WTI Crude Oil Falls US$4/b Or 5% On Wednesday Morning To US$73.85/b On OPEC Disarray And Large Build In US Inventories.
Global Economic, Political & Military Update
The stock and bond markets continue to have positive momentum heading into the US Thanksgiving holiday season. On the stock side the AI sector continues to be the major lift for stock prices. This narrow market focus with AI stocks up significantly in 2023 is similar to the rise we saw prior to the Dot-Com bubble. The key seven AI stocks now make up 30% of the S&P 500 market capitalization, a new record high for any industry group. On the bond side weaker US inflation data and durable goods orders have lifted expectations of rate cuts by the Fed in 1H/24. Bond and stock bulls have gone all in and we see this one way trade as ovedone. Any bad news on inflation or problems in Congress passing bills, could change this dynamic quickly. We are more worried about the next 5,000 points on the downside for the Dow Jones Industrials Index than about missing the next 5,000 points on the upside. We do not see the Fed lowering Fed Funds rates in 1H/24 and maybe not until late in 2H/24. Caveat Emptor!
Some of the noteworthy economic data for the world’s largest economy are:
- US Durable Goods Orders for October fell 5.4% versus a rise of 4.0% in September.
- The Fed continues to reduce its balance sheet tightening monetary conditions. From March 2023 to now they have reduced their balance sheet by US$900B, this in under 8 months. The peak was at US$8.7T in late March to US$7.8T last week.
- Subprime auto borrowers are now facing the highest delinquency rates at 6.1% of outstanding loans. This exceeds the rates seen in 2008 during the financial crisis.
- Recent Treasury issues have been well received as interest rates have pulled back. Net new debt sold by the Treasury in 2023 is a net US$2T. Most of the new debt has shorter maturities.
- Moody’s has shifted its outlook for some of the major US banks (Bank of America, JPMorgan Chase and Wells Fargo) to negative due to credit risks.
On the two wars fronts:
- The US has seen increased rocket and drone attacks against US forces in Iraq and Syria since the Hamas terrorist attack in Israel. The US has retaliated and taken out various Iranian backed terrorist facilities and personnel.
- Iran’s Yemini proxies have hijacked a Bahamas flagged vehicle carrier ship (Galaxy Leader) owned by an Israeli billionaire.
- Ukraine’s military has made progress against Russia with a beachhead on the eastern side of the Dnieper river.
- Russia is using more Iranian drones against Ukraine and is husbanding their growing stockpiles of cruise missiles in preparation for an increased winter campaign to destroy Ukraine infrastructure.
- NATO warehouses around the world are admitting they are running out of 155 mm artillery shells. This will impair any offensive actions by Ukraine.
- NATO leaders (including from the US) are talking to Ukraine leaders about what happens in 2024 if the US does not pass the USS$60B of aid (economic and military) packages. Ukraine is being pressured to find solutions on its own or realize that negotiations with Russia may be the best of the bad choices that it faces. Independent autonomy for the Russian held areas may be what they are being pressured to accept. In effect a ceasefire at current positions is what is being proposed.
Market Update: We continue to expect stock market weakness into year end. Once this correction has lowered stock prices and fear has returned to the markets, be ready to buy the bargains that develop. As the general stock market declines, energy prices will back off some more and the Energy Bullish Percent Index should retreat 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 2023 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 data (data cut-off November 17th) was clearly bearish for crude prices. Commercial Crude Stocks rose 8.7 Mb to 448.1 Mb and are 16.4 Mb above last year’s levels. The SPR saw no change on the week. Motor Gasoline inventories rose 0.7 Mb. Refinery activity rose 0.9% to 87.0% from 86.1% last week and is down from 93.9%, seen last year at this time. Distillate Fuels saw a decline of 1.0 Mb/d. US crude production stayed at their yearly high of 13.2 Mb/d. Production in 2023 is up 1,100 Kb/d above year ago levels, as longer reach horizontal wells with improved fracking procedures and more sand, are producing more crude. Cushing inventories rose 0.9 Mb to 25.9 Mb. Motor Gasoline consumption fell 469 Kb/d to 8.48 Mb/d. Gasoline prices are now at the lowest level this year at US$3.39/gal down from over US$5.00/gal last year. Jet Fuel saw a decline of 283 Kb/d to 1.51 Mb/d. Total Demand fell 38 Kb/d to 20.04 Mb/d. Total US consumption is below last year on a year-to-date basis by 0.6%. Consumption was at 20.19 Mb/d versus 20.31 Mb/d last year.
EIA Weekly Natural Gas Data
The EIA data released last Thursday November 16th was neutral for natural gas prices as it showed a build of 60 Bcf for the week ending November 10. Storage is now at 3.83 Tcf. The biggest increase was in the South Central area (32 Bcf). This compares to the five-year withdrawal of 4 Bcf and the 2022 injection of 64 Bcf. US Storage is now 5.4% above last year’s level of 3.64 Tcf and 5.6% above the five year average of 3.63 Tcf. NYMEX is today priced at US$2.86/mcf.
Our forecast is for NYMEX to rise above US$3.50/mcf 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. Colder weather forecasts for the coming weeks in Europe should begin the winter price rise.
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 17th the US rig count rose two rigs to 618 rigs (down two rigs last week). Rig activity is now 21% below the level of 782 in 2022. Of the total rigs working last week, 500 were drilling for oil and this is 20% below last year’s level of 623 rigs working. The natural gas rig count is down 27% from last year’s 157 rigs, now at 114 rigs. The natural gas focused Haynesville now has 38 rigs working down from 70 rigs working last year or down by 46%.
In Canada, there was a three rig decrease (three rig increase in the prior week) at 196 rigs. Canadian activity is down 3% from last year when 201 rigs were working. Activity for oil is down 9% to 123 rigs compared to 135 last year. Activity for natural gas is up 11% at 73 rigs up from 66 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 8 points from last week due to the sharp decline in crude prices today. As the general market rolls over next week and the Dow Jones Industrials heads downward and breaches 30,000, we expect the S&P/TSX Energy Index to fall below 230, and could reach 220. This would trigger the next 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 2024 as winter demand should exceed supplies.