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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 39 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:
There is some good news on the inflation front to keep Central Banks from raising interest rates but also some data that is not supportive of this end of rate hikes optimistic view. Today the FOMC unanimously voted to raise its key rate by 25 BP (to 5.25 – 5.50%) to a 22-year high and plans to wait for more data before their September meeting to decide if another rate increase is warranted. The ECB is expected to raise its official rate tomorrow as inflation in Europe is much more persistent.
On the positive side supporting an end to the US rate hike cycle are the following:
- CPI and PPI data for June was very muted and heading downward to the 2% Central Bank targets.
- The US Leading Economic Indicator (LEI) declined 0.7% in June following a 0.6% decline in May.
- US regional banks continue to be under asset shrinkage problems and this forces the banks to lessen lending. US$78B was withdrawn from commercial banks a week ago. The FDIC has warned some banks against misreporting their uninsured deposits. Those involved are seeing more deposit outflows.
On the Negative side indicating that the rate rise cycle may not be over are the following:
- Crude prices which were a big part of the inflation declines are now reversing. WTI is up US$6/b from the average of Q2/23 @ US$73.99/b. This will add to CPI and PPI pressure in the coming months.
- Electricity prices have risen double digits as electricity providers are running flat out and brownouts are expected during key usage periods from 4PM to 9PM.
- Food inflation is persistent as drought conditions mean smaller and less nutritious crops. Animal herds are shrinking on higher feed costs and lack of water, which mean higher meat prices in coming months.
- India which exports 40% of global rice supplies has placed restrictions on rice exports. The country is worried about lower crops this year due to heavy monsoon rains in the north and deficit rain in other parts of the country. Panic buying has arrived around the world. In the US a bag of 9 kg of rice previously sold for US$15-16, and now sells for US$46.99 for the bag.
- The UPS contract agreement has significant wage increases for the Teamsters Union members (340,000 members). The rank and file start voting on the tentative deal on August 3rd.
- The entertainment industry strikes have spread and the issues of AI and its usage has made this a strike that could last quite a while and be very costly.
- With a win by the Teamsters at UPS, their next big battle is with the auto manufacturers and they could strike in September if a lucrative deal is not agreed to. Here it is about EV’s needing less employees to build cars and what happens to laid off workers.
The war in Ukraine is seeing more escalations as one side hits the other and this is now spreading to daily drone attacks on Moscow by Ukraine and the Black Sea Ukrainian ports being blockaded and attacked by Russia.
Some recent events:
- Russia did not renew the export agreement allowing Ukraine to ship grain to the third world sponsored by the UN. Russia agreed to the prior deal as it was supposed to allow Russia to sell its grains around the world. One of its agricultural banks was to have access to the SWIFT financial system and western shipping and insurance as well; which did not occur. They now have warned all shipping heading into Ukrainian ports that they will be considered ‘potential carriers of military cargo’ and stopped or sunk. Wheat prices rocketed higher by 15% in the days thereafter.
- Ukraine in retaliation sent drones to attack military depots of munitions and fuel in Russian held Crimea as well as the main bridge from Crimea to the mainland.
- Russia then attacked the ports in Odessa and destroyed infrastructure and grain elevators and storage facilities.
- Ukraine then sent drones attacking multiple sites around Moscow. The attacks were targeted against military facilities and the oligarch living areas.
- Russia then moved to attack ports in southern Ukraine near the Romanian border (Reni) and destroyed grain and grain infrastructure. What is of importance is that they used new modified Iranian drones called Doritos that have more accuracy and range.
- Russia, to move its grain is giving cheap prices to its African buyers which keep them supporting the Russian regime and gaining the food that they need. Other buyers are getting grain but shipping routes have had to be changed.
The move by Russia against ports near NATO member Romania is considered by Europe as a ‘massive escalation’ by Moscow. The only way now for Ukraine to ship grain is via truck and rail to nearby countries and see if they can move it to UN storage facilities and to countries getting this aid.
Market Movement: Overall earnings expectations for the S&P 500 are a decline of 7% in earnings comparisons from last year. If results come in worse or guidance is negative then the markets exuberance will reverse. Stock multiples are high and if earnings are heading downward there can be a material near term correction. We are watching the 33,600 level for the Dow, which if breached would complete a topping formation for the Dow. A close below 32,600 would set up the waterfall decline phase to below 30,000. Stay patient with cash reserves and be ready to BUY at the next low risk entry point. Don’t get trapped by this current euphoria.
The start of energy earnings results shows weaker comparisons. Last year in Q2/22 WTI prices averaged US$108.57/b and this year US$73.99/b or down by 32%. Chevron reported cash flow down 12.5% to US$6.3B from US$7.2B in Q2/22. Today (the first Canadian E & P Company to report) Crescent Point Energy (CPG-T) reported cash flow from operations down 12.7% from a year ago. Net Income at CPG fell 38% from $331.5M to $205.4M. So comparison this quarter may prove disappointing especially for natural gas focused entities. Last year AECO traded at C$6.27/mcf and this year at C$2.35/mcf, or down by 63%.
Get ready to be buyers once this expected correction has lowered stock prices and fear has returned to the markets. The CNN Fear & Greed Index was recently at an extreme greed reading of 84, pushing near a record high. Bottoms usually occur below a 20 reading.
We are waiting for the stock market to get oversold again 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 10% and triggers the next BUY signal.
Bullish pressure for crude prices comes from the announcements of August production cuts by Saudi Arabia, and Russia. This squeezed crude short sellers and drove the price of WTI up by over US$10/b over the last four weeks. The question is are these real barrel cuts at the levels announced or just more rhetoric to squeeze shorts. The cuts that have been announced have been mostly of heavier sour grades, while light oil grades remain plentiful. Iraqi exports via Turkey remain held up by the Iraqi government adding to the tightness.
Bearish pressure for crude comes from the weakness in economies in the US, Europe (Germany now officially in recession) and Japan.
EIA Weekly Oil Data: The EIA data (data cut-off July 21st) was mixed for crude prices as Crude Commercial Crude Stocks fell 0.6 Mb (forecast a decline of 2.35 Mb) to 456.8 Mb as Net Imports fell 1.58 Mb/d or 11.1 Mb on the week. Storage is now 34.7 Mb above last year’s 422.1 Mb in Commercial Stocks. The SPR saw no change again last week, the second such result this year. Motor Gasoline inventories fell 0.8 Mb while Distillate Fuels saw a small decline of 0.2 Mb/d. Refinery Utilization fell 0.9% to 93.4%. US crude production fell due to the lack of drilling and came in at 12.2 Mb/d down 100 Kb/d from the prior week. Compared to a year ago US Crude Production is only up 100 Kb/d. Cushing inventories fell 2.6 Mb to 35.7 Mb. This fits with our view that by winter 2023-2024 WTI crude prices will exceed US$90/b as global demand exceeds global supplies during the highest demand period of winter.
Motor Gasoline consumption rose 84 Kb/d to 8.94 Mb/d as the summer driving season is ongoing. Jet Fuel saw a big increase due to the strong summer holiday travel season and was up 240 Kb/d to 1.81 Mb/d. Total Demand rose 509 Kb/d to 21.3 Mb/d as Other Oils consumption rose 163 Kb/d to 5.56 Mb/d, but the big addition of more flying and jet fuel consumption was the largest contributor to demand.
Total US consumption is now above last year. This week consumption was at 21.3 Mb/d versus 19.98 Mb/d last year at this time. This of course is a big contributor to the bullish case for crude oil now.
EIA Weekly Natural Gas Data: The EIA data released July 21st showed a build of a very low 41 Bcf for the week ending July 14th (injections was expected at 48 Bcf) as electricity demand picked up during this very hot summer. Storage is now at 2.97 Tcf. The biggest increase was in the Midwest (17 Bcf). This compares to the five-year injection rate of 45 Bcf and the 2022 injection of 32 Bcf. US Storage is now 24.0% above last year’s level of 2.40 Tcf and 13.8% above the five year average of 2.61 Tcf. NYMEX is at US$2.64/mcf as summer demand for electricity for air-conditioning has increased significantly. Electricity availability is very tight in many places across the US and rolling blackouts may occur in the coming weeks if temperatures stay over 110 F degrees. Many electricity providers have requested less usage during the peak hours so as not to face the blackouts. Texas gets 49% of state power from gas fired plants and is the most affected by being at capacity. Its other contributors of electricity are wind (22%), Coal (16%), Nuclear (8%) and solar (4%).
Our forecast is for NYMEX to rise to US$3.50/mcf this fall as hurricane season commences and to rise over US$4.50/mcf during winter 2023-2024. Europe may see rising natural gas prices as the Netherlands closes Europe’s largest gas field (Groningen) in October. This will tighten up supplies for winter 2023-2024 and if winter is cold, lift prices materially. 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 July 21st the US rig count fell six rigs (down five rigs last week) to 669 rigs. Rig activity is now 12% below the level of 758 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 the stage for the next upward cycle for crude and natural gas pricing. Of the total rigs working last week, 530 were drilling for oil and this is 12% below last year’s level of 599 rigs working. The natural gas rig count is down 15% from last year’s 155 rigs, now at 131 rigs. The natural gas focused Haynesville now has 44 rigs working down from 68 rigs working last year or down by 35%. The Highly prolific Permian basin saw a decline of four rigs to 333 rigs working compared to 349 rigs working last year. Natural gas supplies could fall 3-4 BCF/d by year end due to the lack of drilling and demand should pick up once annual maintenance is completed at key LNG facilities.
In Canada, there was no change in the rig count (a twelve rig increase last week) to 187 rigs as summer drilling activity picked up. Canadian activity is now only down 4% versus last year when 195 rigs were working. Activity for oil is now at 116 rigs compared to 124 last year. Activity for natural gas was down two rigs to 71 rigs. The focus on natural gas drilling has been on the liquids rich condensate Montney and Duvernay plays.
Energy Stock Market: The S&P/TSX Energy Index today is at 239 up six points from last week on the rise in WTI to US$80/b. As the general market decline unfolds and the Dow Jones Industrials breaches 30,000, we expect the S&P/TSX Energy Index to fall below 200. This would trigger another key BUY signal for us. Get your BUY List ready!
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. We expect that WTI should lift above US$90/b as demand recovers and demand exceeds supplies. That should give the energy sector large capital appreciation potential.
CONCLUSION:
We see the March crude price decline to US$64/b as being the low for 2023. However, we may test levels below US$70/b over the coming weeks. 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 rises and exceeds supplies. The rise this week to US$80 met our third quarter price target forecast. Near term we expect to see a backoff in prices as the general stock market correction impacts most areas and energy is normally one that corrects.
WTI is priced today at US$78.85/b, up nearly US$3/b from last week on the optimism that OPEC+ will cut 1.5 Mb/d (1.0 Mb/d from Saudi Arabia and 500 Kb/d from Russia) in August. We don’t see such a major cut coming as Russia especially needs all the revenues it can get. Yes it will export less from western Baltic ports but will sell more via eastern ports to its major buyers China and India. Therefore if the cuts don’t occur we expect in the coming weeks for crude prices to back off. If our stock market view is correct then we should see WTI crude trading below US$70/b once again. This should be a temporary market event as we see prices rising materially (to over US$90/b) once the cold weather of winter 2023-2024 arrives.
As markets retreat we expect to take advantage of the bargains in energy stock prices. More BUY ideas will be added to our Action BUY List when we get the next low risk BUY window. Down market days during that time are the best days to build your positions for the lengthy energy super cycle we see lasting into the end of the decade.
Our next SER Interim Report comes out Thursday August 17th. We start the Q2/23 earnings results and review this issue. If interested in our review of the 39 covered companies in our upcoming Q2/23 result write-ups please become a subscriber. Go to https://bit.ly/2FRrp6k.
Please also note that we are having our third quarter webinar for subscribers on Thursday August 17th at 7PM MDT. This will be a 90-minute review of Q2/23 reporters and highlighting the best BUYS that we see at that time if the decline we expect in the coming weeks occurs.
Our 2023 ‘Catch The Energy’ has its Presenter line-up almost complete. We expect to have 45 Presenters (10 Presenters from the TMX on Clean Tech and important renewable materials, up from five in 2022). We have taken more space this year and have expanded our booth rooms so attendees can spend more time with the Presenter companies and their senior executives. We have increased MRU capacity to 750 attendees due to the oversold condition last year. Early bird tickets will be available for $119 each in the coming weeks.
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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