As a result, the S&P/TSX Energy Index has retreated from its high of 213 to 201, a decline of nearly 6%. Stocks that are leveraged to higher crude prices have been particularly hard hit. Baytex Energy, for example, declined from its high of $6.23 to just over $4 recently, or down 35% and MEG Energy retreated from $11.51 to $7.80 recently or down 32%.
Schachter predicts one last plunge in oil prices to below the US$60/b level later this year. “If we are right about lower crude prices,” says Schachter, “the Energy Index should fall to below 160, implying a further 20% overall energy sector downside. Hold cash and remain patient for a great buying opportunity during the tax-loss selling season of 2018 which occurs from mid-November through early December.”
So why is Schachter so bullish on natural gas at the moment and focusing his recommendations in this area? One key reason – lower storage levels.
The Energy Information Agency (EIA) reports weekly on US natural gas storage. It is extremely low versus the norm. US demand has been very strong this year due to high temperatures and strong demand for electricity generated by natural gas, prevents large injections of gas into storage facilities. Additionally, the ramp up in US LNG exports is also slowing normal injection levels. Schachter explains that last week (August 3rd) only 46Bcf went into storage which is now at 2.35Tcf. This level is 22% below the five-year average and even with normal injections from here on, with only 14 more weeks in the injection season, it is likely that storage will only build to the 3.1-3.2Tcf level, below 3.8-4.0Tcf which is the normal range at the start of winter. Recent injections have also been below normal, adding to the problem.