ENERGY MARKET OVERVIEW

Market Update.

Crude oil

World crude consumption in Q3/21 (the last data point available) showed consumption ahead of production. Consumption was 97.9Mb/d while production was 96.5Mb/d (Chart #38) shrinking world wide inventories. With winter here we expect to see demand in Q4/21 and Q1/22 at around 98.5-99.0Mb/d and supplies at 97.5-98.0Mb/d in Q4/21 and 99.5-100.5Mb/d in Q1/22 as sales from Strategic Petroleum Reserves (SPRs) occur and production worldwide grows modestly. Heading into Q2/22 inventories will grow materially as new supplies come onstream and demand backs off after the peak winter season (Chart #39).

Proof of the build in inventories is seen in last week’s EIA Weekly Petroleum Status Report. Gasoline and Heating Fuel oil inventories rose as refineries increased product for the important winter season. Total Motor Gasoline Stocks rose 10.1Mb and Fuel oil by 4.4Mb (Chart #40).

Demand fell quite a bit after the Christmas/New Years holiday season ended. Last week Total Product consumed was 19.665Mb/d, a decline of 2.55Mb/d from the holiday season level of 22.218Mb/d. Of this decline Gasoline fell 1.55Mb/d to 8.172Mb/d and Jet Fuel fell by 122Kb/d to 1.47Mb/d (Chart #41). We compare this to pre-pandemic levels in the first week of 2020 and Total Demand was 19.922Mb/d, Gasoline consumption was 8.961Mb/d and Jet Fuel burned was 1.972Mb/d. So demand for Gasoline and Jet Fuel are clearly being impacted by the pandemic travel slowdown and the weaker US economy.

Chart #38

World Oil Supply and Demand

INTERIM UPDATE: January 13, 2022 - 3. Energy Market Overview

Source: Federal Reserve of Dallas December 2021

Chart #39

Implied Change in World Oil Stocks

INTERIM UPDATE: January 13, 2022 - 3. Energy Market Overview

Source: Federal Reserve of Dallas December 2021

Chart #40

Large Gasoline and Fuel Oil Builds

INTERIM UPDATE: January 13, 2022 - 3. Energy Market Overview

Source: EIA Weekly Petroleum Status Report January 5, 2022

Chart #41

Demand Falls And Is Below Early 2020 Pre-pandemic Level

INTERIM UPDATE: January 13, 2022 - 3. Energy Market Overview

Source: EIA Weekly Petroleum Status Report January 5, 2022

US crude production has risen from 10.0Mb/d in mid-2021 to 11.8Mb/d two weeks ago (Chart #42). With increased drilling in the prolific Permian basin and more capital being invested to increase production, we expect to see overall US volumes exceed 12.0Mb/d this quarter and 12.5Mb/d by the summer. We do not see getting production back to the peak level seen in early 2020 of 13.1Mb/d this year unless the Biden administration changes its anti-energy policies for domestic production. If the Congress (either or both the House & Senate) go Republican this November, then Congress can overrule President Biden early next year and the US industry will get the go-ahead to increase production meaningfully again.

Crude prices have stayed lofty due to winter demand and the cheaper use of heating oil versus very high priced natural gas on international markets. The price of natural gas is over US$30/mcf in Europe and Asia so use of heating oil during the current winter shortages and high prices is economic. Once winter is over we see prices of natural gas and oil retreating significantly.

Another reason for current high prices is some OPEC members are not able to lift production to their raised quotas due to under-investment or infrastructure problems (Libya and Nigeria).

One last reason: last week a political issue added to the rise in crude prices. Kazakhstan erupted with unrest and Russia deployed military forces from the Collective Security Treaty Organization (the CST), the new Soviet equivalent of NATO, to stabilize the country. The members include Russia, Belarus, Tajikistan, Kyrgyzstan and Armenia. The current Chairman Armenian Prime Minister Nikol Pashinyan authorized the military support. Of course Russia was the leading force and provides the most military manpower for this new peacekeeping force.

We see crude prices retreating in the near term if the general stock market is under duress and inter-market margin calls hit the very liquid energy futures area. Our WTI price target once the military/political issues are discounted and winter ends, is for a decline to the USS$60-64/b area (Chart #43). If we get into Q2/22 (post winter) with lower energy consumption and more supplies as noted above then a market meltdown could happen with the Dow Jones Industrials breaching 30,000 and the FAANGM and MEME stocks melting down and WTI crude falling to the US$48-54/b area in late Q2 or during Q3/22.

Chart #42

US Crude Production (‘000 b/d) Rising

INTERIM UPDATE: January 13, 2022 - 3. Energy Market Overview

Source: DailyShots.com January 3, 2022

Chart #43

WTI Crude US$/b (Daily Chart)

INTERIM UPDATE: January 13, 2022 - 3. Energy Market Overview

Source: Stockcharts.com January 7, 2022

Natural Gas

Demand for natural gas internationally and the rapid expansion of US LNG over the last few years (Chart #44) has now made the US the largest exporter of LNG (ahead of Qatar and Australia). The US exported a record 11.9Bcf/d to Europe and Asia in December 2021.

Europe’s under-investment in natural gas projects (Chart #45) and becoming big importers from Russia (Gazprom) and now from the US, needs to be reversed. There still is large potential in the North Sea and onshore in many European countries. The environmental focus is commendable and the growth of renewables has been significant but with wind levels down and power storage lacking, when the crunch came in Europe they rushed to use coal to meet their electricity needs. More than two dozen shipments of US LNG have been sent to Europe to alleviate the crisis (Chart #46). These US shipments are very lucrative (Chart #47).

With more LNG arriving and the weather moderating the price of natural gas, futures have retreated for now (Chart #48). However, any problem with Russia and potential sanctions could mean lower volumes coming from Russia as they retaliate. Russia can solve the shortage of natural gas quickly as the Nord Stream 2 pipeline (Chart #49) is ready to move gas to Germany if all the bureaucratic approvals occur. It is not a one way street though, as Russia has tough measures it can also apply to Europe, especially during the high demand winter period.

Chart #44

US Now #1 LNG Exporter Worldwide

INTERIM UPDATE: January 13, 2022 - 3. Energy Market Overview

Source: DailyShots.com January 4, 2022

Chart #45

European Natural Gas Production Falls Significantly In Recent Years

INTERIM UPDATE: January 13, 2022 - 3. Energy Market Overview

Source: DailyShots.com December 24, 2021

Chart #46

US Ships More LNG To Europe

INTERIM UPDATE: January 13, 2022 - 3. Energy Market Overview

Source: DailyShots.com December 24, 2021

Chart #47

Profitability Of LNG Exports – Treasure Ships

INTERIM UPDATE: January 13, 2022 - 3. Energy Market Overview

Source: Forbes Magazine January 2022

Chart #48

European Natural Gas Prices Plunge Over 60%

INTERIM UPDATE: January 13, 2022 - 3. Energy Market Overview

Source: DailyShots.com January 3, 2022

Chart #49

Nord Stream 2 Pipeline Ready To Deliver Natural Gas To Europe

INTERIM UPDATE: January 13, 2022 - 3. Energy Market Overview

Source: Offshore Magazine January 5, 2022

Last week’s consumption of natural gas was only 31Bcf (Chart #50) which is way below the usage in 2021 and for the five year average. Last year 114Bcf was consumed and the five-year average consumption level was 100Bcf (Chart #51). The storage level is now at 3.195Tcf and is 3.1% above the five-year average of 3.099Tcf. The Midwest saw the biggest draw at 25Bcf.

NYMEX natural gas prices peaked in September 2021 at US$6.47/mcf and have retreated to US$3.94/mcf last week. AECO prices were C$4.56/mcf at the end of the week. With potentially cold weather into the end of February, we could still see price spikes when cold spells push withdrawals of 200Bcf+ weeks. You can see the volatility of NYMEX natural gas prices in Chart #52. We have noted where price spikes have occurred in the early months of the years; not many, but when they did they were big moves (two instances 2008 and 2014).

Chart #50

US Natural Gas Storage

INTERIM UPDATE: January 13, 2022 - 3. Energy Market Overview

Source: EIA Weekly Natural Gas Storage Report January 6, 2022

Chart #51

Natural Gas In US Storage

INTERIM UPDATE: January 13, 2022 - 3. Energy Market Overview

Source: EIA and SERSI January 6, 2022

Chart #52

NYMEX Natural Gas US$/mcf (Monthly Chart)

INTERIM UPDATE: January 13, 2022 - 3. Energy Market Overview

Source: Stockcharts.com January 7, 2022

The strong lift in crude prices from the low of US$62.43/b in early December 2021 to the current spike level of US$78.90/b has lifted energy stocks sharply. The S&P/TSX Energy Index rose from the December 2021 low of 147.26 to 177.35 at the close last Friday.

The S&P Energy Bullish Percent Index has again lifted into SELL territory at over 95% reaching 95.24% last week (Chart #53). This on top of SELL signals in October 2021 and June 2021, means we are again in bubble territory and we urge caution. Chasing energy stocks now when the market pundits are raving about the sector is a great contrarian signal. Where were these same pundits in March 2020 when stocks were bargains and we sent out many Action Alert BUYS?

The long term history of the S&P Energy Bullish Percent Index (Chart #54) shows that market peaks occur when the Index exceeds 95% and profit taking is advised when over 90%. On the bottom when energy stocks are cheap the Index falls to under 10% bullishness and Table Pounding BUYS occur at under 5% bullishness. We expect that during Q2/22 we should get our next low risk BUY signal as the general market gets pasted.

For the S&P/TSX Energy Index (Chart #55), we are again in SELL territory. In this chart we show the other sharp rises and then significant declines. Our view is that a decline in crude prices below US$60/b in Q2/Q3-2022 will drive the Index and its constituent stocks down to the 95-105 level or a decline of over 40%. This may seem crazy but just look at the other declines and see that there have been even more severe retreats after robust up moves. We have been early with our caution and sales but the market is not cheap and if we are right that there is a severe correction coming then sitting with cash reserves and defensive positions is the right stance.

Chart #53

S&P Energy Bullish Percent Index (Daily Chart) – Another SELL Signal

INTERIM UPDATE: January 13, 2022 - 3. Energy Market Overview

Source: Stockcharts.com January 6, 2022

Chart #54

S&P Energy Bullish Percent Index – Monthly

INTERIM UPDATE: January 13, 2022 - 3. Energy Market Overview

Source: Stockcharts.com January 6, 2022

Chart #55

S&P/TSX Energy Index – Monthly

INTERIM UPDATE: January 13, 2022 - 3. Energy Market Overview

Source: Stockcharts.com January 7, 2022

CONCLUSION

Another SELL signal has been triggered for the energy area. A lot of downside is in front of us. As the general stock market plunges and drags down energy due to inter-market pressure, we will wait patiently for the evidence of a clear bottom to send out new Action Alert BUYS.
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