Schachter Energy Report

Eye on Energy: January 24
Schachter's Eye on Energy

Crude Oil War Premium Expands As US and UK Bomb Houthi Military Targets In Yemen.

Global Economic, Political & Military Update

The AI mania continues to take stock markets to new highs. In our view we are getting even higher into parabolic nose bleed territory with the risk of a sharp and painful decline imminent. We do not know what will be the catalyst, just history shows that these parabolic rises end badly. So far this year markets are ignoring that interest rates are rising (US 10-Year Treasury yield up from 3.90% to 4.16% (rates up nearly 7% so far this year).  Many companies have reported disappointing Q4/23 earnings. One example this week is 3M fell 16% after their poor results.  Also, TESLA fell 18% (US$250 to US$206 per share) since the start of the year as it lowers prices in China to compete and has supply problems for parts requiring it to close their German car plant for a few more weeks. It’s earnings and shipments come out tonight and will be closely monitored. 

Next week the Fed meets and is unlikely to pivot and lower the Fed Funds rate. Keen watchers will want to hear what the  Fed plans for the March meeting and if it is moving its consensus to cut rates at that meeting. If they do not provide encouragement for this optimistic view then the stock and bond markets will retreat meaningfully. 

On the economic front there have been quite a few releases of note:

  • China is having continued economic problems and their stock markets are falling sharply even after banning short selling and taking intervention action. If the second largest economy is facing travails then this may be the leading force to the market challenges I foresee.
  • Global debt levels are rising as are deficit spending (many for war spending) that makes raising funds more expensive and interest rates cannot come down even as inflation has moderated for now. 
  • Farmers in Europe are protesting (Romania, France and Germany) against higher taxes, higher climate change issues and the net squeeze on incomes. If this is not resolved then planting this spring will be smaller and food prices could rise materially in 2H/24.
  • US Savings as a percentage of GDP is now negative as consumers use up their savings to fund their current lifestyles. The historic rate has been over 2% of GDP. This should impact consumer spending this year as household budget cuts occur due to a loss of purchasing power. 
  • US M2 Money Supply is negative and should after some delay impact the economy. 
  • Supply chain issues have returned with many shippers cutting use of the Red Sea (except Houthi friends China, Iran and Russia). The longer transit times add to supply chain challenges. The route around the Cape of Good Hope adds 6,500 km and 10-12 days of sailing time per trip. Some shipping experts fear this could disrupt global supply chains more than the Covid pandemic did. 
  • Canada may be in recession or entering recession as Core Retail Sales fell 0.5% in November versus a forecast of a decline of 0.1%. 
  • Retail Sales in the UK fell 3.2% in December increasing the likelihood of recession. 

On the war and belligerent front:

  • The US is pressuring Israel to do a deal to end the fighting in Gaza in return for all the remaining hostages alive. Netanyahu remains adamant that Hamas must be destroyed.
  • Another move by the US is for a post war scenario where a revitalized Palestinian Authority (PLA) is given control of the area. Again Israel sees the PLA as incompetent and full of corrupt officials. Isn’t Netanyahu under attack for his corruptions?
  • The US now has evidence that Iran is ‘directly involved’ in Yemen’s rebel ship attacks. 
  • Taiwan’s election is over and the result is not what President Xi wanted to see. More forms of intimidation to coerce Taiwan are expected. Tensions here would add to US military responses if a blockade occurred. 
  • Pakistan and Iran are now belligerents with regular attacks (missile and airstrikes) against each other’s border areas as they fight anti-government insurgents. If this expands we would be seeing one more war front and Iran directly involved. Remember both have nuclear weapons. 
  • Ukraine is running out of weapons to defend themselves and the US Congress is stalled as the Biden administration is reluctant to compromise on shutting down the border and sending back the millions of migrants that have already landed. If no deal is done that includes funding and weapons for Ukraine, a defensive posture by Ukraine would be to Russia’s advantage. 
  • North Korea is testing new weapons and is showing more antagonism to South Korea. This could be a hotspot in 2024. 

Market Update:  We expect general stock market weakness in 1H/24 as markets are extremely overbought and seem to be getting even more so. If the general stock market starts to retreat over the coming weeks then energy stocks, which are high beta, will weaken and 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 released today January 24th was impacted by the cold weather and when North Dakota oil production was shut in as well as some US refineries. Overall a positive report for crude prices which rose on the week. Refinery levels declined 7.1% points to 85.5% versus 92.6% in the prior week. Crude saw shut ins of 1.0 Mb/d and US production was only 12.3 mb/d. With the weather getting better North Dakota is seeing their production returning on stream. Commercial Stocks fell 9.2 Mb to 420.7 Mb. The SPR saw an increase of 0.9 Mb. Gasoline saw an increase of 4.9 Mb as demand waned. Distillate fuels saw a draw of 1.4 Mb due to the cold weather. Overall stocks fell 22.3 Mb (excluding the SPR). Cushing inventories fell 2.0 Mb to 30.1 Mb. US inventories are sufficient to meet winter 2023-2024 needs. 

Motor Gasoline consumption fell 388 Kb/d last week to 7.88 Mb/d. Jet Fuel saw a rise of 218 Kb/d to 1.52 Mb/d. Total Demand fell 312 Kb/d to 19.56 Mb/d as Other Oils demand fell 661 Kb/d to 4.37 Mb/d. 

EIA Weekly Natural Gas Data

The natural gas report was mostly 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$2.64/mcf due to colder weather into the US Midwest and East Coast. The US is expecting another Arctic Polar Vortex in coming weeks after a brief normal weather period, and we suspect that prices will rise above recent highs 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. AECO spot prices on very cold days have reached over $10.00/mcf but have reversed to below $2.00/mcf as storage levels remain high and warmer weather has returned. 

We recommend buying the very depressed natural gas stocks during periods of general market weakness. We plan 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 19th the US rig count rose one rig to 620 rigs (it fell two rigs in the prior week). Rig activity is now 20% below the level of 771 rigs in 2023. Of the total rigs working last week, 497 were drilling for oil and this is 19% below last year’s level of 613 rigs working. The natural gas rig count is down 23% from last year’s 156 rigs, now at 120 rigs. 

In Canada, there was a 10 rig increase to 223 rigs (up 88 rigs last week) as activity resumed quickly after the Christmas slow down period. Canadian activity is down 7% from last year’s 241 rigs due to the slower ramp up by E&P companies after the holidays due to sloppy commodity prices. Activity for oil is at 140 rigs compared to 153 last year or down by 8%. Activity for natural gas is at 83 rigs versus 88 last year or down by 6%. 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 of 2024 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 239, up four points from last week. The war premium has expanded due to US and UK strikes into Yemen and the Houthis military targets. If the attacks subside 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. Another 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. 

Our SER Report that comes out on February 1st will include the introduction of one new growth story in a high profile geological area. We see rising prices for energy throughout the year which should make the energy sector one of the best performing areas in the markets in 2024. Commodities as a whole should lead the performance board this year. If interested in this upcoming report and the new E&P idea become a subscriber.

We continue to work to add new energy ideas to our Coverage List in Q1/24 that we see as exciting ideas for this energy super cycle. We plan to meet with the prospective companies after they report their 2023 results and their Annual Information Form has been released.

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