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:
The fiscal situation in the US is getting worse and the moves by the Federal Reserve to restrain inflation pressures and cool the pace of economic growth, funded by record budget deficits, is a losing battle so far. Lifting the price of money and removing liquidity (QT) has not yet worked. The Federal spending largesse from both the previous Trump administration and now the Biden administration has lifted total debt to record levels of US$32.7T. With the need for nearly US$2T of new money this year and debt renewals, the US Treasury will be issuing around US$1T of new debt this quarter. With historic foreign US debt buyers like China and Japan not bidding, the price of debt continues to rise and the cost of interest for the US Treasury this year will reach US$1T. With tax revenues forecast at only US$4.7T, debt servicing costs are 21% of the funds coming in. This is the highest percentage ever and the cost of borrowing is still rising. Just the 30-day T-bill rate has risen from 4.52% in March to 5.57% currently and the Treasury borrows a lot of its funding in the short term duration market.
Some of the positive and negative issues facing the US and other major economies are:
- For the US:
- The US fiscal problem this year is the spend on the war in Ukraine and major entitlement spending. The US deficit is projected by the CBO at US$1.7T+. Revenues (corporate and individual taxes) are down US$400B from prior estimates. Social Security spend is up 11% to US$111B as more retirees get checks and the inflation adjustments add to per person costs. Medicare is forecast to rise 18% to US$104B.
- The US banking system is still fragile as regulatory capital increases (effective October 1st) mean less ability for banks to lend and those banks with large real estate portfolios (commercial real estate the big headache) are facing large write-downs. Moody’s yesterday downgraded 10 small and midsize lenders. The largest entities in the list include US Bancorp, Bank of NY Mellon and State Street Corp. More downgrades are expected and the pressure on deposits of regional banks continues.
- The pressure of wage demands and spreading union strikes by members wanting to get real wage increases after many years of real wage declines is of concern. The UPS and airline deals were way above what the Fed wants to see. The July employment report showed job growth of 187K jobs, slightly below the forecast of 200K jobs. In the report the problem was that average hourly earnings grew by 4.4% and the unemployment rate fell to 3.5% from 3.6% in June. The Fed needs hourly earnings to grow at a slower rate and the unemployment rate to rise if they are going to halt rate increases. Tomorrow we get CPI data and on Friday PPI data. The July increase in energy and food prices may end up higher than estimates. The effective Fed Funds rate is now as high as it was pre ‘08 and the financial crisis that ensued.
- For the rest of the major economies in the world:
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- China is facing a difficult economic period with exports falling 14.5% and imports down 12.4% in July. They are the second largest consumer of oil and the largest importer but have reduced imports with the US$18/b rise (from the June low of US$66.80/b).
- In the UK, June consumer inflation was up 7.9% from the year before. The Bank of England raised its key rate for the 14th time in a row. Their rate is now 5.25% up 25 BP.
The war in Ukraine is seeing more escalations as one side hits the other. This is now spreading to daily drone attacks on Moscow by Ukraine and the Black Sea Ukrainian grain ports being blockaded and attacked by Russia. A lot of the grain infrastructure at the export Ukrainian ports has been severely damaged.
Some recent events:
- A Ukrainian drone hit the engine room of a Russian flagged Sig oil tanker in the Kerch strait (connecting the Black Sea and the Sea of Azov and a shipping point for Russian crude and products to buyers). US intelligence helped with location data according to reports. The US and NATO support looks more and more that the war is expanding and Russia may escalate in retaliation. The focus of targeting the export income of each country is of concern to countries buying the grain and energy each produces.
- Ukrainian drones and cruise missiles hit locations in Moscow including three that hit an elite office building and residential skyscraper that many of Russia’s oligarchs use. Nearby office buildings of the government ministries were also hit. Targeting support from the US helped their drones and cruise missiles. Another example happened on August 4th. Ukrainian drones attacked the Russian naval base at Novorossiysk directed by nearby US recon aircraft in international space.
- The land war is not progressing as the optimists had forecasted and the narrative of progress that Ukraine needs to continue to get military support from NATO is not there. Pressure for a negotiated settlement is rising. Russian defensive lines have held and Russian troops are holding their lines. This war of attrition will soon face wet conditions starting in October so Ukraine needs to see progress before the weather ends this campaign season.
- Russia has warned that these attacks will be responded to with severe consequences for Ukraine. Some of the reports indicate Russia is considering:
- Putin has authorized the cutting of undersea communication cables of the countries ‘enemies’.
- The Wagner group has been repositioned in Belarus and with some of that country’s troops training to fight with Wagner forces, speculation is rising that a combined force of 50,000 troops could be ordered to attack Ukraine from the north. This would require Ukraine to move their best troops from the eastern and southern offensives to the north to halt this attack.
- Russia is on the offensive now in the northeast but this has not been confirmed.
- An attempt to assassinate President Zelensky was foiled by Ukrainian intelligence. Russia has spies near the fighting lines and would like to bomb locations that he is visiting to decapitate the leadership of the country.
Market Movement: We are watching the 33,600 level for the Dow (today at 35,159), 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.
Get ready to be buyers once this expected correction has lowered stock prices and fear has returned to the markets. The S&P Energy Bullish Percent Index is at an extreme high reading of 91% bullish, pushing near record highs. For traders this means they may want to take profits. Our view is to wait for the next low risk BUY window as we see much higher prices in the years ahead and want to build positions for the commodity super cycle that we see lasting into the end of the decade. As the general stock market declines we expect energy prices to back off and the Energy Bullish Percent Index retreat back to below 10% and ring the bell for the next BUY window. The last BUY signal was in March and we added 14 new ideas to our Action BUY List.
Once the general stock market is oversold again and energy stocks retreat we expect to add additional energy investment ideas. Many energy stocks are down over 50% from their 2022 highs, and many trade again below Proved Developed Producing (PDP) Reserve valuations levels. 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 announcements of production cuts by Saudi Arabia and Russia which they plan to extend into September. This squeezed crude short sellers and drove the price of WTI up by over US$17/b over the last six weeks. The question is are these real barrel cuts at the levels announced or just more rhetoric to squeeze shorts?
Bearish pressure for crude comes from the weakness in OECD economies in the US, Europe and Japan. China’s recent trade and manufacturing weakness and sluggish consumer spending add to the economic problems in that country. Libya may surprise in the OPEC report tomorrow as they have lifted Force Majeure measures and have increased production. Exploration activity has also resumed with ENI and BP becoming more active. If Russia does not cut production by 500 Kb/d into the end of September as they announced, then the agreement between Saudi Arabia and Russia will gain skepticism and crude prices will retreat. We are in the skeptical camp about the real barrel cuts by the both of them. Russia may be the big cheater on this deal.
EIA Weekly Oil Data: The EIA data (data cut-off August 4th) was bearish for crude prices as Crude Commercial Crude Stocks rose 5.9Mb (forecast a decline of 233 K) to 445.6 Mb as Net Imports rose 2.94 Mb/d or 20.6 Mb on the week – WOW! Storage is now 13.6 Mb above last year’s 432 Mb in Commercial Stocks. The SPR saw its first injection in quite some time. It was an increase of 1.0 Mb to 347.8 Mb. Motor Gasoline inventories fell 2.7 Mb while Distillate Fuels saw a decline of 1.7 Mb/d. Refinery Utilization rose 1.1% to 93.8%. US crude production surprised forecasts with a rise of 400 Kb/d to 12.6 Mb/d and is now 400 Kb/d above year ago levels. Cushing inventories rose 100 Kb to 34.6 Mb. Motor Gasoline consumption rose 464 Kb/d to 9.30 Mb/d as the active summer holiday driving season continues. Jet Fuel saw a rise of 80 Kb/d to 1.81 Mb/d. Total Demand rose 704 Kb/d to 20.73Mb as Other Oils consumption rose 412 Kb/d to 5.00 Mb/d. Total US consumption is now above last year. This week consumption was at 20.7 Mb/d versus 19.47 Mb/d last year at this time.
EIA Weekly Natural Gas Data: The EIA data released August 3rd was very bullish for natural gas prices as it showed a build of a very low 14 Bcf for the week ending July 16th as electricity demand rose sharply. Storage is now at 3.00 Tcf. The biggest increase was in the Midwest (18 Bcf) while there was a decline in storage in the South Central area of 15 Bcf. This compares to the five-year injection rate of 36 Bcf and the 2022 injection of 41 Bcf. US Storage is now 22.4% above last year’s level of 2.45 Tcf and 12.0% above the five year average of 2.68 Tcf. NYMEX has lifted nearly $0.50 over the last week to today’s level of US$2.96/mcf. Electricity availability is very tight in many places across the US and rolling blackouts could occur in the coming weeks if temperatures again rise over 110 F degrees. Many electricity providers have requested less usage during the peak hours so as not to face the blackouts.
Our forecast is for NYMEX to rise >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 August 4th the US rig count fell five rigs (down five rigs last week) to 659 rigs. Rig activity is now 14% below the level of 764 in 2022. Of the total rigs working last week, 525 were drilling for oil and this is 12% below last year’s level of 598 rigs working. The natural gas rig count is down 20% from last year’s 161 rigs, now at 128 rigs which will impact production levels materially in the coming months. The natural gas focused Haynesville now has 44 rigs working down from 69 rigs working last year or down by 36%. Natural gas supplies could fall 2-3 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 and winter demand ramp up.
In Canada, there was a five rig decrease in the rig count (up six rigs last week) to 188 rigs. Canadian activity is down 7% versus last year when 203 rigs were working. Activity for oil is down 16% to 118 rigs compared to 140 last year. Activity for natural gas is at 70 versus 63 last year. The main focus on natural gas drilling has been on the liquids rich condensate Montney and Duvernay plays.
Catch the Energy Conference Update: Tickets are now on sale for the public. Become a subscriber and get two free tickets to the conference (tickets to the public are on sale at $119 per ticket each during the early bird window into the start of September). To find out more go to www.catchtheenergyconference.com . We did sell out last year so if you would like to attend please get your tickets as soon as possible. Thank you to our Sponsors, Exhibitors and Presenters. It is going to be a great lineup this year!
Energy Stock Market: The S&P/TSX Energy Index today is at 254 up 12 points from last week on the rise in WTI to >US$84/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 during Q4/23 as demand recovers and demand then will clearly exceed 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 as we enter the lower demand period of Fall. Our long term optimism on the sector is due to our view that in Q4/23 we will see WTI breaching US$90/b and in 2024 US$100/b as demand rises and exceeds supplies. Before the end of this decade we expect prices will exceed the high in 2008 of US$147.27/b. 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$84.13/b, up over US$4/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) over the July/August/September period. 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 (200-300 Kb/d) but it will sell more crude and products via eastern ports to its major buyers in China, India and the Middle East. These Middle East producers are buying Russian products at discounts to Brent (naphtha, jet fuel, gasoline, propane etc.) and then sell their crude oil at full Brent pricing. The August OPEC Monthly Report comes out tomorrow Thursday August 10th. Some forecasters see the Saudi cuts for July at 311 Kb/d, others at 500 Kb/d and the most bullish at 860 Kb/d. If overall OPEC+ cuts are less than 600 Kb/d then crude prices will reverse. If more than 860 Kb/d then the price lift will continue. Saudi cuts will be greater than the overall OPEC amount but should be offset by smaller member producers increasing production in their desperate need for cash. In the July report overall OPEC June production rose 91 Kb/d and the Saudi’s raised production to nearly 10.0 Mb/d, up 22 Kb/d during the month. OPEC was supposed to cut production that month by 400 Kb/d. We will see tomorrow if the large production cut in July met the forecast. If not, will it show another round of rhetorical barrel cuts? A lower cut gives OPEC more revenue. Their production cut announcements have pushed oil prices up nearly US$20/b (from early May) and successfully shafted crude commodity shorts.
If our stock market view is correct then we should see WTI crude trading below US$70/b again sometime this fall. 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 Report comes out Thursday August 17th. We start the Q2/23 earnings results and review 21 companies in this issue. We intend to terminate Coverage of one E&P entity which is increasing its debt load while seeing a production decline. We go through all the reasons for this in that report. If interested in our review of the covered companies in our upcoming Q2/23 result write-ups and the info on the terminated company then 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 are available now for $119 each at www.catchtheenergyconference.com or one can buy a quarterly subscription to become familiar with our work and get two complimentary tickets to the event.
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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