Iran And Pakistan Attacks On Each Other Add To Crude War Premium.
Global Economic, Political & Military Update
The stock and bond markets are struggling as we start 2024. Over the first three weeks of 2024 the stock markets are down and historically this has led to negative performance for the year. If the full results of the month of January finish negative then the odds increase for a difficult down year for the major averages. This should mean that the tech sector gets shafted with AI stocks leading the market down. Bond yields have lifted >9% from 3.79% to today’s 4.15% as investors now despair about the hoped for six rate cuts in 2024. Jobs data remains too strong, supply chain issues have returned due to loss of movement of goods through the Red Sea, and the US consumer remains in a spending mood despite financing this spree with increasing credit card debt. Bottom line, there are a lot of excesses in both the stock and bond markets. This year may be a year of business challenges, war expansion and political chaos. The US election will be a strange one, with the likely two geriatric and challenged contestants demeaning the US in the process.
We cover our concerns about the general market and our detailed very positive outlook for the energy sector in 2024, in our January 18 SER Report for subscribers coming out later today.
On the economic front there have been quite a few releases of note:
- US Retail Sales rose by 0.6% in December more than double the forecast.
- Industrial Production in the US grew 0.1%.
- The January Empire Manufacturing Index plunged to -43.7 versus a -5 forecast and a -14.5 prior result. US Manufacturing is having challenges.
- The jobs data released the prior week shows most of the full time growth came from the government sector. More jobs here adds to deficit spending.
- Rising energy prices will dash hope of a 2% inflation rate. It was hard work getting to 4% from 9% but getting the last 2% is proving very difficult. Chain supply issues and rising commodity prices have a major impact on this goal. Shelter rose 6.2% in December, followed by electricity with a rise of 3.3%. Both should rise higher throughout 2024.
- Headline inflation in Canada rose to 3.4% impacted by higher energy prices. We see WTI rising US$20/b by year end. This will drive the inflation data higher. Toronto has proposed a property tax increase of 10.5%.
- AI forecasts expect massive productivity gains as the products are introduced to the marketplace. Goldman Sachs also says that this will impact 300M current jobs. Retraining 300 M people to the new technologies will be difficult on older workers.
- El Nino is bringing heavy moisture from heavy rains and snow depending upon where you live. Heavy rains can lower sugar to wheat crops. Rice prices in Asia continue to rise sharply and are nearing US$1,000 a ton. This will require producing countries to take the robust prices or decide to feed their own populations and halt exports.
- Layoffs are starting to be significant ones from large US corporations. Citibank plans 20,000 layoffs, Google has talked about 30,000 layoffs as it moves to AI ad tech from human employees.
On the war and belligerent front:
- The party that won the election in Taiwan was the one China wanted to see defeated as it is against reunification. Expect more China military action, which if it expands, could turn into a blockade of the island.
- The US and UK have continued strikes against Houthi targets to destroy ammunition dumps, command and control centers and sites being ready to fire at allied shipping. So far 2,000 ships have been diverted from using the Red Sea as attacks persist. Interestingly Russian tankers are moving their oil tankers to Asian buyers with no problems. The hope is that Iran does not get into a direct conflict with the allied forces.
- Tehran is now directly involved in the fighting having fired missiles into Pakistan and Iranian separatists and into Iraq against an Israeli spy base in Kurdistan. The Iranian missiles fired have a range to hit all of Israel and that may have been one of the benefits of Iran showing this capability now. Pakistan in retaliation has now fired into Iran to go after its opposition groups living in SE Iran. Iran now directly involved in fighting is a big escalation. We suspect more is to come!
- More rockets have been fired at Israel. Fifty were fired yesterday in the largest barrage in weeks.
- North Korea tested a missile tipped with a hypersonic missile that could hit Hawaii and Guam. They have been quiet for a while but with assistance from Russia are getting more aggressive so as to pressure South Korea and Japan on concessions (food etc.)
- US Intelligence now is concerned about Hezbollah attacking within the US as many of their operatives have entered the US illegally via the open border.
Market Update: We expect general stock market weakness in Q1/24 as markets are extremely overbought. If the general stock market continues to retreat 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 January 12th) was mostly negative for crude prices. Commercial Crude Stocks fell 2.5 Mb to 429.9 Mb. The SPR saw a build of 600 Kb/d to 355.6 Mb. Motor Gasoline inventories rose 3.1 Mb. Refinery activity fell 0.3% to 92.6% as product inventories grew. Distillate Fuels saw a rise of 2.4 Mb/d to 134.8 Mb. Total Stocks (including the SPR) rose 3.4 Mb on the week.
US crude production recovered by 100 Kb/d to reach the recent high of 13.3 Mb/d. Production in 2024 is up 1.1 Mb/d from year ago levels. Cushing inventories fell 2.1 Mb to 32.1 Mb. US inventories are sufficient to meet winter 2023-2024 needs.
Motor Gasoline consumption fell 57 Kb/d last week to 8.27 Mb/d. Jet Fuel saw a decline of 300 Kb/d to 1.30 Mb/d. Total Demand rose 263 Kb/d to 19.87 Mb/d as Other Oils demand rose 440 Kb/d to 5.03 Mb/d.
opec monthly report
The January 2024 report released yesterday showed that in December OPEC saw a modest increase in production of 73 Kb/d to 26.7 Mb/d as Nigeria saw an increase of 100 Kb/d to 1.42 Mb/d. This data removes Angola which withdrew from OPEC at the beginning of the year as it did not want to accept OPEC cutback guidelines. Offsetting this were decreases by Iran of 11 Kb/d to 3.14 Mb/d and Saudi Arabia down 12 Kb/d 8.96 Mb/d.
Adjusting these numbers for the removal of Angola. So far total OPEC cuts since the start of cutbacks in July 2023 have been only 387 Kb/d (June 2023 base production without Angola of 27.19 Mb/d to December’s 26.7 Mb/d of production). These are far away from the stated cut of 1.2 Mb/d by OPEC and the cut of 1.0 Mb/d by Saudi Arabia. So while cutbacks in production, they are not the 2.2 Mb/d cuts that were announced. Of note US production increases have more than offset the real OPEC cuts by a large margin. These excess barrels are the reason we have adequate supplies and prices have retreated.
EIA Weekly Natural Gas Data
The EIA data released today January 18th was positive for natural gas prices as it showed a withdrawal of 154 Bcf. Storage is now at 3.18 Tcf. The biggest decline was in the Midwest area (51 Bcf). This compares to the five-year withdrawal of 102 Bcf and the 2023 decline of 86 Bcf. US Storage is now 12.4% above last year’s level of 2.83 Tcf and 11.2% above the five year average of 2.86 Tcf. NYMEX is today priced at US$2.73/mcf due to colder weather into the US Midwest and East Coast. The US is expecting another Arctic Polar Vortex in coming weeks and we suspect that prices will rise above last week’s high of US$3.31/mcf. If a cold spell goes down to the Texas area then NYMEX prices will strengthen materially and could breach US$4.00/mcf.
The US is now the largest LNG exporter as the Freeport LNG plant is back online. This year two more plants should come on stream. Venture Global LNG in Louisiana and Golden Pass in Texas will add 38M tons a year. This adds materially to the 91.2M tons delivered in 2023 (Bloomberg). The US is now the largest exporter ahead of Australia and Qatar.
We expect NYMEX to rise above US$3.50/mcf as very cold winter weather hits later this month and many cold periods are seen in February. If this unfolds then we may see weekly drawdowns of over 200 Bcf. NYMEX should spike over US$4.50/mcf during the coldest days during Q1/24. Europe is seeing stronger demand 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. Both Texas and Alberta were close to having rolling blackouts but requests to lower usage kept blackouts from occurring. In Alberta’s case quick cutbacks and help from Saskatchewan kept us all warm last weekend. AECO spot prices on very cold days have reached up to $7.00/mcf. Strong demand from data centers is seen as a problem for the rising need to expand electricity across nations. Utilities are having problems meeting this demand. More cogen facilities and renewables will need to be developed quickly if the AI revolution is to occur.
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 January 12th the US rig count fell two rigs to 619 rigs (it fell one rig in the prior week). Rig activity is now 20% below the level of 775 rigs in 2023. Of the total rigs working last week, 499 were drilling for oil and this is 20% below last year’s level of 623 rigs working. The natural gas rig count is down 22% from last year’s 150 rigs, now at 117 rigs.
In Canada, there was an 88 rigs increase to 213 rigs (up 39 rigs last week) as activity resumed quickly after the Christmas slow down period. Canadian activity is down 6% from last year’s 227 rigs due to the cold weather and slow ramp up by E&P companies after the holidays due to sloppy commodity prices. Activity for oil is at 133 rigs compared to 141 last year or down by 6%. Activity for natural gas is at 80 rigs versus 86 last year or down by 7%. In our discussion with E&P companies they are holding to lower spending at this time due to low commodity prices and will increase activity in the summer if prices rise materially as we get close to LNG Canada ramping up. It is likely that production volumes will taper off in Q1/24 and Q2/24 for many operators, as decline rates offset drilling of new wells.
Energy Stock Market
The S&P/TSX Energy Index today is at 235, down eight points from last week. The war premium is likely to erode US$5-8/b in the coming weeks as the US and allies have their convoy system working well with no attacks getting through. If no successful attacks occur then crude should 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 (now not too far away), and could reach 220-225, for a spike bottom and another important BUY signal.
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.
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.