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 focus in the Middle East is on hostage releases with Qatar playing a major role in negotiating hostage releases in return for food, medicine, water and fuel being allowed in via Egypt’s Rafah crossing. Daily needs are over 200 trucks according to the UN but only a fraction of that is being permitted in by Israel. A lower number of trucks have been allowed in due to Israeli fears that Hamas will take most of the items. Their main concern is about fuel, which can be used for more rocket attacks against Israel. On the humanitarian side the fuel is needed in hospitals and kitchens to provide necessary medical care and provide heated meals. A big release of 50 hostages is being proposed by Qatar and the US has been advising Israel to halt its invasion of Gaza so this deal can succeed. Internally in Israel the pressure is on the government to start the invasion and free the hostages and destroy Hamas. It is a very tense situation as Israel has the US’s support to destroy Hamas after the heinous attack on civilians on October 7th but has been held back by the US. The US wants to see if their 10 remaining US hostages will be released in the new exchange. The US also has hundreds of dual citizen Palestinian/US citizens in Gaza and is working to get them out of Gaza with Qatari help.
On the military front, Iran is having its proxies attack Israel from Lebanon (Hezbollah), West Bank (Islamic Jihad) and Yemen (Houthis). Against the US it has its proxies in Syria and Iraq attacking US bases in each country and last reporting shows that over two dozen US service members have been injured (thirteen attacks just over the last week). If the war is to be contained or allowed to be a regional war will be up to the Mullahs in Iran. With daily attacks against Israeli and US forces the odds of this being contained is more and more unlikely. Once the ground offensive in Gaza starts Hezbollah will likely get the go ahead from Tehran to use their 150,000 missiles (guided and unguided) and its 100,000 bloodied soldiers (they fought to keep Assad in power in Syria). They would then attack via southern Lebanon and Syria, making Israel fight a two front war. In the meantime, Yemeni forces will fire more cruise missiles and drones at Israel (US naval forces have already stopped one attack against Eilat). What Israel is worrying about is fighting in the west bank (a three front war if this occurs) and is hitting terrorist targets before they attack to impede this front being expanded.
Some other occurrences:
- Saudi Arabia has urged its citizens to leave Lebanon “Immediately & Now”.
- The US has removed non-emergency personnel and family members from Lebanon and advised US citizens to leave the country.
- Israel has evacuated over 20 villages and 60,000 people from northern Israel as it expects Hezbollah to attack aggressively once the Gaza offensive commences.
- Russia has moved more military assets to its bases in Syria. This included more of their front line fighter jets.
- The US has sent more Iron Dome equipment to Israel to defend northern Israel and to increase defenses for American troops in the area. Israel has agreed to delay the offensive until these supplies are in place over the coming weeks.
- The US is sending Israel artillery shells to be able to defend against future attacks in the north. These were originally destined for Ukraine.
- Israel found files on dead terrorists with instructions on how to make and use cyanide based chemical weapons. This is a new escalation of weapons and brings WWI and WWII banned weapons back in play.
- As Israel regained control of southern Israel they found on some of the terrorist bodies documents showing that any Hamas member bringing back a hostage would be paid US$10,000 each.
- Israel’s navy has stopped a number of attacks by Hamas divers who were trying to enter Israeli towns north of Gaza and take more hostages and kill others.
- The US and allies are pressuring Israel for their exit plan after they defeat Hamas. Will they allow international peacekeepers to go in and control the place and then when safe hold new elections without any terrorist groups allowed to run?
The US economy remains hotter than forecast as consumers keep on spending and increasing their credit card debt to maintain lifestyle. At the same time the most recent forecast for the US deficit has reached US$2T. The Treasury is very active a few times a week with new issues to fund the deficit and roll over maturing debt and there have been quite a few issues that were weak and rates rose. The focus is on the 10-Year Treasury now at 4.92% which would cause havoc if it exceeded 5%. It did touch there but has not yet exceeded this rate. Any real difficulty raising funds or if Congress fails to elect a Speaker and then pass funding needs for the government then we may see a breach of 5% which would tank stock markets. Some forecasters are throwing around rates rising to over 6% before the end of the year. November 17th is the day the US is supposed to run out of current funding. The President’s urgent aid request of US$105B is caught up in this Republican Speaker mess.
Market Movement: We have warned about a breach of the 33,600 level for the Dow (today at 33,225), which completes 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.
Once this correction has lowered stock prices and fear has returned to the markets over the coming weeks, be ready to buy the bargains that develop. As the general stock market declines we expect energy prices to back off 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 2022 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 war drums (Hamas, egged on by Iran) and daily scenes of horrific destruction in Gaza.
Bearish pressure for crude comes from the weakness in OECD economies in the US, Europe and Japan. The significant rise in US production is justification enough on its own for crude to retreat and breach US$80/b if not for the war drums. I still expect WTI crude to bottom between US$75-US$78/b over the coming weeks.
EIA Weekly Oil Data: The EIA data (data cut-off October 20th) was mixed for crude prices. Commercial Crude Stocks rose 1.4 Mb to 421.1 Mb as Net Imports rose 539 Kb/d (3.8 Mb on the week) as Exports fell 468 Kb/d to 5.83 Mb/d (3.3 Mb on the week). The SPR saw no change on the week. Motor Gasoline inventories rose 0.2 Mb. Refinery activity was at 85.6% down 0.5% from the prior week, and down from 88.9% seen last year at this time. Distillate Fuels saw a decline of 1.7 Mb/d. US crude production stayed at their new yearly high of 13.2 Mb/d. Production in 2023 is up 1,200 Kb/d above year ago levels, as longer reach horizontal wells are producing more. Cushing inventories rose 0.2 Mb to 21.2 Mb. Motor Gasoline consumption fell 80 Kb/d to 8.86 Mb/d. Jet Fuel saw a rise of 257 Kb/d to 1.73 Mb/d. Total Demand fell 1.80 Mb/d to 20.10 Mb/d as Propane demand fell 668 Kb/d to 826 Kb/d and Other OIls consumption fell 880 Kb/d to 4.36 Mb/d. Total US consumption is below last year on a year-to-date basis by 0.5%. Consumption was at 20.17 Mb/d versus 20.28 Mb/d last year.
EIA Weekly Natural Gas Data: The EIA data released last Thursday October 19th was bullish for natural gas prices as it showed a build of only 97 Bcf for the week ending October 13th as electricity demand remains strong. Storage is now at 3.63 Tcf. The biggest increase was in the Midwest (29 Bcf). This compares to the five-year injection rate of 67 Bcf and the 2022 injection of 111 Bcf. US Storage is now 9.0% above last year’s level of 3.33 Tcf and 5.1% above the five year average of 3.45 Tcf. NYMEX is today priced at a very healthy US$3.02/mcf.
Our forecast is for NYMEX to rise above US$3.50/mcf during late November as cooler winter weather arrives. We sure have it now in Alberta. NYMEX should rise over US$4.50/mcf during winter 2023-2024. Europe should see tightened supplies this winter as tight supplies and war premiums impact available LNG cargo. 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 October 20th the US rig count rose two rigs to 624 rigs (up 2 rigs last week). Rig activity is now 19% below the level of 771 in 2022. Of the total rigs working last week, 502 were drilling for oil and this is 18% below last year’s level of 612 rigs working. The natural gas rig count is down 25% from last year’s 157 rigs, now at 118 rigs. The natural gas focused Haynesville now has 40 rigs working down from 70 rigs working last year or down by 43%.
In Canada, there was a five rig increase in the rig count (13 rig increase last week) to 198 rigs. Canadian activity is down 6% versus last year when 210 rigs were working. Activity for oil is down 16% to 121 rigs compared to 144 last year. Activity for natural gas is up 17% at 77 rigs up from 66 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 264, down 11 points from last week as weaker demand around the world and the war premium removed has lowered crude prices and energy stock prices. As the general market decline continues and the Dow Jones Industrials breaches 30,000, we expect the S&P/TSX Energy Index to fall below 220. 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 and stay above US$90/b during winter 2023-2024, as winter demand recovers and demand should clearly exceed supplies.
CONCLUSION:
We see the March crude price decline to US$64/b as being the low for 2023.
Our long term optimism on the sector is due to our view that in 2H/24 WTI will exceed 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% two weeks ago but has bounced to 65% due to the Israel/Hamas war. It should send out a BUY signal as it falls below 10% Bullishness.
WTI is priced today at US$83.42/b down US$5/b from last week. As the stock market retreat continues we should see WTI crude get dragged down further. Our expectation is that we will see a bottom this quarter in the US$74-$78/b area. 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.
The results for Q3/23 for the energy sector may not show good comparisons. WTI last year in Q3/22 was at US$91.56/b and in Q3/23 was at US$82.26 or down 10%. Natural gas prices were even more negatively impacted with AECO at $4.62/mcf last year and only $2.70/mcf this year. So if we have a weak overall stock market and corporate results are shabby for Q3/23 then we may see the energy stock area retreat providing the next low risk entry point. Remember we see much higher prices for both commodities in 2H/24.
Our October SER Monthly Report comes out tomorrow Thursday October 26th. It spends most of the report on our market and energy outlook and as well shows picture highlights of our 2023 ‘Catch The Energy’ Conference. Our November reports will cover the Q3/23 results of all the companies we cover, split over the two November issues. If interested in these upcoming reports on the 35 companies we cover please become a subscriber. Go to https://bit.ly/2FRrp6k.
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