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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 36 energy, energy service and pipeline & infrastructure companies with regular quarterly updates. We also hold quarterly webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more.
Economic, Political & Military Update:
Today’s FOMC meeting and press conference by Chairman Powell thereafter, reiterated their plan to have three rate cuts of 25 BP each later this year. When, was left ambiguous. While there has been significant progress on the inflation front over the last year, recent CPI and PPI data are showing inflation re-accelerating. With the recent US$12/b increase in WTI crude (from early February) upcoming headline inflation may prove problematic for any Fed rate pivot. The Chairman said in his press conference “the data hasn’t really changed the overall story, which is that inflation is moving down gradually, on sometimes bumpy road”. US 10-year Treasury yields ended the day at 4.27% down from the high earlier in the week of 4.34% but above the early February rate of 3.87% due to the inflation problem. The market had been expecting that the Fed would make its first rate cut in June but if the inflation data remains hot then the pivot may not happen at that meeting. The problem then becomes the election cycle and historically the Fed has not wanted to upset the political apple cart during this tense time for the political elite. The challenge for the Fed is that they are navigating two risks. The first is that they ease too soon allowing inflation to re-ignite and then they face the mid-1970’s inflation challenge. The second is that they move too slowly and the economy falls from a ‘soft landing’ to a full on recession.
Mixed economic data in the US continues with some data showing a slowing economy but others indicating inflation reversings to the upside. This stagflation pivot is not what the bond and stock market want to see. So let’s go through the recent economic & political releases of significance.
- The National Association of Independent Business (NFIB) reported that their measure of the economy fell 0.5 points to 89.4 the sixth decline in the past seven months to a nine month low. Members reported rising unemployment and falling business optimism.
- PPI came in at up 0.6%, month over month in February or over 7% annualized. This was much hotter than the 0.3% expected. Excluding the rising energy and food prices, PPI still rose at an uncomfortable high of 0.4% in the month.
- February Retail Sales continued strong with a rise of 0.6% but the main contributor was the increase in sales for gasoline as the price rose. Excluding energy, it appears that the consumer is getting tapped out and spending on non-essentials is losing steam and was flat in the month.
- The NY Fed noted last week that credit card and auto loans delinquencies have ticked up to the highest level in a decade, as consumer budgets are stretched and debt and interest payments have been the casualty of this squeeze. Families are feeling a significant strain that is shaping spending choices for middle and lower income families.
- China is seeing a pick up in exports and manufacturing, but consumer demand remains weak. Industrial output rose 7% in the first two months of the year and fixed asset investment rose by 4.2%, according to the China National Bureau of Statistics. This helped to lift energy prices after they were released.
On the wars front:
- Ukraine used more drones to attack critical Russian energy infrastructure (three key refineries in western Russia). This may impact Russia’s exports by over 600,000 b/d according to recent reports and has lifted crude prices. Ukraine had found a new way to deter Russia and plans on sending increasing swarms of drones into Russia to sway the Russian people against Putin’s misadventure.
- Newsweek reports that Ukraine special forces have attempted to attack a Russian nuclear plant in the border region of Kursk with at least five kamikaze drones and one S-200 missile. To date Ukraine has seen its nuclear facilities attacked by Russia and now it has done the same to Russia as the war is stalemated on the ground as Ukraine awaits more munitions from the west to reverse Russian land gains over the last few months.
- France’s President Macron is trying a two tier strategy to end the war in Ukraine. On one side he is asking for a ceasefire for the window of the Paris Olympics and on the other hand has threatened to send French troops into Ukraine (along with other EU NATO countries) with a force goal of 60,000 to fight Russia and free eastern Ukraine. President Putin has responded that if this occurs then WWIII will have started and the nuclear option is on the table. Hopefully this is just posturing as NATO troops in their uniforms would be a serious escalation. Having special forces in the Ukrainian foreign forces is one thing but in NATO uniforms would be what Russia has surmised as the goal of Europe all along. Russia reports that they have picked up transmissions in English and French on the battlefield.
- Yemen’s Houthis have received hypersonic missiles from Iran and have fired three in the Red Sea over the last week. Iran’s support continues the challenge for international shipping in the region and ties up warships of many nations.
Market Update: We remain concerned about the general stock market which is overbought due to the AI craze. When, not if, the general stock market retreats energy stocks, which are high beta, should weaken and test the lows of early December. When that happens be ready to buy the bargains that develop across all markets. 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.
Bullish pressure for crude prices comes from the Ukrainian success in attacking refineries in western Russia and the Iranian backed Houthis Red Sea and Gulf Of Aden attacks. OPEC is seriously considering extending its official cuts to the end of 2024 with the hope this tightens up global inventories and raises oil prices much further. Compliance however is still a problem. The area to watch now is China demand. With their recent data release of rising exports they should be needing more oil soon and if they buy aggressively that could boost prices this summer. China has recently booked 10 Very Large Crude Carriers (VLCC’s) to carry crude from the Persian Gulf.
Bearish pressure for crude comes from demand weakness in some OECD economies. Also the US is an exporter of crude (4.89 Mb/d last week) and has been self-sufficient for a number of years. We expect WTI crude prices to reverse their recent upward move to this week’s high of US$83.12/b (close today US$81.68/b) and decline below US$70/b as we enter the spring shoulder season when global demand weakens by 2.0 – 2.5 Mb/d. During the last correction WTI fell (in December) to an intra-day low of US$67.71/b from US$79.60/b, just a few weeks before. Use periods of market and energy price weakness to build up your energy weightings.
EIA Weekly Oil Data: The EIA data released today March 20th showed a modest decline in inventories. US Commercial Crude Inventories fell 2.0 Mb to 445.0 Mb as Net Imports fell 947 Kb/d or 6.6Mb on the week. The Strategic Reserve showed an increase of 0.8 Mb on the week. Refinery levels rose 1.0 points to 87.8%. This compares to 88.6% last year. Motor gasoline inventories fell 3.3 Mb. Distillate fuels saw an increase of 0.6 Mb. Cushing inventories fell 100 Kb to 31.4 Mb.
US Crude production was flat at 13.1 Mb/d and is up 800 Kb/d above last year’s level. Motor Gasoline consumption fell by 235 Kb/d to 8.81 Mb/d while Jet Fuel saw a decline of 14 Kb/d to 1.57 Mb/d. Total Demand fell 1.06 Mb/d to 19.74 Mb/d as Residual fuel demand fell 510 Kb/d and Other Oils saw a decline of 385 Kb/d to 4.65 Mb/d. Year-to-date demand is up 0.6% or at 19.82 Mb/d versus 19.70 Mb/d last year. This of course is bullish for energy prices.
OPEC has extended its production cutbacks to the end of June and members are now talking about extending the official cuts to the end of 2024 to curtail inventories and firm prices up even further. OPEC will decide their next move at a face-to-face meeting in Vienna on June 1st.
EIA Weekly Natural Gas Data:
The natural gas report out last Thursday showed a very small decline in storage as the withdrawal season is nearly over. The withdrawal last week was 9 Bcf versus 84 Bcf in 2023 and the five year withdrawal rate of 62 Bcf. Storage is now at 2.33 Tcf. US Storage is now 16.9% above last year’s level 1.99 Tcf and 37.1% above the five year average of 1.70 Tcf. The warm weather and lower LNG exports have caused natural gas prices to decline.
NYMEX is today priced at US$1.70/mcf. US production is set to decline. Hedge funds have gone massively short of the commodity so any good news could cause prices to elevate quickly as the shorts cover. An outage at a Freeport Texas facility has been out for a month but should be back shipping LNG later this month. The current depressed natural gas prices have been seen before and the industry has slowed drilling which will move inventories into balance later this year.
We recommend buying the very depressed natural gas stocks during periods of market weakness as we see higher prices in Q4/24 and much higher prices in 2025. We plan 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 March 15th, the US rig count rose seven rigs to 629 rigs (it fell seven rigs in the prior week). Rig activity is now 17% below the level of 754 rigs in 2023. Of the total rigs working last week, 510 were drilling for oil and this is 13% below last year’s level of 589 rigs working. The natural gas rig count is down 28% from last year’s 162 rigs, now at 116 rigs due to the depressed natural gas prices at this time. This sharp decline in drilling should in the coming months produce material declines in natural gas production.
In Canada, there was a decline of 18 rigs to 207 rigs (down six rigs in the prior week). Canadian activity is flat with last year’s 207 rigs. Activity for oil is at 128 rigs compared to 122 last year or up by 5%. Activity for natural gas is at 79 rigs, down six rigs from last year. In our discussion with E&P companies they are planning on lower spending during Q1-Q3 due to low natural gas commodity prices. They have mentioned that they might increase activity later in the year, if natural gas prices rise materially as LNG Canada starts up. The industry needs north of $2.50/mcf to see the economics attractive to drill more gas wells. As we get closer to LNG Canada ramping up in Q4/24 and natural gas fills the Coastal GasLInk pipeline, prices should lift. AECO prices are around $1.70/mcf now.
Energy Stock Market: The S&P/TSX Energy Index today is at 277, up six points from last week. We still expect the S&P/TSX Energy Index to fall in the next month or so to below 230, and should bottom around 220-225 and provide the next low risk BUY signal. If so, we expect to be able to add 4-6 new BUY ideas if this view unfolds.
Investors should decide what you want your energy weighting to be for this long energy super cycle. Our BUY 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. We expect that WTI should lift above US$90/b in 2H/24 as winter 2024-2025 demand should exceed supplies at that time and we see recovering economies globally.
CONCLUSION:
We see crude prices falling below US$70/b with a low around US$65-68/b providing the next BUY signal. Longer term we remain very bullish. Our view remains that before the end of this decade we expect to see WTI prices exceeding the high in 2008 of US$147.27/b.
WTI is priced now (as we write this report) at US$81.68/b up US$2/b from last week. We expect to take advantage of the bargains in energy stock prices with new BUY ideas if one more of our BUY signals is triggered. Down market days for energy stocks 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 Report comes out next Thursday March 28th. This report will cover 9 companies that have reported since our last SER report. Reports after this one will cover the remaining companies that we cover. Our new section on ‘TOP PICKS NOW’ covers the best ideas from our five groupings that we cover (Pipelines/Infrastructure/Royalty Companies. Domestic Natural Gas Companies, Domestic Liquids Producers, International E&P Companies and Energy Service Companies). Not every issue will have an idea in every grouping if the stocks in such a group are not at bargain buy levels. If interested in these upcoming reports and the detailed review of their results, become a subscriber. Go to https://bit.ly/2FRrp6k.
We added a new SER Action BUY idea today and sent an Action Alert to paid subscribers. If you want access to our BUY ideas one needs to become a subscriber.
Please save the date for our 2024 ‘Catch The Energy’ conference on Saturday October 19th at MRU. We have received confirmation that the Honourable Brian Jean, Minister of Energy and Minerals of Alberta will be our opening Speaker. We have started to meet with Presenter energy companies and have started signing up presenters for this year’s conference. As this list develops we will start providing you with the names of the Presenting companies in our upcoming reports as we did last year.
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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OP-ED: It’s About Reducing Emissions, Not Oil Demand – OPEC Secretary General Haitham Al Ghais