Schachter’s Eye on Energy: US Crude Inventories Rise For Commercial Stocks And At Cushing. WTI Likely To Fall Below US$80/b Shortly. – Canadian Energy News, Top Headlines, Commentaries, Features & Events – EnergyNow

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:

Rising inflation pressure globally and decent economic growth are making it harder for the Fed to reduce interest rates. Investors have an expectation that the first of three 25 BP cuts will occur in June. With the rise in crude prices to US$82/b (nearly US$12/b over the last two months) and gasoline prices having risen to US$4.00/gal (from US$3.00 gal earlier this year), we expect that the Fed will be boxed in and will not lower rates in June and maybe even not this year. 

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. 

• One of the crown jewels of the FAANG’s and related names and of AI stocks has been TESLA. The stock rose to US$265 in late 2023 and in mid-March fell to US$160 per share or down by nearly 40% as sales and production fell sharply in China and Germany as they started to have production problems due to supply chain issues. The most serious problem is the sales collapse in China as their local competitors come out with new models at cheaper price points and longer ranges. 
• Apple, another market darling, has fallen in price from US$199.37 in Dec 2023 to $168.49 or down by over 15% as they saw sales in the important China market fall 33% in February 2024 as China directs buyers to Chinese manufacturers. Apple phones are no longer allowed at government buildings and government owned companies. With little new exciting products for tech mavens, Apple may have lost its luster. A breach of US$167 per share could drive it down to US$123 per share, the low of early 2023. 
• Fed watchers are now waiting to see if the Fed holds rates steady to the mixed inflation data and the unwillingness to interfere during an election year but they may decide to slow their QR efforts of selling bonds and mortgages and draining the economy of liquidity. A deceleration in the pace of QT would be seen as a stimulus by market bulls. 
• The Swiss National Bank cut its key rate by 25 BP to 1.5%. This was done not for inflation or economic issues but due to the rapid strength of the franc. The franc has risen 10% against the US dollar this year. 
• Retail entities are seeing lower demand for high end products around the world as the squeeze on household spending worsens. Lululemon fell 12% last week on the day they announced lower net revenue and EPS for their first quarter. Gucci had an even worse sales drop from its key Asian markets.
• Observers of the US Labour market are noting that in the February jobs data, that average weekly hours in manufacturing fell and are declining at a fast pace. Historically companies have cut hours first and then cut the bodies. If this continues with the March data out next Friday then we may not be heading to a soft landing but a recession. 
• Core US Durable Goods Orders rose 0.5% in February (forecast 0.4%) as auto sales were strong on markdowns by manufacturers. 
• Speculative juices remain for the US markets as Bitcoin rose to over US$73,800 a coin and option markets are seeing record buying of short term call options on favored stocks (mainly AI related). 
• US Corporate profits for Q1/24 start in a few weeks and if they disappoint or have negative guidance then the market bubble could burst.

On the wars front:

• Ukraine used more drones to attack additional Russian energy infrastructure (four key refineries in western Russia, nine in total affecting 11% of their refining capacity). This has impacted Russia’s exports by over 500,000 b/d and Russia has now banned sales outside Russia as they need all the supplies for the domestic market and don’t want their consumers to see a big price rise.
• Russia is planning for a large spring offensive as it is creating two new large armies before the end of 2024. This may be to counter NATO or for more offensive in Ukraine if Trump wins the US Presidential election.
• Russia in return is sending massive waves of missiles and drones to knock out the electrical system in Ukraine amidst the ongoing cold winter weather. Quite the tit for tat!

Some of the attacks are hitting Kiev and Lvov, two major population centers. The largest hydroelectric plant at Dnieper has been shut down as a result of these attacks. 

• Russia is supplying crude and products from eastern Russia to North Korea in trade for artillery shells and munitions. Thousands of North Koreans are now building kits for Russia. In return North Korea is getting food and basic supplies that they need; all in contravention of UN sanctions. 
• The US is now pressuring Ukraine to end these refinery strikes as they worry about rising energy prices in the US just before their Presidential election. 
• China has become more aggressive in its back yard against Taiwan and the Philippines as it wants more territory. China has increased its defense spending by 16% to US$223B. They added 4000 fighter aircraft, more landing craft and 20 more warships so that their navy exceeds that of the US. They have stated that reunification of Taiwan will happen quicker and they are gaming different approaches that force Taiwan to react. A maritime blockade and air blockade are the most talked about. 
• The US has now stationed US marines on Kinmen island just 1 mile from the China mainland. The island, a military outpost for the South Korean military, is being expanded with US help. How would the US feel if China or Russia stationed troops and offensive weapons in Cuba or Venezuela? There was almost a WW in October 1962, which was averted when Russian President Kruschev blinked and withdrew the weapons and manpower. This situation is more dangerous, and China is feeling threatened directly on its border by the US. 
• The US military is overstretched and undermanned. It has military bases in 80 different countries and troops stationed in 178 different countries.
• If the US were to broker a ceasefire and hostage release in the coming weeks we could see the crude war premium shrink US$6-9/b. 

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. 

Bearish pressure for crude comes from demand weakness in some OECD economies. Also the US is an exporter of crude (4.18 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 from last week’s high of US$83.12/b (today US$81.30/b). We see a decline below US$70/b as possible 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. In 2023, WTI fell from US$83.53/b in April to US$66.80 in June. In 2021, crude fell from US$76.98 in June to US$61.74/b in August. So remain patient and let the market do its normal swinging around and use the next period of market and energy price weakness to build up your energy weightings. 

EIA Weekly Oil Data: The EIA data released today March 27th showed a healthy increase in inventories. US Commercial Crude Inventories rose 3.2 Mb to 448.2 M. The Strategic Reserve showed an increase of 0.7 Mb on the week to 363.1 Mb and is only 8.5Mb below last year’s 371.6 MB. Refinery levels rose 0.9 points to 88.7%. This compares to 90.3% last year. Motor gasoline inventories fell 1.3 Mb while Distillate fuels saw a decline of 1.2 Mb. Cushing inventories rose 2.1 mb to 33.5 Mb. 

US Crude production was flat at 13.1 Mb/d and is up 900 Kb/d above last year’s level. Motor Gasoline consumption fell by 94 Kb/d to 8.72 Mb/d while Jet Fuel saw a rise of 6 Kb/d to 1.57 Mb/d. Total Demand fell 212 Kb/d to 19.53 Mb/d as Other Oils demand fell 463 Kb/d to 4.19 Mb/d. Year-to-date demand is up only a miniscule 0.1% or at 19.79 Mb/d versus 19.77 Mb/d last year. 

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  small but notable increase in storage levels, much earlier than the early start of this historic injection season. The injection was 7 Bcf last week versus a 58 Bcf decline in 2023 and the five year withdrawal rate of 31 Bcf. Storage is now at 2.33 Tcf. US Storage is now 21.4% above last year’s level of 1.92 Tcf and 41.0% above the five year average of 1.65 Tcf. The warm weather and lower LNG exports have caused natural gas prices to decline. 

NYMEX is today priced at US$1.71/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 in May. 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. The Monthly EIA Productivity Report indicates that natural gas production will fall in April by 167 Mmcf/d to 100.4 Bcf/d from 100.6 Bcf/d in March. The main decline will come from the Haynesville and the Appalachian regions.

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 22nd, the US rig count fell  five rigs to 624 rigs (it fell five rigs in the prior week). Rig activity is now 18% below the level of 758 rigs in 2023. Of the total rigs working last week, 509 were drilling for oil and this is 14% below last year’s level of 593 rigs working. The natural gas rig count is down 31% from last year’s 162 rigs, now at 112 rigs due to the depressed natural gas prices at this time. This sharp decline in drilling should in the coming months produce noticeable declines in natural gas production. 

In Canada, there was a decline of 38 rigs to 169 rigs (down 18 rigs in the prior week) as spring breakup has started. Canadian activity is up 2% from last year’s 165 rigs. Activity for oil is at 91 rigs compared to 86 last year or up by 6%. Activity for natural gas is at 78 rigs, down one rig 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 281, up four points from last week. We still expect the S&P/TSX Energy Index to fall in the coming months 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$81.30/b, no real change 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 tomorrow Thursday March 28th. This report will cover 10 companies that have reported since our last SER report. Reports after this one will cover the remaining companies that we cover. Our new well received 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. In this issue we have three very attractively priced ideas that one can consider now. If interested in these reports and the detailed review of the 10 reporting companies, become a subscriber. Go to https://bit.ly/2FRrp6k.  

We added a new SER Action BUY idea out last week and it is covered in tomorrow’s report to subscribers. If you want access to our new SER Action 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 lis

t develops we will start providing you with the names of the Presenting companies in our upcoming reports as we did last year. We have space for 35 companies in the energy industry of today and 10 spots for energy industry companies of the future (clean-tech, renewable energy, and critical minerals). This mix can change depending upon response from our meetings. If you know of companies that are public or nearing going public and have a compelling story to tell, have them contact us at [email protected]. 

As usual subscribers will receive two complimentary tickets to the event, so another good reason to become a subscriber.

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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