Crude War Premium Expands As US Plans Retaliation Against Iran's Proxies For Killing Three US Soldiers In Jordan.
Global Economic, Political & Military Update
All eyes are on the Fed today as it finishes its two day FOMC meeting. They announced no change in rates today and plan to watch inflation data before cutting rates at future meetings. No timing of rate cuts was announced. The market consensus is that depending upon the data, that the first cut could occur in June as recent economic data has been two hot for a March cut. Employment data, consumer spending, rising crude oil prices, and some food cost items all make it difficult to consider a March rate cut. The hoped for six cuts in 2024 now looks more like 3-4 cuts with it back ended into 2H/24. If the economy gives data supporting a slowdown (soft landing thesis) then a rate cut could occur in June.
The ‘AI’ mania may be doing a Humpty Dumpty for the Magnificent Seven (M7) and the hype about the ‘AI’ craze and the recently released quarterly results don’t support the lofty expectations. AMD announced that their next quarter was not going to be as robust as analyst forecasts and is down 4% today to US$166 per share and down US$20/share over the last week. Intel, a chip competitor with not as good an AI chip line-up, is down $8 per share to US$42.66/share on weak results and disappointing guidance. TESLA continues to have travails and is now down from US$265/share at the end of 2023 to US$190 per share or down by 28%. TESLA’s plant in Germany faces closure due to supply chain disruptions and its car sales are not growing as it faces tougher competition. Its aged fleet and the recent announcement by Hertz to sell half its expensively repaired EV’s adds to downside concerns. Musk himself adds to the consternation by wanting more control of his challenged company. Outside investors are balking at this but his friendly Board may find a way via giving his shares more votes. It appears that a few cracks have been shown for the AI area but so far this bubble has not burst. Yet!
On the economic front there have been quite a few releases of note:
- China now has four months of declining manufacturing activity and deflationary pressures are rising. To provide funds to restructure and help their economy China continues to sell US Treasuries. They now hold US$800B down from US$1.2T just a few years ago. Some sources expect sales to pick up in 2024 due to current China/US tensions.
- The Hong Kong court decision to force the sale of Evergrande real estate assets with over US$300B of liabilities may keep the pressure on the Chinese real estate sector. Individuals have lost massive amounts of money in real estate in the last few years and are now moving more of their remaining savings into precious metals. Gold imports are at record highs.
- US GDP came in at a robust 3.3% Q/Q and was hotter than the 2.0% forecast. What is not getting attention is that the US$329B of growth in the economy during Q4/23 was derived from US$834B of borrowings. Isn’t it nice that Public Debt grew by 2.5X GDP growth. So it now takes $2.50 in new debt to create $1.00 of GDP Growth. NUTS and unsustainable!!
- Durable Goods in the US rose 0.6% in December (forecast 0.2%) which will hold the Fed back from cutting rates in the near future.
- Banks in Europe may face renewed bank runs as depositors worry about loan losses and the tighter lending activity. Any big bank run could start a domino effect around the region and to banks they do business with, usually US Money Centre banks.
- Global freight costs (global freight cost index) have skyrocketed 140% in one month signaling a second round of supply chain inflation as ships have longer to traverse as the Red Sea is not safe.
- Companies are making more layoff announcements. Microsoft – 1,900 jobs, Google – in the hundred’s, Paypal 2,500 jobs; overall over 25,000 high tech job losses so far in 2024.
- UPS shocked the market with an announcement to cut 12,000 management employees of this 85,000 person group, after having signed a record deal with its unions last year. UPS’s stock over the last two days has fallen nearly US$20/share to $143 per share, or down by 11%. Its revenues fell 7.8% to US$24.92B with earnings falling 32% to US$2.47 per share. This may be an early indication that consumers may be tapped out and future spending declines are likely which would slow the US economy.
On the war and belligerent front:
- A Houthi missile hit a British oil tanker in the Gulf Of Aden on January 27th adding another area needing naval forces to protect shipping. The US and allies need more warships in the Red Sea and now the Gulf Of Aden.
- Somali pirates have gotten braver with the lack of allied warships off its coast and are attacking and hijacking ships and then ransoming their crews and ships and keeping the goods.
- The Houthis have continued to attack Red Sea shipping daily which shows the ineffectual limits of allied retaliation. This has not degraded the Houthis military capabilities (missiles, radars, command and control facilities). Iran seems to be restocking them sufficiently to continue their attacks .
- President Biden is facing significant pressure to confront Iran over the recent killing of three soldiers in Jordan. The scope being looked at include killing Revolutionary Guards (IRGC) when they leave Iran (as Trump did), cyber attacks against the IRGC in Iran, destroying the two Iranian warships in the Red Sea, or any other measure that does not kill civilians in Iran, which would widen the war. An escalation to worry about would be an attack against Iranian refineries or crude oil export ports which has been proposed by Republican hawks. They want to end the largesse Iran is getting from selling crude to China and India.
- A new concern is that US intelligence is seeing more discussion of China or North Korea using an EMP against the US in the US or US assets in the Pacific. Any such action would start WWIII. We now have wars in Ukraine and the Middle East. Adding a new zone would surely have the news media calling this the start of WWIII. Recently their hacking has gotten more disruptive for government agencies and critical infrastructures, according to FBI Director Wray before Congress today.
Market Update: We expect general stock market weakness in 1H/24 as markets are extremely overbought and seem to be getting even more so. As the general stock market retreats 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 31st was still North Dakota having shut in oil production as well as some US refineries not fully working due to cold weather repairs. Overall a neutral report for crude prices which rose on the week. Refinery levels declined 3.6% points to 82.9% versus 85.5% in the prior week. Crude saw a recovery of 700 Kb/d as Texas and North Dakota regained production. With the weather warming up, shut-in fields can get equipment repaired and production restarted. Commercial Stocks rose 1.2 Mb to 421.9 Mb. The SPR saw an increase of 0.9 Mb. Gasoline saw an increase of 1.2 Mb. Distillate fuels saw a draw of 2.5 Mb due to the ongoing winter weather albeit not as cold. Cushing inventories fell 2.0 Mb to 28.1 Mb. US inventories are sufficient to meet winter 2023-2024 needs.
Motor Gasoline consumption rose 264 Kb/d last week to 8.14 Mb/d. Jet Fuel saw a rise of 75 Kb/d to 1.59 Mb/d. Total Demand rose 563 Kb/d to 20.12 Mb/d as Propane demand rose 404 Kb/d to 1.93 Mb/d.
EIA Weekly Natural Gas Data
The natural gas report last Thursday was very positive for natural gas prices as it showed a withdrawal of 326 Bcf. Storage is now at 2.86 Tcf. The biggest decline was in the South Central (138 Bcf). This compares to the five-year withdrawal of 105 Bcf and the 2023 decline of 86 Bcf. US Storage is now 4.0% above last year’s level 2.75 Tcf and only 5.2% above the five year average of 2.71 Tcf. This big weekly consumption due to cold weather takes the storage levels down materially from last week’s levels which were 12.4% above the 2023 level of 2.83 Tcf and 11.2% above the five year average of 2.86 Tcf. The largest weekly drawdown so far was in January 2018 at 359 Bcf and the next largest draw was in late February 2021 of 338 Bcf. So the next month of data could see one more cold spell that takes inventories below 2023 levels and below the 5-year average and thus provide a strong lift to prices.
NYMEX is today priced at US$2.12/mcf due to warmer weather into the US Midwest and East Coast. The US is expecting another Arctic Polar Vortex in the coming weeks after this brief above normal weather period. We suspect that prices will rise above the 2024 highs of US$3.39/mcf. If a cold spell goes down to the Texas area then NYMEX prices will strengthen materially and could breach US$4.00/mcf.
President Biden has announced a hold on new LNG plants as he wants a review done that will take until after the November election. He is doing so to appease his young climate-change voters as he fears a very tight election that may need every young voter to get him over the finish line. However this raises doubts about the US being a reliable supplier. The US forced Europe to cut off Russian gas supplies and to turn to the US as an alternative. The US has seven operating LNG plants and four under construction but twelve proposals under review are impacted by this move.
We expect NYMEX to rise above US$3.50/mcf as very cold winter weather hits later in February. If this unfolds then we may see weekly drawdowns of over 250 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 the very cold days in mid-January reached over $10.00/mcf but have reversed to $2.00/mcf as storage levels still 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 26th the US rig count rose one rig to 620 rigs (it rose one rig in the prior week). Rig activity is now 19% below the level of 771 rigs in 2023. Of the total rigs working last week, 499 were drilling for oil and this is 18% below last year’s level of 609 rigs working. The natural gas rig count is down 26% from last year’s 160 rigs, now at 119 rigs.
In Canada, there was a 7 rig increase to 230 rigs (up 10 rigs last week) as activity resumed quickly after the Christmas slow down period. Canadian activity is down 7% from last year’s 247 rigs due to the slower ramp up by E&P companies after the holidays due to sloppy commodity prices. Activity for oil is at 144 rigs compared to 157 last year or down by 8%. Activity for natural gas is at 86 rigs versus 90 last year or down by 4%. 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 244, up five points from last week. The war premium has expanded due to US and UK strikes into Yemen and the Houthis and Syrian proxies hitting military targets and recently killing three US soldiers. If the attacks subside and the tensions decrease, then crude should retreat below US$70/b again as supplies are ample, and provide another low risk BUY window. We expect the S&P/TSX Energy Index to fall below 230 (not too far away), and could trough around 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. We now have 25 SER BUY Ideas. Another BUY signal is likely to be triggered 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.