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 FOMC meeting today came out with a hawkish view even though they decided to skip an increase this time. The majority of voting members see two or more increases this year so it now puts July’s meeting as the next window for a rate rise in the Fed Funds rate. Most see higher inflation this year and don’t see unemployment rising as much as previous views. The stock market is taking this on the chin and is down 325 points on the Dow, now at 33,887. In the coming days we shall see how the markets react to the press conference and the hawkish stance announced today.
The Fed remains concerned about core CPI inflation which remains over 5% (5.3% year over year for May) which is over double the 2% target. While the month over month was muted, the concern is that the benefit was due to lower gas prices (down 19.7% from last year when the invasion of Ukraine was front and center). We see this as temporary and that we may soon see much higher inflation from energy. One other problem is rental increases which were up 8.7% from the year earlier. The PPI released today showed core up 0.2% in May and is being ignored because of the temporary energy benefit.
The spring counter-offensive by Ukraine has started but appears to have stalled with only a few small towns recaptured. Both sides have seen large amounts of munitions used and the winner may be the one with the best logistics and supply trains. Ukraine advanced on four fronts to the south and southeast and has gained less than five kilometers of ground according to recent reports. Use of much of the new weaponry provided by NATO has helped with this advance but the Russians have destroyed some of the German Leopard tanks and US Bradley fighting vehicles in the recent skirmishes. Russia has been bragging about this success in defeating the latest NATO weaponry with videos on State TV showing columns of the German tanks being blown up. The numbers are less than when Ukraine knocked out large numbers of Russian tanks during the invasion but the loss of large numbers of new equipment makes the chance of a major offensive success less likely. If this drags on for a few more months with no large gains for Ukraine on the ground it is likely that NATO will push for a diplomatic solution which President Zelensky may find appalling to accept.
China continues to show the US that it can play offense as well as they can. Since 2019 China has had a spy base in Cuba but has now agreed to spend billions of dollars to expand its intelligence gathering. This enhanced signaling facility could scoop up electronic communications (emails, phone calls and satellite transmissions) throughout the southeast of the US where many military bases are located. The US initially denied the base’s existence but were more forthcoming after multiple media reports of China’s espionage signet facility. The US has had multiple eavesdropping facilities near China and now China has increased its own monitoring against the US.
In the meantime more aggressive flights over Taiwan and closer warship maneuvers in the straits shows China is testing Taiwan’s responses. Concern is growing that the US being so involved militarily in Ukraine may give President Xi the confidence that now may be the time to move against Taiwan and put in place an economic blockade.
We are in the bullish camp for this energy super cycle but are concerned about too much speculation in the tech sector, particularly the AI stocks. We suspect a general stock market correction will unfold in the near term which will take the Dow down >10% to below 30,000 (now 33,887. We had expected the market to have broken down already but this has been delayed by the debt ceiling agreement and the recent love affair with AI related stocks. A breach and close below 32,600 for the Dow should start the downside pressure for all the indices. This decline could extend into late July versus our prior expectation of late June. One interesting supportive contrarian indicator is that the CNN Fear & Greed Indicator is today at an Extreme Greed level of 81. One year ago we had a 20 reading which was one of Extreme Fear. This pendulum swings back and forth and now with this extreme optimistic level the next move should concur with our expectation of the Dow Jones Industrials Index falling below 30,000.
Get ready to be buyers on this dip/correction. We are waiting for the next overall 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 5% and triggers a Table Pounding BUY signal.
Bullish pressure for crude prices continues with the June cutbacks by Saudi Arabia, UAE and Kuwait. The expectation that China will add more stimulus to their economy also has aided prices. A potential strike in Norway by offshore workers starting June 29th over wages may play a role in July pricing depending on how long the strike action lasts. Any escalation of tensions or blockade action against Taiwan by China could move crude prices significantly higher.
Bearish pressure for crude comes from the weakness in economies in the US, Europe (Germany now officially in recession) and Japan. The US alone has consumption down by 3.3% from 2022 levels according to today’s EIA Weekly Petroleum Report (see below).
EIA Weekly Oil Data: The EIA data (data cut-off June 9th) was bearish for crude prices as Commercial Crude Stocks rose 7.9 Mb to 467.1 Mb. This is 48.4 Mb above last year’s 418.7 Mb. The SPR saw a release of 1.9 Mb of crude last week. Motor Gasoline inventories rose 2.1 Mb while Distillate Fuels also rose by 2.1 Mb. Refinery Utilization fell 2.1% to 93.7%. Total Stocks (excluding the SPR) grew by 12.1 Mb on the week.
US crude production held at 12.4 Mb/d last week and is up 400 Kb/d from 12.0 Mb/d last year. Cushing inventories rose 1.5 Mb to 42.1 Mb. Motor Gasoline consumption fell 25 Kb/d to 9.19 Mb/d while Jet Fuel saw a rise in demand of 51 Kb/d to 1.54 Mb/d. Total Demand grew 1.19 Mb/d as Other Oils demand lifted 1.75 Mb/d. Propane consumption fell 350 Kb/d to 570 Kb/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 3.3% (19.8 Mb/d versus 20.5 Mb/d).
OPEC Monthly Report:
The June 2023 report released June 13th showed that in May OPEC saw a material decline in production of 464 Kb/d to 28.1 Mb/d. OPEC had planned on cutting 1.2 Mb/d starting in May so while this tightened supply and demand it was not at levels that OPEC pronounced. The Saudis cut 519 Kb/d to 9.98 Mb/d, UAE by 140 Kb/d to 2.89 Mb/d and Kuwait by 95 Kb/d to 2.56 Mb/d. Offsetting this were increases by Angola of 54 Kb/d to 1.15 Mb/d, Iran 61 Kb/d to 2.68 Mb/d and Nigeria up 171 Kb/d to 1.27 Mb/d; as these countries desperately needed revenues to keep their economies functioning. Russia appears to be continuing to produce 10.4 Mb/d and selling 90% of the exports to China and India which are taking advantage of the significant discount Urals is selling at versus Brent (>US$15/b).
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 28.1 Mb/d they produced in May and would imply a shortage situation and declining world inventories. We are not so optimistic but see demand exceeding supply in Q4/23 by around 1.0 Mb/d which could lift WTI crude back over US$90/b.
EIA Weekly Natural Gas Data: The EIA data released last Thursday showed a build of 104 Bcf for the week ending June 2nd. Storage is now at 2.55 Tcf. The biggest increase was in the East (up 30 Bcf). This compares to the five-year injection rate of 83 Bcf and the 2022 injection of 101 Bcf. US Storage is now 28.3% above last year’s level of 1.99 Tcf and 15.1% above the five year average of 2.19 Tcf. NYMEX retreated from US$7.10/mcf in mid-December 2022 to a low of US$1.95/mcf in April. It is up six cents today to US$2.34/mcf. AECO is trading at C$2.13/mcf. We are now in the air-conditioning season so prices should see even more of a 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. More forest fires are being seen around the world as dry conditions leave forests vulnerable. Western Canada is experiencing hotter temperatures and we have been seeing more fires and people having to vacate their communities. This week’s rain may help to get control of many of the fires.
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. 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 June 9th the US rig count was down one rig to 695 rigs (down 15 rigs in the prior week). Rig activity is now 5% below the level of 733 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, 556 were drilling for oil and is below last year’s level of 580 rigs working. The natural gas rig count is down 11% from last year’s 151 rigs, now at 135 rigs. The natural gas focused Haynesville now has 51 rigs working down from 68 rigs working last year or down by 25%.
In Canada, there was a 39 rig increase last week (up 10 last week) to 136 rigs as activity picked up. Canadian activity is down 4% from 141 rigs last year. Activity for oil is now at 85 rigs compared to 94 last year (down 10% from a year ago). Activity for natural gas was up five rigs to 51 rigs and up 5 rigs from the 47 rigs focused on natural gas last year. The focus on drilling has been on the liquids rich condensate Montney and Duvernay plays. This summer we expect the rig count in Canada to recover to over 200 rigs during the peak of 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 and economic woes we may test those lows 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.
WTI is priced today at US$68.68/b down over US$4/b from last week’s US$73.01/b. In the coming weeks we see crude trading towards the bottom of the expected trading range of US$65-74/b. As we near the lower end of this band 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.
Energy Stock Market: The S&P/TSX Energy Index today is at 223 (down 8 points from last week) due to the decline in crude prices. 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.
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. We expect that WTI should lift into the US$80s during Q3/23 and for crude to trade in Q4/23 above US$90/b as demand recovers and demand exceeds supplies. That should give the energy sector large capital appreciation potential.
Our next SER Report comes out tomorrow Thursday (June 15th) and includes the quarterly update on the last of our 37 covered companies. In addition, we have added a new feature ‘Timely Investment Ideas’ with our first recommendation. This international E&P company has significant near term activities that could lift the stock price as the production milestones are achieved. We are likely to have only a few of these investment ideas each year so this is something for investors to read and consider.
If you are interested in access to the review of all 37 companies Q1/23 results covered in our recent reports, 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 two new E&P ideas to add to our Coverage List in July. Both are international E&P companies with material volume growth (development and exploration) in the years ahead.
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