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 35 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:
The stock and bond markets rejoiced and prices rose over the last two weeks as muted inflation data gave investors confidence that the end of Fed Funds increases was here. Some bond bulls have even come out with forecasts of Fed rate cuts in early 2024. We do not concur!
Yes, the CPI and PPI fell in October but the majority was due to two items: lower energy and lower used car prices. On energy we see a bit more downside to the US$72-75/b level (today US$77.18/b) but then as we head into 2024 we expect a tightening supply/demand situation to take WTI to >US$90/b in 2H/24, with even some prints over US$100/b. Regarding the used auto side, the recent wage increases won by the UAW mean new car and truck prices will rise next year and this could provide a lift to the used vehicle market as buyers face sticker price shock and budget constraints.
Some of the noteworthy economic data for the world’s largest economy are:
- Retail Sales in October fell 0.1% compared to a rise of 0.9% in the prior month. Given inflation, unit sales volumes fell over 3%.
- PPI fell 0.5% month over month thanks to lower gasoline prices and used car prices. Both should reverse in the coming months. Gasoline prices first, once winter demand lifts overall consumption. CPI rose 3.2% in October but core CPI remains high at 4.0%.
- The US Treasury needs to raise US$2.5T in 2024 of which US$1.8T is to fund the deficit and the rest maturing issues. To fund this gargantuan amount the Treasury is issuing less long term issues and increasing T-Bill issuance. The Treasury plans on using Bills for 22.4% of 2024 funding requirements versus its normal range of 15-20%. This level is a historic high.
- Moody’s downgraded the outlook for the US to negative from stable due to the downside risk to the US’s fiscal strength and the lack of progress to reign in deficits.
- US M2 money supply is now contracting at its deepest level this century. It is a negative 5% versus last year and could imply a recession coming in 2024.
- Congress passed a funding bill that moves the needle to Q1/24 and gives time for the House to pass individual appropriation bills. This will avert a government shutdown if the Senate votes for this deal and then President Biden signs it into law. The new Speaker Mike Johnson may have a victory here but he has alienated his right wing Republican members.
- US office space got another whammy as WeWork filed for bankruptcy and plans to shed most of its lease space that is uneconomic. Landlords will face funding problems and may also file for bankruptcy.
Overall, this is mixed data, some weaker inflation data but also weakening consumer spending. We expect that earnings will get more attention. If we see more downgrade announcements then the recent stock market price rise will reverse. Part of the recent strength was due to hedge funds that had been shorting the market, reversing their positions and causing price gaps upward, especially for the Magnificent Seven.
On the two wars fronts:
- The US is cutting back sending military aid to Ukraine as its funding has run out (US$1B left as at November 10th according to the Pentagon). It needs the new appropriation bill President Biden sent to Congress but this has been stalled. Ukraine’s offensive action may soon turn into a winter holding action.
- Slovakia has stopped sending aid to Ukraine as there is a border skirmish between the two countries and Ukraine has been dumping grain into the Slovakian market harming Slovakia’s farmers.
- The destruction of the Nord Stream pipeline has been confirmed by the Washington Post as being done by Ukrainian Special Operations Forces with the help of the CIA. The Ukrainian Colonel in charge, Roman Chervinsky has confirmed the operation.
- NATO has confirmed to Ukraine that it cannot meet its commitment to supply one million artillery shells in 2024 due to the deplorable state of the defense industries in their member countries. The US is also emptying its arsenal for both Ukraine and Israel and Biden’s administration is proposing more spending to help the defense industry retool to add more capacity and meet international needs and restock US supplies.
Market Update: The very narrow market rise over the last few weeks is due to the seven large cap AI stocks being chased by hedge funds that were short the names. The market is overbought and we see the next significant move to be to the downside. Stay patient with cash reserves.
Once this correction has lowered stock prices and fear has returned to the markets, be ready to buy the bargains that develop. As the general stock market declines, we expect energy prices to back off some more and the Energy Bullish Percent Index to 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. Many energy stocks are down from their 2023 highs, and many trade around 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 various wars (Israel/Hamas, Israel/Hezbollah and Russia/Ukraine). If Iran gets involved directly, versus now via their proxies, then crude will get a big quick lift as the broader war increases uncertainty about oil production and shipments from the Middle East. Any blockades of major crude transportation routes could provide a quick lift to prices.
Bearish pressure for crude comes from the weakness in OECD economies in the US, Europe and Japan. The significant rise in US production this year and weakening US demand (see next section) is justification enough for crude to retreat some more. I now expect WTI crude to bottom between US$72-US$75/b over the coming weeks. More production is expected from non-OPEC in 2024 to alleviate concern about OPEC production levels. Brazil and Guyana should together add 670 Kb/d according to Economist data and Canada will have TMX volumes moving west to BC ports for export to Asia. Iran is a wild card. They announced this week that they were going to lift production to 3.4 Mb/d this month (3.1 Mb/d in October).
EIA Weekly Oil Data: The EIA data (data cut-off November 10th) was bearish for crude prices. Commercial Crude Stocks rose 3.6 Mb to 439.4 Mb. The SPR saw no change on the week. Motor Gasoline inventories fell 1.5 Mb. Refinery activity rose 0.9% to 86.1% from 85.2% last week and is down from 92.9%, seen last year at this time. Distillate Fuels saw a decline of 1.4 Mb/d. US crude production stayed at their yearly high of 13.2 Mb/d. Production in 2023 is up 1,100 Kb/d above year ago levels, as longer reach horizontal wells with improved fracking procedures and more sand, are producing more crude. Cushing inventories rose 1.9 Mb to 25.0 Mb. Motor Gasoline consumption fell 544 Kb/d to 8.95 Mb/d. Jet Fuel saw a decline of 29 Kb/d to 1.79 Mb/d. Total Demand fell 1.64 Mb/d to 20.08 Mb/d as Propane demand fell 437 Kb/d to 854 Kb/d and Other Oils usage fell 586 Kb/d to 4.00 Mb/d. Total US consumption is below last year on a year-to-date basis by 0.6%. Consumption was at 20.20 Mb/d versus 20.32 Mb/d last year.
OPEC Monthly Report:
The November 2023 report released November 13 showed that in October OPEC saw an increase in production of 80 Kb/d to 27.9 Mb/d as Angola (up 51 Kb/d to 1.17 Mb/d) and Iran (up 46 Kb/d to 3.12 Mb/d) raised production. Saudi Arabia cut back production by 26 Kb/d to 8.99 Mb/d. So far total OPEC cuts since the start of cutbacks in July 2023 have been only 289 Kb/d (June 2023 production at 28.2 Mb/d to October’s 27.9 Mb/d of production) and are far away from the stated cut of 1.2 Mb/d by OPEC and the additional cut of 1.0 Mb/d by Saudi Arabia. So while cutbacks in production, they are not the 2.2 Mb/d cuts that were announced. Of note US production increases since July 2023 have more than offset the real OPEC cuts by a large margin.
The market is ignoring the actual production data and is listening to the OPEC pronouncements and their gadflies. Just yesterday a trial balloon announcement of keeping the 2.2 Mb/d cuts into the end of Q1/24 gave crude a small bounce. This increase has reversed today and then given up more ground.
EIA Weekly Natural Gas Data: The EIA data released last Thursday November 2nd (next data release November 16th as they are updating their website) was neutral for natural gas prices as it showed a build of 79 Bcf for the week ending October 27. Storage is now at 3.78 Tcf. The biggest increase was in the Midwest (25 Bcf). This compares to the five-year injection rate of 23 Bcf and the 2022 injection of 79 Bcf. US Storage is now 8.4% above last year’s level of 3.49 Tcf and 5.7% above the five year average of 3.57 Tcf. NYMEX is today priced at a very healthy US$3.17/mcf.
Our forecast is for NYMEX to rise above US$3.50/mcf during late November as cooler winter weather arrives. NYMEX should rise over US$4.50/mcf during the coldest days of winter 2023-2024. Europe should see tightened supplies this winter as war premiums impact available LNG cargoes. European gas prices have risen in recent weeks as Egypt LNG shipments have been halted. The source of their gas exports was from the Israeli offshore natural gas fields.
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 November 10th the US rig count fell two rigs to 616 rigs (down 7 rigs last week). Rig activity is now 21% below the level of 779 in 2022. Of the total rigs working last week, 494 were drilling for oil and this is 21% below last year’s level of 622 rigs working. The natural gas rig count is down 24% from last year’s 155 rigs, now at 118 rigs. The natural gas focused Haynesville now has 37 rigs working down from 71 rigs working last year or down by 48%.
In Canada, there was a three rig increase (no change in the prior week) at 199 rigs. Canadian activity is flat with last year when 200 rigs were working. Activity for oil is down 6% to 125 rigs compared to 133 last year. Activity for natural gas is up 10% at 74 rigs up from 67 last year. The main 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 262, up 12 points from last week due to the overall market bullish enthusiasm. As the general market rolls over and declines and the Dow Jones Industrials heads downward and breaches 30,000, we expect the S&P/TSX Energy Index to fall below 230, and could reach 220. This would trigger the next 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 in 2024 as winter demand should exceed supplies.
CONCLUSION:
We see the crude price decline in March to US$64/b as being the low for 2023. The current decline from the high of US$95.03/b in late September should find a bottom at the lower end of the US$72-75/b in the coming weeks.
Our long term optimism on the sector is due to our view that in 2H/24 WTI will see price spikes over US$100/b as demand rises and exceeds supplies. Before the end of this decade we expect WTI 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, a high beta area, is normally one that corrects during market declines. The S&P Energy Sector Bullish Percent Index recently was at a 2023 high of 96%, a warning signal of too much euphoria by energy stock investors. It fell to 48% yesterday. It would send out a BUY signal as it falls below 10% Bullishness.
WTI is priced today at US$77.18/b up US$1.00/b from last week. As the stock market retreat continues we should see WTI crude get dragged down further. We expect to take advantage of the bargains in energy stock prices as this downside pressure gets extreme. 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 November SER Monthly to be released on November 23rd will cover 26 of the 35 covered companies Q3/23 results. If interested in this upcoming report become a subscriber. Go to https://bit.ly/2FRrp6k.
Our Q4/23 quarterly Webinar takes place on Thursday November 23rd at 7:00PM MT. We plan to go over the best ideas we see from our universe of Conservative, Growth and Entrepreneurial companies we cover. Subscribers can then decide which ideas they want to consider adding to their energy portion of their portfolios when we get the next low risk BUY window. To join this webinar one needs to be a subscriber. Subscribers should send topics they would like me to cover during the webinar to [email protected].
We are planning to add three or four new energy ideas to our Coverage List in early 2024 that we see as exciting ideas for this energy super cycle.
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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