Crude Oil War Premium Shrinks As Allied Warships Patrol Red Sea
Global Economic, Political & Military Update
I will be traveling next week so there will be no ‘Eye On Energy’ report. Our next issue will be out on Wednesday January 10, 2024.
The stock and bond markets continue to enjoy strong year end performance. There are a lot of excesses in both markets but for now investors are ignoring the negatives.
It is quiet on the economic front as the holiday season is underway but a few releases are of note:
- Wage inflation persists and unions are gaining power in their negotiations. President Biden has been one of their biggest political supporters and with Presidential elections due in 2024 we may see him support unions even more to get their voter, organizational skills and funding support.
- US Consumer Credit showed a slowdown as spending slowed as household budgets were strained. It grew at a 1.2% pace in October down from a 3% pace in September. Nike last week reported a weaker sales outlook and unveiled US$2B of cost cuts and the stock sank that day by 12%.
- A positive for inflation was that the Fed’s favourite measure, the PCE price index fell 0.1% in November. It was up 2.6% year over year. Core was up 3.2% in the month. This is closing in on the Fed’s target of 2%. The biggest benefit has been from lower energy costs and we expect them to swing upward in 2024 making future data problematic.
- The US Deficit widened in the first months of fiscal 2024 and is projected to rise to US$2T from US$1.7T in fiscal 2023.
- The deficit and ongoing inflation pressures may make the forecast by the markets of six or seven cuts in 2024 unlikely. Even the Fed’s indications of four cuts may prove too optimistic if we are right about rising energy costs and wage inflation persists. Housing is another problem area as it is rising much faster than headline inflation data.
- The first two weeks in January are critical for the US Congress to pass spending bills or face closure. In addition, aid to Ukraine and Israel need progress on the US southern border which looks to be gridlocked.
On the war front:
- The US has attracted sufficient warships from allied countries to keep the Red Sea from having additional attacks. Some shippers like Maersk are now planning more shipping via this route. While there is still danger from the Iranian backed Houthis, saving over 8,000 miles from the African route around the Cape of Good Hope saves materially in fuel costs. If all shipping had to be redirected it could have added over 1 Mb/d of incremental demand. The Red Sea moves 12% of world crude trade and 40% of European total trade. One negative was that Spain, Italy and France requested joining. They would prefer the effort be led by NATO and not the Pentagon.
- Both the US and Israel have killed Iranian generals in Syria and Iraq that were responsible for recent attacks.
- The US shot down last week Houthi missiles aimed at the Israeli port of Eilat. The missiles were directed by an Iranian spy ship in the Red Sea. If it directs more attacks one can expect the US or Israel to destroy the vessel.
- Iran is now via its Revolutionary Guards threatening to close waterways in the region. This is just bluster as they do not have the warships. They could do something of a short term nature, via mining, but this can be removed quite quickly by allied forces.
Market Update: We expect general stock market weakness in Q1/24 as markets are extremely overbought. Over the last two weeks since our BUY recommendation (December 7th) energy stocks have had a very nice bounce. However, if the general stock market retreats over the coming weeks then energy stocks, which are high beta, will test the lows of early December. When that happens be ready to buy the bargains that develop across all markets. 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 December 22nd) was positive for crude prices. Commercial Crude Stocks fell 6.9 Mb to 436.6 Mb but are still 17.6 Mb above last year’s levels. The SPR saw a build of 800 Kb/d to 353.3 Mb. Motor Gasoline inventories fell 0.6 Mb. Refinery activity rose 0.9% to 93.3% from 92.4% last week. Distillate Fuels saw a rise of 0.8 Mb/d to 115.8 Mb. US crude production stayed at its yearly high of 13.3 Mb/d. Production in 2023 is up 1.3 Mb/d from year ago levels, as longer reach horizontal wells with improved fracking procedures and more sand, are producing more crude. A near term negative was that Cushing inventories rose 1.5 Mb to 34.0 Mb and up from 25.0 Mb a year ago. US inventories are sufficient to meet winter 2023-2024 needs.
Motor Gasoline consumption rose 439 Kb/d last week to 9.17 Mb/d. Jet Fuel saw a sharp rise of 534 Kb/d to 1.90 Mb/d. Total Demand rose 622 Kb/d to 21.41 Mb/d. However, total US consumption is below last year on a year-to-date basis by 0.7%. Consumption was at 20.21 Mb/d versus 20.34 Mb/d last year.
EIA Weekly Natural Gas Data
The EIA data released last Thursday December 28th was mixed for natural gas prices as it showed a withdrawal of 87 Bcf, the same level of withdrawal as the prior week. Storage is now at 3.49 Tcf. The biggest decline was in the Midwest area (36 Bcf). This compares to the five-year withdrawal of 83 Bcf and the 2022 withdrawal of 213 Bcf due to a very cold spell last year. US Storage is now 11.1% above last year’s level of 3.14 Tcf and 10.0% above the five year average of 3.17 Tcf. NYMEX is today priced at US$2.53/mcf as colder weather is in the forecast. The US may see a Polar Vortex in the coming weeks according to meteorologists. If this cold spell goes down to the Texas area then NYMEX prices will strengthen materially. The last time this happened was in 2021.
We expect NYMEX to rise above US$3.50/mcf as very cold winter weather hits in January and February. NYMEX should spike over US$4.50/mcf during the coldest days during Q1/24. Europe should see tightened supplies this winter as well as colder weather has arrived earlier than in North America. China has been hit by a cold arctic blast putting their electricity grid at risk. Heavy snows have made things more dire for agricultural activity and farm sheds and greenhouses have collapsed.
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 December 21st the US rig count fell three rigs to 623 rigs (down three rigs last week). Rig activity is now 20% below the level of 779 rigs in 2022. Of the total rigs working last week, 4981 were drilling for oil and this is 20% below last year’s level of 622 rigs working. The natural gas rig count is down 23% from last year’s 155 rigs, now at 120 rigs. The Permian saw a decline of three rigs to 307 rigs working now versus 352 working in 2022 or down by 13%.
In Canada, there was a 39 rig decrease to 146 rigs (down 9 rigs last week) as the Christmas slowdown period is underway. Canadian activity however is up from last year’s 96 rigs as pad drilling gets more year round. Activity for oil is at 81 rigs compared to 32 last year. Activity for natural gas is at 65 rigs versus 64 last year.
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Just use code: Holiday23 at checkout. https://schachterenergyreport.ca/subscriptions/
Energy Stock Market
The S&P/TSX Energy Index today is at 243, down three points from last week as WTI trades down as the war premium for the Red Sea Houthi shipping attacks subsides. This war premium is eroding as the US and allies have their convoy system working well. If no successful attacks occur over the next few weeks then crude will likely retreat below US$70/b again, and provide another low risk BUY window. We expect the S&P/TSX Energy Index to fall below 230, and could reach 220-225, for a spike bottom.
On December 7th one of our three key BUY signals triggered (crude price decline below US$70/b) and we sent out an Action Alert with seven new investment BUY ideas for subscribers to consider. A second signal is likely to trigger in the coming weeks (after things calm down in the Red Sea) and we plan to add four or five additional investment BUY ideas. If you want access to this information please become a subscriber and take advantage of our holiday special offer.
Investors should decide what you want your energy weighting to be for this long energy super cycle. Our BUY 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. We expect that WTI should lift above US$90/b in 2H/24 as winter 2024-2025 demand should exceed supplies at that time and we see recovering economies globally.