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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 cut deal negotiated by President Biden and Speaker McCarthy passed in the House with significant support from Democrats. More Democrats voted for the deal than Republicans (165 versus 149). The total yes votes were 314 and the negatives were 117 votes (including 71 from Republicans). It now moves to the Senate and then, before the weekend, to the President to be signed (if the plan works within the announced timeline). To get high support from the Democrats it took some dealing with members of Congress and the help of President Biden. This is not a great outcome for the Speaker as he did not get more support from his own party versus that of the President’s party.
The drama of the negotiations and rhetoric along the way are disturbing to the bond and stock markets. The Dow Jones Industrial Average broke the support level of 32,900 this morning. Tomorrow’s jobs data will be of key importance for the market going forward. If it’s a strong report, the Fed will be cornered into raising rates again at either their meeting this month or in July.
The Federal Reserve remains challenged by sectoral forces of economic slowdown and general forces of inflation pressure (core US PCE rose 4.7% year-over-year in April) and a strong labour market. It is likely that there will be a 25 BP increase at the June 14th meeting announcement as the JOLTS (job openings data) rose to 10.1M from 9.5M last month. Non-farm productivity for Q1/23 came in at negative 2.1% (Q4/22 was a positive 1.7%) and overall unit labor costs rose by 4.2% in Q1/23 versus 3.2% in Q4/22. The market is expecting a ‘skip’ this month and a rise of 25 BP at the July meeting.
The world is still waiting for the spring offensive in Ukraine to start. So far there have been drone attacks by Ukraine into Russian controlled Crimea and some successful drone and missile attacks into Russia, most recently against targets in Moscow. In retaliation Russia has escalated its attacks against munition bases in Ukraine and against civilian targets in Kiev using Iranian drones. The season for Ukraine to repel Russian forces is now but they are stressing out Russian forces by the delay of where and when they will strike. Both sides are trying to destroy the war making capability of the other. Recent Ukrainian drone incursions into Russia (particularly Moscow) is of concern to its NATO allies as they fear escalation of weaponry by Russia, especially the use of tactical nukes.
We are officially in the bullish camp for the energy sector but overall stock markets have rolled over. 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, 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 potential production cutbacks by OPEC at their June 4th meeting and demand increases expected from China and India in 2H/23. Iraq’s production difficulties with its Kurdish volumes of 450,000 b/d aids prices.
Bearish pressure for crude comes from the weakness in economies in the US, Europe (Germany now officially in recession) and Japan. Crude demand weakness due to slowing global economies could be greater than any likely supply cutbacks from OPEC. The US alone has consumption down by 3.5% from 2022 levels according to today’s EIA Weekly Petroleum Report (see below). China’s manufacturing data for May fell to 48.8 (anything below 50 is contraction). The forecast had been for a 49.5 number. The PMI sub-indexes that cover production, new orders and inventories all contracted in May, highlighting softer demand for exports but also capital investments.
EIA Weekly Oil Data: The EIA data (data cut-off May 26th) was bearish for crude prices as demand was weak and Net Imports rose. US Commercial Crude Stocks rose 4.5 Mb to 459.7 Mb as Net Imports rose 1.0 Mb/d (7.0 Mb on the week). Energy demand fell 1.26 Mb/d on the week). Commercial Crude Storage is now 44.9 Mb or 10.8% above a year ago. The SPR saw a release of 2.5 Mb of crude.
Total product demand fell last week by 1.26 Mb/d to 19.4 Mb/d from 20.7 Mb/d in the prior week as Distillate and Other Oils demand fell. Motor Gasoline inventories fell 0.2 Mb while Distillate Fuels rose by 1.0 Mb. Refinery Utilization rose 1.4% to 93.1%. US crude production fell by 100 Kb/d to 12.2 Mb/d last week. Cushing inventories rose 1.7 Mb to 38.9 Mb. Motor Gasoline consumption fell by 339 Kb/d to 9.1 Mb/d while Jet Fuel saw a rise of 350 Kb/d to 1.78 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 3.5% (19.81 Mb/d versus 20.54 Mb/d).
EIA Weekly Natural Gas Data: The EIA data released today showed a build of 110 Bcf for the week ending May 26th. Storage is now at 2.45 Tcf. The biggest increase was in the East (up 33 Bcf). This compares to the five-year injection rate of 104 Bcf and the 2022 injection of 90 Bcf. US Storage is now 29.5% above last year’s level of 1.89 Tcf and 16.8% above the five year average of 2.10 Tcf. NYMEX retreated from US$7.10/mcf in mid-December 2022 to a low of US$1.95/mcf in April. It is down nine cents today to US$2.18 due to the large injection.We are now in the air-conditioning season so prices should see some bounce as the weather gets hotter and electricity use rises.
Scientists believe that we are experiencing a major El Nino event this year. The effect has already been seen in Chile. China is feeling this via the hottest weather for this time of year ever. It is likely to have a meaningful impact on the weather this winter with much colder weather and more precipitation (rain and 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.
Our forecast is for NYMEX to rise to US$3.50/mcf this summer and to rise over US$4.50/mcf during winter 2023-2024. We recommend buying the very depressed natural gas stocks during periods of general market weakness. We intend to add additional natural gas names to our Action BUY list when we get the next low risk energy BUY signal.
Baker Hughes Rig Data: In the data for the week ending May 26th the US rig count was down nine rigs to 711 rigs (down 11 rigs in the prior week). Rig activity is now 2% below the level of 727 in 2022 as low commodity prices slow down spending. If this lower activity persists over the next few months then production will fall off for both commodities and this will set up the next upward cycle for crude and natural gas pricing. Of the total rigs working last week, 570 were drilling for oil (down five from the prior week) and below last year’s level of 574 rigs working. The overall US rig count is down from 728 rigs working a year ago. The US oil rig count is now at 570 rigs compared to 574 rigs last year. The natural gas rig count is down 9% from last year’s 151 rigs, now at 137 rigs. The natural gas focused Haynesville now has 55 rigs working down from 69 rigs working last year or down by 21%.
In Canada, there was a two rig increase last week (down nine last week) to 87 rigs. While fire issues continue, most companies have now fully restarted shut-in production. Canadian activity is down 16% from 103 rigs last year. Activity for oil is now at 42 rigs compared to 55 last year. Activity for natural gas was down three rigs to 45 rigs and down from 48 rigs focused on natural gas last year. The focus on drilling has been on the liquids rich condensate Montney and Duvernay plays. Once the fires are fully under control we should see the rig count in Canada recovering to over 200 rigs during the summer drilling season.
CONCLUSION:
We see the March crude price decline to US$64/b as being the low for 2023. However in light of the current banking, debt limit battle 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$69.49/b down nearly US$5/b on the week. The Saudi threat against short sellers has abated even though the next meeting is on June 4th and is a face-to-face meeting. The Saudis’ have threatened to lower production for a short while and cause a sharp price spike that would be financially painful for those shorting crude oil. Russia has said it would not go along so this has dampened this concern. Crude prices have weakened due to the Russian announcement and the lower manufacturing activity data from China. If the OPEC meeting does any substantial production cuts that would give crude a bit of a price bid.
In the coming weeks we see crude trading in a range of US$65-74/b as the economic data swings around and as the politics around the globe challenge investors’ view of economic prospects. We are near the lower end of this band so take advantage of the bargains in energy stock prices when we get the next low risk BUY signal. More BUY ideas will be added to our Action BUY List. 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 221 (down 10 points from last week) due to the weakness in crude prices. If there is a general market problem (as we expect) and the Dow Jones Industrials breach 30,000, then we expect the Energy Index to fall to below 200. This decline is unfolding as we have been forecasting. Late June is likely the time to make more investments in the sector at prices 10-15% below current levels for many of the high beta names.
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 in our recent research reports. In the issue to be released tomorrow we review the results of 16 more covered companies.
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 expect to add five to seven more ideas during the next BUY signal window over the next few weeks.
Many E&P companies trade below their 1P levels (proven reserves) and some even below their PDP levels (proved developed producing). You get the probables, land and tax pools for free. Some also pay shareholders healthy dividends (regular and specials). Yields of over 7% are available from many ideas on our Action BUY List, which is hard to beat in other market sectors.
Many of the service companies are trading debt free or near debt free and are paying decent 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 Q3/23 and for crude to trade in Q4/23 above US$90/b. That should give the energy sector large capital appreciation potential.
As the market decline unfolds, we expect additional BUY signals to be 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% is 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 bounce level of 70%. We are closing in on the next BUY signals from this key indicator. 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 16 companies covered in our report to be issued tomorrow June 1st, become a subscriber. You will also get our timely BUY Action Alerts when they are issued. 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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