We are taking next week off for holidays for our team. Our next Eye on Energy issue will be released on Thursday September 7th due to the Labour Day holiday on Monday.
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 38 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.
Global Economic, Political & Military Update:
Some of the positive and negative issues facing the US and other major economies are:
- For the US:
- 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. S&P Global has joined Moody’s in downgrading banks. Some of their notable downgrades were: KeyCorp., Comerica and Valley National Bancorp. Banking stocks (large through small) have been hit in recent weeks. For example, Bank of America is down 14% over the last month.
- US Retailers are getting smacked down in the market as sales slow down and profits plummet. Recent disasters include: Foot Locker (down over 30%, Peloton (down 25%) and Dick’s Sporting Goods (down 24%) when they reported. Part of the problem was inventories that did not sell and many reported record shrinkage or theft, as a big impactor on their recent quarterly results. Stores are shutting across the country due to the lawlessness and no action being taken to stop this.
- Recent Federal Reserve minutes showed that rate hikes for this year may not be over.
- The recent contract deal by American Airlines pilots will worry the Fed as it included first year raises of 21% and over four years of 46%. Wage inflation is a key factor in Fed consideration when they set rates. The next major unions with wage negotiations are the US auto companies where the unions want large wage increases, an end to the two tier of employees and job guarantees as the companies switch over to EV’s which need less labour.
- For the rest of the major economies in the world:
- China is facing a difficult economic period as exports fall and domestic spending by consumers withers. Some of their real estate companies and shadow non-bank financial entities are facing interest payment arrears and refunding problems. These are very large potential defaults and many have bonds trading at very distressed levels of pennies on the dollar. Total debt of these entities are in the 100’s of US$billions. China’s Evergrande filed for bankruptcy for its US assets last week. It has over US$300B of liabilities. The Yuan is under pressure and will need stabilization by their Central Bank. Currency controls could be put on.
- Russia’s currency hit a 12-month low to the dollar and Russia needs to keep resource sales as high as possible to meet their fiscal and military needs. Russia raised its key interest rate by 350 BP to 12% to counter this weakness. It appears that this has stabilized the rouble for now.
- Canada saw its Core Retail Sales fall 0.8% in June as consumers face inflation pressure and pull in discretionary spending.
- German business activity has shrunk again. The Purchasing Managers Survey fell to 44.7 in August from 48.5 in July. Below 50 is contraction and this decline was faster than forecasts.
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 export ports being blockaded and attacked by Russia. A lot of the grain infrastructure at the export Ukrainian ports has been severely damaged. Ukraine is trying to route grains and oilseed products via rail and trucks via Romania and Moldova, but this cannot make up much of what had been transported by ships.
Some recent events:
- Ukraine continues to use seaborne drones to attack Russian naval ships (also focusing on crude and product tankers) in the Black Sea near Crimea.
- Belarus is getting its military upgraded by the Wagner group and these revitalized forces (Wagner and Belarus troops) have moved close to the Polish and Baltic borders. Belarus has warned that they will attack their neighbors if offensive action is taken against the country, either militarily or via sanctions. The threat includes use of hypersonic tactical nukes.
- The US has implemented a convoy system from Romania to get grain shipped there from Ukraine to get to the Mediterranean Sea and to customers.
- Drone attacks against Moscow are becoming a daily occurrence and may result in some kind of escalation by Russia that is now expected to begin shortly. The airports around Moscow have faced regular closures. This could become a serious escalation. Russian media daily talks about the use of tactical weapons that have been upgraded by Iran with greater accuracy in hitting their programmed targets in Ukraine.
- The US now sees the death and casualty toll in Ukraine at around 500,000. Russia’s toll at 300,000 (120,000 dead and 170,000 injured). Ukraine’s figures are 170,000 (70,000 killed and 100,000 wounded). With Ukraine having only 500,000 troops this is a high percentage of their military. Russia is seen as having 1.33M in uniform and has over three times the population (143M versus Ukraine’s 44M people).
- Russia reported today that a passenger plane crashed in Russia, killing all aboard. The Wagner paramilitary group’s owner, Yevgeny Prigozhin was one of the deceased. Was this an instrument/mechanical failure or a successful assassination?
Market Movement: We are watching the 33,600 level for the Dow (today at 34,420), 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 still at the recent high reading of 91% bullish. 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 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.
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 production cuts by Saudi Arabia and Russia which has been extended through September. This squeezed crude short sellers and drove the price of WTI up by over US$17/b over the last six weeks to the high last week of US$84.89/b for WTI. There is now chatter that Saudi Arabia may unilaterally extend its 1.0 Mb/d cut into late October.
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. New production could come on stream this fall from the weak sisters of OPEC (Iran, Iraq, LIbya, NIgeria and Venezuela). The biggest increase would likely be from Iraq which is negotiating with the Kurds and the Turkish regime to reopen the northern border pipeline which can move over 450 Kb/d. It has been closed for most of this year due to revenue sharing disagreements. Iran is talking about adding 250 Kb/d to 3.5 Mb/d by Q4/23.
EIA Weekly Oil Data: The EIA data (data cut-off August 18th) looks bullish for crude prices as Crude Commercial Crude Stocks fell 6.1Mb to 433.5 Mb. The SPR saw another injection, this time of 0.6 Mb Mb to 348.9 Mb. Motor Gasoline inventories rose 1.5 Mb while Distillate Fuels saw a rise of 0.9 Mb/d. Refinery Utilization fell 0.2% to 94.5%. US crude production surprised forecasts with a rise of 100 Kb/d to 12.8 Mb/d and is now 800 Kb/d above year ago levels, as longer reach horizontal wells are producing more. Cushing inventories fell 3.1 Mb to 30.7 Mb. Motor Gasoline consumption rose 59 Kb/d to 8.91 Mb/d as the summer holiday driving season is moving to its end. Jet Fuel saw a rise of 149 Kb/d to 1.69 Mb/d. Total Demand fell 498 Kb/d to 21.17 Mb as Other Oils consumption saw a decline of 555 Kb/d to 5.43 Mb/d. Total US consumption is now above last year by 1.83 Mb/d. Consumption was at 21.17 Mb/d versus 19.34 Mb/d last year at this time. Year-to-date total consumption is 1.3% below last year or 20.08 Mb/d versus 20.34 Mb/d.
EIA Weekly Natural Gas Data: The EIA data released August 17th was bullish for natural gas prices as it showed a build of a low 35 Bcf for the week ending August 11th as electricity demand remains strong given the current heat wave. Storage is now at 3.06 Tcf. The biggest increase was in the Midwest (19 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 45 Bcf and the 2022 injection of 32 Bcf. US Storage is now 21.8% above last year’s level of 2.52 Tcf and 10.8% above the five year average of 2.77 Tcf. NYMEX is today priced at US$2.54/mcf.
Our forecast is for NYMEX to rise above US$3.50/mcf in the coming weeks as hurricane season commences for the Gulf coast. Four tropical storms are forming in the Caribbean and will soon enter the Gulf of Mexico. If they shut down offshore oil and natural gas production then NYMEX could rise to over US$4.50/mcf during winter 2023-2024.
Europe should see tightened supplies this winter and if winter is colder than last year should 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. European prices have spiked in recent weeks by 30-50% due to the strikes called at Australia’s two largest LNG facilities (Woodside and Chevron). These plants produce around 10% of global supplies and Europe has been a big buyer of their product. Strikes could start in early September.
Baker Hughes Rig Data: In the data for the week ending August 18th the US rig count fell 12 rigs (down five rigs last week) to 642 rigs. Rig activity is now 16% below the level of 762 in 2022. Of the total rigs working last week, 520 were drilling for oil and this is 13% below last year’s level of 601 rigs working. The natural gas rig count is down 26% from last year’s 159 rigs, now at 117 rigs which will impact production levels materially in the coming months. The natural gas focused Haynesville now has 43 rigs working down from 69 rigs working last year or down by 38%. 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 one rig decrease in the rig count (down one rig last week) to 189 rigs. Canadian activity is down 6% versus last year when 201 rigs were working. Activity for oil is down 13% to 119 rigs compared to 137 last year. Activity for natural gas is at 70 rigs versus 64 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 two points from last week. 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 should 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$78.63/b, down >US$2/b from last week. The low today was US$77.62/b) If our near term negative stock market view is correct then we should see WTI crude dragged down below US$70/b again this fall. It has fallen over US$6/b over the last two weeks and we see it reaching below US$70/b during October. This next US$9/b decline 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 next Thursday August 31st. We cover 16 more companies with their Q2/23 earnings results. If interested in our review of the covered companies in the upcoming report please become a subscriber. Go to https://bit.ly/2FRrp6k.
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 (a financially attractive offer).
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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