Eye on Energy: September 20

September 20, 2023
11:33 am

US, China And Germany Seeing Lower Crude Consumption. WTI Prices Face Near Term Downside.

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 FOMC today decided to leave its Fed Funds rate unchanged, despite rising food and energy inflation, but left open one more increase in the Fed Funds rate later this year. Crude oil prices are up 43% from the early May low of US$63.57/b. These increases are now being felt in CPI and PPI data. The PPI for August rose 0.7% (month over month or at an annual rate of 8.4%), a big problem for the Fed. As usual the Fed is data dependent and there is still a lot of information to come out before the next meeting, on October 31/November 1st, when the markets expect the next rate hike. The risk of a federal shutdown remains a concern as it is only 10 days away from Congress’s month-end deadline to fund the government.
US interest rates have reached 2007 highs, led by three year and 10-year rates. The US 3-month T-bill rate is the highest now since 2000. With the Federal debt now at US$33T (up US$2T this year), interest costs may eat up nearly US$1T of this year’s budget due to the rising rates and short term funding of the outstanding debt. Remember 3-month T-Bills have risen over the last two years from 6 BP to 554 BP now. US tax revenues now are at US$4.35T so the interest cost will eat up over 22% of revenues. Real Yields on 10-year Treasuries is now around 2% (not seen since 2009) and suggest borrowing costs are pinching individuals and businesses significantly.
The UAW has taken strike action at one plant each for the big three. If no progress is made this week the strike action will spread, shutting down more of this important industry and affecting their suppliers. So far only 13,000 workers have taken to the plant entrances. Workers want 40% wage increases and an end to a two tier pay system. Workers start at US$18 per hour and get a top rate of US$32 per hour.The second tier of temporary workers start at US$15 per hour.

For the rest of the major economies in the world:

The ECB raised its rate for the 10th time in a row to 4% last week from below zero last year to press ahead with its fight against inflation despite a weak Germany.
China continues to put pressure on Taiwan and its US allies with military flights that are dangerous.China admitted that it has developed with private entities in the country semiconductor chips that rival US manufacturers and can handle AI for commercial and military products. China has added to Apple’s problems by banning the use of their phones in sensitive departments, government-backed agencies and state farms. This is likely to impact their latest generation of phones. Also to stabilize the falling renminbi they have asked big banks to stagger and adjust dollar purchases.

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 grain export ports being blockaded and attacked by Russia.

Some recent events:

Russia has imposed a blockade on Bulgaria. This was to stop them from assisting Ukraine economically.
President Zelensky is on a tour of the US and Canada to keep the munitions and military and economic aid flowing. If this tapers off due to right wing Republican obstinance then they will not be able to continue their counteroffensive once the rainy season arrives.
Ukraine has successfully attacked Crimean shipyards and damaged a number of Russian ships (reports indicate a Russian sub was severely damaged by Ukraine’s use of a British cruise missile) and the main command center in the region.
President Zelensky is frustrated by his military’s lack of progress on throwing out the Russians. He sacked all six of the Deputy Defense Ministers to shake things up. This may also be for international support to show he is tough on potential corruption.
Ukraine is desperate to sell last year’s food crops before the current year is harvested and has been selling cheaply into western European countries now that the Black Sea is a war zone and exports have been stopped by the Russians. Poland, Hungary and Slovakia have embargoed Ukraine grains to protect their own farmers who were seeing grain prices plummet.

Market Movement: We are watching the 33,600 level for the Dow (today at 34,702), 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 the current market enthusiasm. Investors may want to take some profits in non-taxable accounts due to the sizable move in energy stocks over the last six months. Traders may take a more aggressive approach. We have harvested some of our currently held positions with very nice profits. We are however keeping core weightings in each name. Subscribers please check the SER Ownership releases to see what we have done via our partial harvesting.

Once this correction has lowered stock prices and fear has returned to the markets over the next few months, be ready to buy the bargains that develop. As the general stock market declines we expect energy prices to back off and the Energy Bullish Percent Index to 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. Many energy stocks are down from their 2022 highs, and many trade around 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.

BULLISH PRESSURE

Bullish pressure for crude prices comes from the production cuts by Saudi Arabia and Russia which has been extended through the end of 2023. The original Saudi plan was for the 1.0 Mb/d cut to last just the two months of July and August. They then extended the cuts to the end of September and now to the end of 2023. This extension of the Saudi production cut of 1.0 Mb/d squeezed crude short sellers again, and drove the price of WTI up. Since late June these multiple announcements have lifted crude prices by over US$26/b. Russia has shaved sales from its western ports but has increased crude and product sales from their eastern ports. One new item helping crude prices is that the Panama canal has introduced further restrictions on the maximum number and load levels of daily transits as a drought has impacted the water levels to move ships. The canal handles 5% of world trade. A Canadian reason to support crude prices is that the ill-fated TransMountain pipeline (so far a $30.9B fiasco) may not start up in 2024 as it needs to reroute 1.3 KM of line south of Kamloops and is facing first nations opposition. This impacts 590 Kb/d of western crude that can be exported to Asia. The issue is micro-tunneling that is technically challenging and expensive.

BEARISH PRESSURE

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. Additional production could come on stream this fall from the weak sisters of OPEC (Iran, Iraq, LIbya, Nigeria and Venezuela). The biggest increase would likely be from Iraq which is negotiating with the Kurds and the Turkish regime to reopen the northern border pipeline which can move over 450 Kb/d. It has been closed for most of this year due to revenue sharing disagreements. Iran is talking about adding more barrels to reach 3.5 Mb/d by Q4/23. The August OPEC report shows that they raised production to 3.0 Mb/d from 2.86 Mb/d in July. This is the highest production rate for Iran since 2018. The deal to release US and Iranian hostages and also release US$6B held in South Korean banks appears to have been completed in recent days.

The US$32/b Urals discount is finding lots of buyers and some who don't care about sanctions are now paying over the sanction limit price of US$60/b to get supplies. Russia is also playing a game of cutting crude exports but increasing product sales so that they are not really cutting overall supplies and energy revenues continue to meet their war needs. Russia keeps on finding new buyers for its discounted crude and products. OilPrice.com recently had an article that noted that Brazil had become a buyer of crude and diesel.

EIA Weekly Oil Data

The EIA data (data cut-off September 15th) was moderately bearish for crude prices as Crude Commercial Crude Stocks fell 2.1 Mb to 418.5 Mb as Net Imports fell 3.0 Mb/d or 21 Mb on the week. The SPR saw another injection, this time, 0.6 Mb to 351.2 Mb. Motor Gasoline inventories fell 0.8 Mb while Distillate Fuels saw a decline of 2.9 Mb/d. Total Stocks (excluding the SPR) rose 3.0 Mb to 1,268.5 MB. Refinery Utilization fell 1.8% to 91.9%. US crude production stayed steady at the new yearly high of 12.9 Mb/d. Production is up 800 Kb/d above year ago levels, as longer reach horizontal wells are producing more. Cushing inventories fell 2.1 Mb to 2.9 Mb. Motor Gasoline consumption rose by 103 Kb/d to 8.41 Mb/d. Jet Fuel saw a decline of 171 Kb/d to 1.62 Mb/d. Total Demand fell 76 Kb/d. Total US consumption is below last year on a year-to-date basis by 0.4%. Consumption was at 20.17 Mb/d versus 20.26 Mb/d last year.

EIA Weekly Natural Gas Data

The EIA data released on September 14th was bullish for natural gas prices as it showed a build of 57Bcf for the week ending September 8th as electricity demand remains strong given the current heat wave. Storage is now at 3.20 Tcf. The biggest increase was in the Midwest (27 Bcf). This compares to the five-year injection rate of 72 Bcf and the 2022 injection of 103 Bcf. US Storage is now 16.1% above last year’s level of 2.76 Tcf and 6.8% above the five year average of 3.00 Tcf. NYMEX is today priced at US$2.73/mcf.

Our forecast is for NYMEX to rise above US$3.50/mcf in the coming weeks as hurricane season hits the Gulf coast. Tropical storms are forming in the Caribbean and will soon enter the Gulf of Mexico. If they shut down offshore oil and natural gas production then NYMEX could rise to over US$4.50/mcf during winter 2023-2024. Bloomberg today reported that the Texas power grid is again close to the edge of blackouts due to high usage and possibility of some shutdowns as the hurricanes approach.

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.

Baker Hughes Rig Data

In the data for the week ending September 15th the US rig count rose 9 rigs to 641 rigs (up one rig last week). Rig activity is now 16% below the level of 763 in 2022. Of the total rigs working last week, 515 were drilling for oil and this is 14% below last year’s level of 599 rigs working. The natural gas rig count is down 25% from last year’s 162 rigs, now at 121 rigs. The natural gas focused Haynesville now has 41 rigs working down from 71 rigs working last year or down by 42%. 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 an eight rig increase (five rig decrease last week) to 190 rigs. Canadian activity is down 10% versus last year when 211 rigs were working. Activity for oil is down 18% to 119 rigs compared to 146 last year. Activity for natural gas is at 71 rigs up from 65 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 $179 each currently so the above deal is a very attractive one for attendees and those interested in trying out our research). 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.

Our Premier, Danielle Smith has agreed to come and open the conference. This plenary session will take place in the Bella Hall.

Thank you to our Sponsors, Exhibitors and Presenters. It is going to be a great lineup this year!

We are working to fill the last slots for the conference. This week we are pleased to announce that we added to the Presenter/Exhibitor line-up: Freehold Royalties Ltd. (FRU-T) and Hammerhead Energy Inc. (HHRS-T). Some companies will no longer be presenting as they have recently been taken over: CWC Energy Services (CWC-V), Essential Energy Services (ESN-T) and Pipestone Energy (PIPE-T).

Energy Stock Market

The S&P/TSX Energy Index today is at 263, down four points from last week. As the general market decline unfolds and the Dow Jones Industrials breach 30,000, we expect the S&P/TSX Energy Index to fall below 220. 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 winter 2023-2024 as winter demand recovers and demand should clearly exceed supplies.

CONCLUSION

We see the March crude price decline to US$64/b as being the low for 2023. However, we may test levels below US$80/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 2H/24 WTI will exceed US$100/b as demand rises and exceeds supplies. Before the end of this decade we expect WTI 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, a high beta area, is normally one that corrects during market declines. The S&P Energy Sector Bullish Percent Index has lifted to a 2023 high of 96%, a warning signal of too much euphoria by energy stock investors. It is prudent now to have decent cash reserves for the next low risk entry point. Usually each year you get two to three buy windows. We expect one more during Q4/23 after the two we saw during March. Consider harvesting some gains and building cash reserves.

WTI is priced today at US$91.00/b. As the stock market retreat continues we should see WTI crude get dragged down, falling below US$80/b this fall. Even lower levels are possible if China’s difficulties get a higher profile. 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 Monthly Report comes out on Thursday September 28th. If interested in our upcoming report please become a subscriber.

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. Tickets are available now for $179 each at www.catchtheenergyconference.com until all are taken down before the conference. We recommend one buy a quarterly subscription to become familiar with our work and get two complimentary tickets to the event (a very attractive financial offer).