OPEC Jawbones Crude Futures Bears. WTI Rises By US$3/b In Recent Days Ahead Of Next OPEC Meeting On June 4th.
Global Economic, Political & Military Update
The US Debt Limit and spending cuts battle to get legislation through the House and Senate and then to President Biden to sign is not making progress. The schedule to get this done is before the Monday Memorial Day holiday, so they need a deal by the end of this week. This does not seem to be in the cards. The drama of the negotiations and rhetoric along the way are disturbing to the bond and stock markets. The Dow Jones Industrial Average broke the support level of 32,900 and is now at 32,804 as Speaker McCarthy spoke to the media today.
Republicans want material cuts in future growth of government spending, with a cap of 1% growth. They want government spending to slow the growth of total US debt (now at >US$31T) or at 130% of US GDP. With interest rates rising the cost of the debt is now larger than the defense budget. The US deficit this year is looking like a shocking US$2T shortfall. This when the US is not fighting Covid or in a recession but is fighting an expensive war in Europe.
The Federal Reserve remains challenged by sectoral forces of economic slowdown and general forces of inflation pressure. While the markets are forecasting that a pause in rate hikes is likely at their next FOMC meeting on June 13-14, the data will be the determining factor of what they do and recent data may require them to make another hike. Some Fed watchers now see that there could be a further 25 BP rise in the Fed Funds rate before the Fed pauses. A pivot to lower rates is not likely unless a severe black swan event occurs.
The US bank crisis is still far from over. Last week US Commercial bank deposits fell US$57B. Since February 22nd US data shows US$590B was withdrawn. The problem is that depositors can withdraw their funds earning less than 15 BP and buy US three month T-bills directly from the Treasury at yields now at 5.34%. This gap cannot close as banks do not have the ability to compete at the high rates. As more people do this switch and say how easy it was to do, we may see a cascade of this switching that will harm more banks (large, regional and small banks).
On the global political and military scene, the Ukrainian major offensive has not yet started. How effective it will be and how long they can move aggressively will tell the tale of which side has more men and more munitions. President Biden has now agreed to give Ukraine F-16 fighters and to train pilots in the US and NATO countries. This will take time and the problem becomes who will service the jets. The US military says it takes 16 man-hours of maintenance for every hour of flying. Will the US send these highly trained personnel to work in Ukraine or in neighboring NATO countries? President Biden upped the ante, by allowing Ukraine to use American weapons against Russian targets in Crimea. The military initiative is bouncing from one side to the other but in the end the one with the best and most weaponry and the manpower to fight is likely to gain the momentum.
The battle for Bakmut seems to be over with the Russian Wagner military victorious. What happens next for offensive action by either Ukraine or Russia is now the key for momentum. Ukraine had a good moment when militants it supports, attacked inside the Russian border but were quickly repelled with high casualties. This was the biggest incursion into Russia by Ukraine forces to date.
We are officially in the bullish camp for the energy sector but overall stock markets are currently rolling over with the most downside pressure from the FAANG tech names. We are waiting for the next oversold condition to add to our energy investments. Many energy stocks are down over 50% from their 2022 highs. 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. We expect to add additional ideas during this next decline phase especially if the S&P Energy Bullish Percent Index falls below 5% and triggers a Table Pounding BUY signal.
EIA Weekly Oil Data
The EIA data (data cut-off May 19th) was bullish for oil prices as demand was strong. US Commercial Crude Stocks fell 12.5 Mb to 455.26 Mb as Net Imports fell 1.25 Mb/d (8.7 Mb on the week) and energy demand rose 1.14 Mb/d (8.0 Mb on the week). Commercial Crude Storage is now at 35.4 Mb or 8.4% above a year ago. The SPR saw a release of 1.6 Mb of crude.
Total product demand fell last week by 1.14 Mb/d to 20.7 Mb/d from 19.6 Mb/d in the prior week. Motor Gasoline inventories fell 2.1 Mb while Distillate Fuels fell by 0.6 Mb. Refinery Utilization fell 0.3% to 91.7%. US production recovered the 100 Kb/d decline from last week back up to 12.3 Mb/d last week. Cushing inventories rose 1.7 Mb to 37.2 Mb. Motor Gasoline consumption jumped up by 529 Kb/d to 9.4 Mb/d while Jet Fuel saw a rise of 53 Kb/d to 1.43 Mb/d.
EIA Weekly Natural Gas Data
The EIA data released last Thursday showed a build of 99 Bcf for the week ending May 12th. Storage is now at 2.24 Tcf. The biggest increase was in the East (up 36 Bcf). This compares to the five-year injection rate of 77 Bcf and the 2022 injection of 89 Bcf. US Storage is now 30.3% above last year’s level of 1.72 Tcf and 17.9% above the five year average of 1.90 Tcf. NYMEX retreated from US$7.10/mcf in mid-December 2022 to a low of US$1.95/mcf in April. We are now in the air-conditioning season which has increased demand and NYMEX has recovered to US$2.40/mcf.
Scientists believe that we will experience a major El Nino event this year. It could have a meaningful impact on the weather this winter with much colder weather and more snow. The last time this occurred was in 2018-2019 and we saw NYMEX spike from US$2.45/mcf to a peak of US$4.92/mcf in three months.
Our forecast is for NYMEX to rise to US$3.50/mcf this summer and to rise over US$4.50/mcf during winter 2023-2024. 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 May 19th the US rig count was down 11 rigs to 720 rigs (down 17 rigs in the prior week). Rig activity is now below the level of 728 in 2022 as low commodity prices slow down spending. If this lower activity persists over the next few months then production will fall off for both commodities and this will set up the next upward cycle for crude and natural gas pricing. Of the total rigs working last week, 575 were drilling for oil (down 11 from the prior week) and below last year’s level of 576 rigs working. The overall US rig count is down 1% from 728 rigs working a year ago. The US oil rig count is now at 575 rigs compared to 576 rigs last year. The natural gas rig count is down 6% from last year’s 150 rigs, now at 141 rigs. The natural gas focused Haynesville now has 57 rigs working down from 70 rigs working last year. Texas lost 9 rigs last week with the Permian losing four rigs to 349 rigs working.
In Canada, there was a nine rig decrease last week (one increase last week) which was at 85 rigs. With fire issues in NW Alberta and NE BC, we expect to see a few more weeks of declines until the fires are under control. Many companies are now announcing restarting of shut-in production. The air quality is changing from day to day as we have been having rain at night to clear the air. However, we are seeing more people wearing masks outdoors again. Canadian activity is down 3% from 88 rigs last year. Activity for oil is now at 39 rigs compared to 40 last year. Activity for natural gas was down 11 rigs to 46 rigs and down from 48 rigs focused on natural gas last year. The focus on drilling has been on the liquids rich condensate Montney and Duvernay plays. Once the fires are under control we should see the rig count in Canada recover to over 200 rigs during the summer drilling season.
Energy Stock Market
The S&P/TSX Energy Index today is at 231 (up nine points from last week) due to the bounce in crude prices caused by the Saudi short sellors warning, as well as the recovery in natural gas prices. If there is a general market problem and the Dow Jones Industrials breach 30,000 (today down 251 points to 32,804) then we expect the Energy Index to fall to below 200. 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. Review the coverage of all our companies and their Q1/23 results as we review the results. We review the results of 16 covered companies in our next SER report out Thursday June 1st.
We rejoined the bull camp on Monday March 13th when the first of our four BUY indicators kicked in. We added seven great ideas to the original eight. This took us to 15 great BUY ideas. On March 15th crude busted US$70/b (dropping to US$65.65/b) as fear of a global recession due to the financial crisis woke up memories of 2008-2009. The market got hit that day by the problems and later forced merger of Credit Suisse by UBS in a take-under that reminded investors of the forced merger of Bear Stearns into JPMorgan, another takeunder where crude fell over US$5/b that day. We added seven more ideas that day taking the Action BUY List to 22 ideas. We expect to add five to seven more ideas during the next BUY signal window.
Many E&P companies trade below their 1P levels (proven reserves). You get the probables, land and tax pools for free. Some also pay shareholders healthy dividends (regular and specials). Some yield over 7% which is hard to beat in other market sectors. Many of the service companies are trading debt free or near debt free and are paying decent dividends. And on the pipeline and infrastructure side you have companies trading with 6-7% yields and are trading 20-25% below their 2022 highs. In a recovery they should see 15%+ capital gains for total upside returns in this conservative sector or over 20% in the next twelve months. For E&P and energy service stocks we see 50%+ upsides from capital gain potential and dividends for those that pay them. Why such upside? We forecasted in recent months that WTI should lift into the US$80s during Q3/23 and for crude to trade in Q4/23 above US$90/b. That should give the energy sector large capital appreciation potential.
So now we will wait to see what unfolds. If a significant market decline unfolds, we will likely see additional BUY signals triggered and we will add more ideas to our Action BUY List. The one I would love to see is the S&P Energy Bullish Percent Index falling below 5% which would trigger a Table Pounding BUY signal. The March 13th first BUY signal occurred when this Index fell to 8.7% (below 10% a BUY signal) from 43% just a week earlier. The S&P Bullish Percent Index is now at 30% and is down from last month’s level of 70%. In March as the markets plunged this Index fell from 43% to the 8.7% trigger (below 10%) in two weeks. So things can move fast in large downside market declines.