by a modest amount which would lift WTI crude back over US$90/b.
EIA Weekly Natural Gas Data: The EIA data released last Thursday showed a build of 78 Bcf for the week ending May 5th. Storage is now at 2.14 Tcf. The biggest increase was in the South Central (up 25 Bcf). This compares to the five-year injection rate of 77 Bcf and the 2022 injection of 76 Bcf. US Storage is now 31.2% above last year’s level of 1.63 Tcf and 18.4% above the five year average of 1.81 Tcf. NYMEX has retreated from US$7.10/mcf in mid-December to US$2.34/mcf today. We are now in the air-conditioning season which should increase demand.
Scientists believe that we will experience a major El Nino event this year. It could have a meaningful impact on the weather this winter with much colder weather and more snow. The last time this occurred was in 2018-2019 and we saw NYMEX spike from US$2.45/mcf to a peak of US$4.92/mcf in three months.
Baker Hughes Rig Data: In the data for the week ending May 12th the US rig count was down 17 rigs to 731 rigs (down seven rigs in the prior week) as rigs drilling for natural gas plunged 16 rigs. Of the total rigs working last week, 586 were drilling for oil (down two from the prior week). The overall US rig count is up 2% from 714 rigs working a year ago. The US oil rig count is up 4% from 563 rigs last year at this time. The natural gas rig count is down 5% from last year’s 149 rigs, now at 141 rigs due to depressed returns from adding new natural gas production at this time. The natural gas focused Haynesville lost five rigs to 57 rigs from 68 rigs working at this time last year, or down by 16%.
In Canada, there was a one rig increase last week (no change in the prior week) which was at 94 rigs. With fire issues in NW Alberta and NE BC, we expect to see a decline this week. Fortunately no one has been hurt and the people moved to safety (nearly 20,000) and have been well taken care of. Many companies announced shut-ins of production as they await progress on putting out the fires. The Drayton Valley area seems to have been the worst hit. The air quality in the Province is very poor and dangerous to those with breathing issues. We are seeing more people wearing masks outdoors again. The forecast of rain later this week should help to clear the air. Canadian activity is up 7% from 88 rigs last year. Activity for oil is higher by three rigs to 37 rigs working and is flat with 37 rigs working at this time last year. Natural gas rigs were down two rigs to 57 rigs but are up from 51 rigs last year. The focus on drilling has been on the liquids rich condensate Montney and Duvernay plays. Once the fires are under control we should see the rig count in Canada recover to over 200 rigs during the summer drilling season.
CONCLUSION:
We see the March crude price decline to US$64/b as likely being the low for 2023. However in light of the current banking, debt limit and economic woes we may test those lows. Our optimism on the sector is due to our view that in Q4/23 we see WTI breaching US$90/b and in 2024 US$100/b as demand exceeds supplies at that time.
WTI is priced today at US$72.54/b. We expect crude to trade down over the next few weeks as the current global banking crisis and economic challenges weigh on crude. A WTI trading range of US$66-74/b is likely into late June. Take advantage of the bargains in energy stock prices when we get the next low risk BUY signal which we expect to see during June. More BUY ideas will be added to the SER Action BUY List. Subscribers, keep an eye on your in-basket when you see big down market days. Down market days are the best days to build your positions for the lengthy energy super cycle we see lasting into the end of the decade.
Energy Stock Market: The S&P/TSX Energy Index today is at 222 (down three points from last week). We expect this Index to fall to below 200 in the coming weeks. New BUY ideas will be issued as energy stocks fall into our BUY ranges. Decide what you want your energy weighting to be for 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 when we send out the next low risk entry point recommendations. Review the coverage of all our companies and their Q1/23 results as we review the results. We review the results of 20 covered companies in the SER report out tomorrow, Thursday May 18th.
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 hard to beat in other market sectors. Many of the service companies are trading debt free or near debt free and some are now paying material 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 or 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 should lift into the US$80s during Q3 and for crude to trade in Q4/23 above US$90/b. That should give the energy sector large capital appreciation potential.
So now we will wait to see what unfolds. If a significant market decline unfolds, we will likely see additional 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. The S&P Bullish Percent Index is now at 26% and is down from last month’s level of 70%. In March as the markets plunged this Index fell from 43% to the 8.7% trigger (below 10%) in two weeks. So things can move fast in large downside market declines.
If you are interested in access to the review of Q1/23 results for the first 20 companies that reported within our publishing timeline, become a subscriber. You will also get our timely BUY Action Alerts when they are issued. Go to https://bit.ly/2FRrp6k.
We are working on our next SER issue and in it we will cover the remaining 17 companies in our Coverage scope. This will be released on June 1st.
Our Q2/23 quarterly Webinar occurred on Thursday May 11th. It was very well received and is available for subscribers to watch in our archives. To watch this 90 minute update on the markets and the best energy 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.
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