Weak China Crude Consumption Drives WTI Below US$77/b. We Are Getting Close To An Important Bottom.
Global Economic, Political & Military Update
The stock and bond markets rejoiced and celebrated via a nice rally in bond prices and stock prices as investors bet that the FED was done raising interest rates based on the press conference after the FOMC meeting and many comments by Fed officials. The Dow rallied 1,900 points over the three weeks while 2-year Treasury yields fell 28 BP to 4.91% from 5.19%. Nice moves, but in our view just another normal swing in psychology that gets overdone. We still have inflation pressures, there is no federal budget deal and there could be a shutdown of the government in less than two weeks. Biden’s funding plan for Israel, Ukraine and the southern border is not going anywhere either. We expect something to spook the market and for lower stock prices and higher bond yields to occur.
Some other economic data from the world’s largest economy and other noteworthy data are:
- Non-Farm Payrolls rose a modest 150,000 in October versus a revised 297,000 new jobs in September. Over 50,000 of the jobs created were in government and 33,000 jobs were lost due to the auto strikes. Upcoming jobs data should be robust as hiring for Christmas will add over 1.0M jobs over the period (just think Walmart, Target and Amazon seasonal hiring). Average hourly earnings rose 4.1% in the October jobs report, a number higher than the Fed wants to see.
- US Treasury bond auctions while smaller than expected are not getting a high bid to coverage ratio. Finding real buyers is harder as China and Japan have gone from buyers to sellers. Add in QT and you have a lot of paper to digest to fund the deficit and the bond renewals.
- The Treasury to get around this is funding more of the debt via T-bills of under one-year duration. Nice way to pass the buck to later administrations.
- Maersk cut 10,000 jobs as shipping demand fell.
- The Panama Canal will make more cuts in the number of ships passing through due to the worst drought in 70 years and lower water levels for ships to navigate.
- China’s October exports fell 6.4% in dollar terms and that impacted its demand for raw material imports including crude oil.
Overall, this is mixed data, but the stronger growth and inflation pressure that are persisting may force the Fed to continue tightening at their next meeting or in early 2024. The basis for a rise is if the data continues hotter than they see as sustainable. If so, they are likely to raise rates at one of those future meetings.
The war in Gaza has become more brutal and deadly for the terrorists but also for the two million innocent civilians held hostage by Hamas being used as human shields. Pressure for a lengthy cease fire has spread around the world and Israel is now on the defensive politically. Memories of the massacres on October 7th are fading as the world sees the daily bombings and deaths in Gaza. One bright spot is that more aid is now coming into the NGOs in Gaza via Rafah in Egypt (100 trucks per day) and Egypt has allowed individuals with foreign passports to exit Gaza (Canadian included).
Some other noteworthy moves are:
- Secretary of State Blinken is pushing for a revitalized Palestinian Authority (PA) to govern Gaza after the fighting is over and Hamas is destroyed. But to start he wants a multinational peacekeeping force to take over after the fighting is over. Netanyahu says he wants to maintain control. This will be a nonstarter with the US and may add to the current friction building between the allies.
- Iran is egging Yemen’s Houthis to fire ballistic missiles (provided by Iran) at southern Israel to achieve a widening of the war. Israel has sent warships into the Red Sea to knock down these attacks alongside US warships in the area.
- The US has warned Iran not to send its proxies to attack US bases in Iraq and Syria which are there to fight Al-Qaeda and other Islamic terrorist groups. The US is sending more missile defense systems, like the Iron Dome, to those bases.
- Israel has been targeting internet and cellular communications in Gaza to disrupt Hamas’s operations.
- Israel’s IDF is now close to surrounding Gaza City and they plan to destroy all the tunnels they find before the gruesome battle to destroy Hamas in the city.
- Hostage negotiations continue with Qatar to free more foreign citizens held in Gaza with the trade-off being more supply convoys being allowed in with humanitarian aid and some lengthier fighting halts.
- President Biden is urging all sides to accept a three day pause to see if hostage negotiations work and that more humanitarian aid can get in. He also wants more international passport holders to get into Egypt and then home. Israel is reluctant to give Hamas time to rearrange its military for future battles. Israel also says that Hamas has taken much of the medical supplies that have come in and also quite a bit of the fuel supplies that have been allowed in.
Market Movement: We have warned about a breach of the 33,600 level for the Dow (today at 34,190), which completes a topping formation for the Dow. A close below 32,300 should set up the waterfall decline phase to below 30,000. While the Dow could fall 10% from here, the S&P 500 should fall even more and the NASDAQ the most as the overvalued FAANG and Magnificent Seven get hit hard due to their high valuations. Stay patient with cash reserves.
Once this correction has lowered stock prices and fear has returned to the markets over the coming weeks, 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.
EIA Weekly Oil Data
The EIA is updating their website so the next weekly issue will be released by them on Wednesday November 15th. Below is last week’s data again.
The EIA data (data cut-off October 27th) was bearish for crude prices. Commercial Crude Stocks rose 0.8 Mb to 421.9 Mb as Net Imports rose 349 Kb/d (2.4 Mb on the week). The SPR saw no change on the week. Motor Gasoline inventories rose 0.1 Mb. Refinery activity was at 85.4% down 0.2% from the prior week, and down from 90.6% seen last year at this time. Distillate Fuels saw a decline of 0.8 Mb/d. US crude production stayed at their new yearly high of 13.2 Mb/d. Production in 2023 is up 1,300 Kb/d above year ago levels, as longer reach horizontal wells are producing more. Cushing inventories rose 0.3 Mb to 21.5 Mb. Motor Gasoline consumption fell 167 Kb/d to 8.70 Mb/d. Jet Fuel saw a decline of 14 Kb/d to 1.71 Mb/d. Total Demand fell 233 Kb/d to 19.87 Mb/d as Distillate demand fell 387 Kb/d to 3.68 Mb/d. Total US consumption is below last year on a year-to-date basis by 0.6%. Consumption was at 20.16 Mb/d versus 20.28 Mb/d last year.
EIA Weekly Natural Gas Data
The EIA data released last Thursday November 2nd was neutral for natural gas prices as it showed a build of 79 Bcf for the week ending October 27th. Storage is now at 3.78 Tcf. The biggest increase was in the Midwest (25 Bcf). This compares to the five-year injection rate of 23 Bcf and the 2022 injection of 79 Bcf. US Storage is now 8.4% above last year’s level of 3.49 Tcf and 5.7% above the five year average of 3.57 Tcf. NYMEX is today priced at a very healthy US$3.15/mcf.
Our forecast is for NYMEX to rise above US$3.50/mcf during late November as cooler winter weather arrives. NYMEX should rise over US$4.50/mcf during the coldest days of winter 2023-2024. Europe should see tightened supplies this winter as war premiums impact available LNG cargoes. European gas prices have risen in recent weeks as Egypt LNG shipments have been halted. The source of their gas exports was from the Israeli offshore natural gas fields.
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 November 3rd the US rig count fell seven rigs to 618 rigs (up one rig last week). Rig activity is now 20% below the level of 770 in 2022. Of the total rigs working last week, 496 were drilling for oil and this is 19% below last year’s level of 613 rigs working. The natural gas rig count is down 24% from last year’s 155 rigs, now at 118 rigs. The natural gas focused Haynesville now has 38 rigs working down from 69 rigs working last year or down by 45%.
In Canada, there was no change in the rig count (two rig decrease last week) at 196 rigs. Canadian activity is down 7% versus last year when 209 rigs were working. Activity for oil is down 13% to 122 rigs compared to 141 last year. Activity for natural gas is up 9% at 74 rigs up from 68 last year. The main focus on natural gas drilling has been on the liquids rich condensate Montney and Duvernay plays.
Energy Stock Market
The S&P/TSX Energy Index today is at 254, down 14 points from last week. As the general market decline continues and the Dow Jones Industrials breaches 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 in early 2024 as winter demand should exceed supplies.