Josef Schachter – Eye On Energy – Energy Market Fundamentals and Price Forecasts
Below is Josef Schachter’s Eye On Energy Report. This report recaps key macro data and news for the energy sector. At the bottom there is information on Josef’s conference coming up on October 14th in Calgary.
I have been since the beginning of the conference. In one day you can hear from a wide range of energy companies and have the opportunity to chat with management. If you are in the Calgary area or are simply interested in energy stocks it’s worth your time to attend.
Your Complimentary Issue of Schachter’s Eye on Energy
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 (SER) newsletter covering the general energy market and 39 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.
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. Moody’s has downgraded 10 small and midsize lenders. The largest entities in the list include US Bancorp, Bank of NY Mellon and State Street Corp. More downgrades are expected and the pressure on deposits of regional banks continues. Banking stocks (large through small) have been hit in recent weeks.
The recent inflation data has helped the CPI and PPI data, but the recent rises in crude and natural gas prices and rising interest rates will produce higher levels for these key economic indicators in the near future. July core CPI came in at 4.7% and we see this rising over 5.5% in the coming months.
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 are again facing refunding problems and have not made their interest payments. The 30-day forbearance period is now on the clock. If payments are not made in time then there will be more pressure on their economy and real estate prices. China has stopped reporting unemployment among young people after record high readings over 21%.
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.
Rice prices in Asia have risen almost 50% due to smaller harvests and India restricting white rice exports (70% of global trade). Rice is an important part of the diet of billions of people in Asia and Africa (42 countries). Feeding people at reasonable prices is likely to be a challenge later this year.
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 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 but this cannot make up much of what had been transported by ships.
Some recent events:
Ukrainian drones hit Russian factories producing parts for a new long range bomber. The accuracy of their attacks is due to more and more NATO weapons and targeting data.
Ukraine now has used seaborne drones to attack Russian ships (focusing on 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 border. Poland in return has deployed an additional 12,000 troops to counter this, doubling its forces in the area.
Romania is worried that attacks on Ukrainian ports across the Danube river could hit their lands. It is a NATO member so if directly attacked then this would bring NATO directly into the conflict. Some damage has occurred on the Romanian side of the border as debris from attacks on the Ukrainian side of the border hits farms on the Romanian side of the Danube border.
Market Movement: We are watching the 33,600 level for the Dow (today at 35,031), 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 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.
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. We are in the skeptical camp about the real barrel cuts by the both of them. Russia may be the big cheater on this deal. See OPEC Monthly Report for more on this.
EIA Weekly Oil Data:
The EIA data (data cut-off August 11th) at initial appearance looked quite bullish for crude prices as Crude Commercial Crude Stocks fell 6.0Mb (forecast a decline of 2.23 Mb) to 439.7 Mb. The reason for the big miss was that Net Imports fell 1.76 Mb/d or 12.3 Mb on the week. The SPR saw another injection. This time an increase of 0.6 Mb to 348.4 Mb. Motor Gasoline inventories fell 0.3 Mb while Distillate Fuels saw a rise of 0.3 Mb/d. Refinery Utilization rose 0.9% to 94.7%. US crude production surprised forecasts with a rise of 100 Kb/d to 12.7 Mb/d and is now 600 Kb/d above year ago levels, as longer reach wells are producing more. Cushing inventories fell 800 Kb to 33.8 Mb. Motor Gasoline consumption fell 451 Kb/d to 8.85 Mb/d as the summer holiday driving season is moving to its end. Jet Fuel saw a decline of 262 Kb/d to 1.55 Mb/d. Total Demand rose 936 Kb/d to 21.66 Mb as Other Oils consumption saw a rise of 979 Kb/d to 5.98 Mb/d. Total US consumption is now above last year by 442 Kb/d. Consumption was at 21.66 Mb/d versus 21.22 Mb/d last year at this time. Year-to-date total consumption is 1.6% below last year or 20.04 Mb/d versus 20.37 Mb/d.
OPEC Monthly Report:
The August 2023 report released August 10th showed that in July OPEC saw a significant decline in production of 836 Kb/d to 27.3 Mb/d, as the Saudis cut production by 968 Kb/d. OPEC had planned on cutting 1.2 Mb/d starting in May and then an additional 1.0 Mb/d in July/August/September for total cuts of 2.2 Mb/d. This had not happened even though the majority of the cuts came from Saudi Arabia. So far total OPEC cuts have been 942 Kb/d with the Saudis cut of 1.13 Mb/d which was offset by increases by other OPEC members. So while significant cuts, they were not the 2.2 Mb/d cuts that were announced. In July, Iran added 68 Kb/d, Angola 56 Kb/d, Iraq 40 Kb/d and Venezuela 37 Kb/d. Producers with lower volumes outside of the Saudis were LIbya down 52 Kb/d and Nigeria down 40 Kb/d. Russia has not made the 500 Kb/d cut that was announced but rather only a net cut of 100 Kb/d to 10.8 Mb/d. They have lowered sales via western Russia (Baltic ports) by 300 Kb/d but increased sales by 200 Kb/d via their eastern ports to their Asian customers. Almost 90% of their exports of crude and products are to China and India, which are taking advantage of the significant discount versus Brent (around US$20/b). Some Urals sales are occurring above the sanction price of US$60/b but are a bargain for the buyers versus US$84.78/b for Brent today.
OPEC sees demand rising in Q3/23 to 102.0 Mb/d and to 103.23 Mb/d in Q4/23. This would mean the call on OPEC would be 30.8 Mb/d in Q4/23 versus the 27.3 Mb/d they produced in July and would imply a shortage situation and materially declining global inventories. We are not so optimistic due to China’s economic difficulties. China consumes about 15.4 Mb/d currently and imports nearly 11 Mb/d of their consumption. If they cut back by 2-3 Mb/d due to economic weakness then supply and demand may be more in balance. However as we enter winter demand we expect to see tighter conditions which could lift WTI crude over US$90/b.
EIA Weekly Natural Gas Data:
The EIA data released August 10th was bullish for natural gas prices as it showed a build of a low 29 Bcf for the week ending August 4th as electricity demand remains strong given the current heat wave. Storage is now at 3.03 Tcf. The biggest increase was in the East (20 Bcf) while there was a decline in storage in the South Central area of 16 Bcf. This compares to the five-year injection rate of 36 Bcf and the 2022 injection of 44 Bcf. US Storage is now 21.4% above last year’s level of 2.49 Tcf and 11.2% above the five year average of 2.73 Tcf. NYMEX has backed off from the nearly US$3.00/mcf level of a week ago to US$2.60/mcf.
Our forecast is for NYMEX to rise >US$3.50/mcf this fall as hurricane season commences and to rise 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 due to the strike at the two large Australia’s LNG facilities (Woodside and Chevron). These plants produce around 11% of global supplies and Europe has been a big buyer of their product. Dutch gas prices have risen over 40% over the last month.
Baker Hughes Rig Data
In the data for the week ending August 11th the US rig count fell five rigs (down five rigs last week) to 654 rigs. Rig activity is now 14% below the level of 763 in 2022. Of the total rigs working last week, 525 were drilling for oil and this is 13% below last year’s level of 601 rigs working. The natural gas rig count is down 23% from last year’s 160 rigs, now at 123 rigs which will impact production levels materially in the coming months. The natural gas focused Haynesville now has 44 rigs working down from 69 rigs working last year or down by 36%. 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 two rig increase in the rig count (down five rigs last week) to 190 rigs. Canadian activity is down 5% versus last year when 201 rigs were working. Activity for oil is down 15% to 116 rigs compared to 137 last year. Activity for natural gas is at 74 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 252 down two points from last week on the decline this week in WTI 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. 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.
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$80.75/b, down over US$4/b from last week’s high of US$84.89/b on more and more reports of problems in China’s economy. 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. This 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 tomorrow, Thursday August 17th. We start the Q2/23 earnings results and review 21 companies in this issue. We intend to terminate Coverage of one E&P entity which is increasing its debt load while seeing a production decline. We go through all the reasons for this in that report. If interested in our review of the covered companies in our upcoming Q2/23 result write-ups and the info on the terminated company then please become a subscriber. Go to https://bit.ly/2FRrp6k.
Please also note that we are having our third quarter webinar for subscribers tomorrow Thursday August 17th at 7PM MDT. This will be a 90-minute review of Q2/23 reporters and highlighting the best BUYS that we see at that time if the decline we expect in the coming weeks occurs. If one wants to participate they will need to sign up to be subscribers to our company focused SER product.
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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