Global Economic, Political & Military Update
US Treasury Yields have lifted sharply from 3.75% in early May to today’s high of 5.04%. The decade high was in early March at 5.05% so we are close to breaking out in yields. The battle over economic slowdown or, inflation pressures continuing; make Central Bankers next moves tricky. In the minutes of the June 13-14 FOMC meeting some officials were reluctant to pause. Now we head into the July 25-26 meeting and the majority of economic forecasters are predicting a 25 BP rise followed by another pause at the September 19-20 meeting so that more economic data can be incorporated.
What remains problematic is inflation. The UPS strike action to start August 1st and impact 340,000 drivers will provide supply chain problems. In Canada the west coast strike is already slowing exports of potash, coal and arriving items like cars from Asia. These supply chain issues can drag on for a while and add to costs and embed itself into higher inflation. The 2% goal of the Fed is something that may take into the end of the decade to occur unless some significant black swan event knocks the economies hard. Today’s US ADP Nonfarm Employment change showed a rise in June payrolls of 497K. The forecast was for 228K and the jobs number tomorrow is forecast prior to this ADP release at 225K. The job market remains tight and wage pressure persists as workers try to keep pace with inflation. Core PCE Deflator came in at a hot 4.6%.
Today the bears are running rampant through the markets. The Dow is down 1.1% or 362 Points to 33,927. As mentioned before a breach of 33,600 (not far away) for the Dow would complete the topping formation for the Dow and 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.
We are bullish on the energy sector as we see a new energy super cycle lasting into the end of this decade as we move to add more renewable energy which will require inputs around the world to bring on more key minerals (lithium, cobalt, copper etc.) needed for this evolution. To bring on new production of these items more crude oil and natural gas will be consumed in the countries adding these important inputs to clean-tech. Overall world crude demand could rise from 101 Mb/d this year to 106-108 Mb/d by the end of this decade. OECD countries should see a decline from 46 Mb/d to 42 Mb/d or less but the non-OECD should rise from 55.0 Mb/d currently to over 65 Mb/d. This year alone demand will grow in the non-OECD by 1.5 Mb/d (according to the EIA). We see a tight balance between supplies and demand which if growth persists could lift WTI prices into year-end. We covered this in detail in our last SER Monthly for subscribers.
Get ready to be buyers on this correction. We are waiting for the next overall stock market to get oversold again 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. 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 June 30th) was moderately bullish for crude prices as Commercial Crude Stocks fell 1.5 Mb to 452.2 Mb. This is 28.4 Mb above last year’s 423.8 Mb. The SPR saw a release of 1.5 Mb of crude last week. Motor Gasoline inventories fell 2.5 Mb while Distillate Fuels saw a decline of 1.0 Mb. Refinery Utilization fell 1.1% to 91.1%.
US crude production recovered the 200 Kb/d that fell two weeks ago and is back 12.4 Mb/d. Cushing inventories fell 400 Kb to 42.8 Mb. Motor Gasoline consumption rose 293 Kb/d to 9.60 Mb/d while Jet Fuel saw a fall of 252 Kb/d due to flight cancellations as tornado weather hit parts of the US. Fire issues also affected where planes could fly. Total Demand grew 929 Kb/d to 21.2 Mb/d as Propane demand grew by 821 Kb/d.
EIA Weekly Natural Gas Data
The EIA data released today showed a build of 76 Bcf for the week ending June 23th. Storage is now at 2.80 Tcf. The biggest increase was in the Midwest (up 27 Bcf). This compares to the five-year injection rate of 66 Bcf and the 2022 injection of 82 Bcf. US Storage is now 25.3% above last year’s level of 2.24 Tcf and 14.6% above the five year average of 2.45 Tcf. NYMEX is at US$2.64/mcf as summer demand for electricity for air-conditioning picks up. There are now warnings that during the early evening there will not be sufficient electricity generating capacity and restrictions are expected especially in places like Texas facing record high temperatures. Rising temperatures and low water supplies may severely impact grain harvests this year and add to inflation concerns.
Our forecast is for NYMEX to rise to US$3.50/mcf this fall as hurricane season commences and to rise over US$4.50/mcf during winter 2023-2024. Europe may see rising natural gas prices as the Netherlands plans to close Europe’s largest gas field (Groningen) in October. This will tighten up supplies for winter 2023-2024 and if winter is cold, 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.
Baker Hughes Rig Data
In the data for the week ending June 30th the US rig count was down eight rigs to 674 rigs. Rig activity is now 10% below the level of 740 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 the stage for the next upward cycle for crude and natural gas pricing. Of the total rigs working last week, 545 were drilling for oil and this is 8% below last year’s level of 595 rigs working. The natural gas rig count is down 19% from last year’s 153 rigs, now at 124 rigs. The natural gas focused Haynesville now has 44 rigs working down from 69 rigs working last year or down by 36%. Supplies could fall 3-4 BCF/d due to the lack of drilling and demand should pick up once annual maintenance is completed at key LNG facilities.
In Canada, there was a 2 rig decrease last week to 167 rigs as activity picked up. Canadian activity is now up 1% from 166 rigs last year. Activity for oil is now at 109 rigs compared to 109 last year. Activity for natural gas was down one rig to 58 rigs. The focus on drilling has been on the liquids rich condensate Montney and Duvernay plays. In the coming weeks we expect the rig count in Canada to recover to over 200 rigs as we enter the peak summer drilling season.
Energy Stock Market
The S&P/TSX Energy Index today is at 220 down 6 points on the day and down by 2.6%. 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. Review the coverage of all our companies and their Q1/23 results in our recent research reports. We expect that WTI should lift into the US$80s during Q3/23 and for crude to trade in Q4/23 above US$90/b as demand recovers and demand exceeds supplies. That should give the energy sector large capital appreciation potential.
