Schachter Energy Report

Eye on Energy: February 7
Schachter's Eye on Energy

Crude Oil War Premium Shrinks US$6/b Over The Last Week As US Does Not Hit Iran Directly.

Global Economic, Political & Military Update

The frenzy over the AI area continues and stocks in the sector continue their parabolic moves. The money flow into this sector is using up the cash on the sidelines and is responsible for the bulk of the stock market rise. The internals continue to weaken. When this bubble will burst is unknown but history shows parabolic moves do not end well for investors caught up in the enthusiasm. 

Fed Chairman Powell on CBS’s 60 minutes reiterated that rate cuts were not in the near term as they want more data to show inflation was at or nearing their 2% target. He mentioned that there could be three rate cuts in 2024. This is below the market’s expectation of five or six cuts. Treasury yields have risen due to his remarks and due to the strong January jobs data (more on this below). 

The Middle East war and the shutting down of shipping through the Red Sea has lengthened delivery times and supply chain concerns are picking up. The longer travel times adds to cost and this inflationary pressure should be seen in the coming months in the PPI, CPI and PCE data. 

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

  • The US Leading Economic Indicator (LEI) fell again. 
  • France and Germany had negative PMI data indicating recessionary conditions. 
  • The US regional banking crisis appears to be taking its toll again. The culprits are commercial real estate and Treasury bond positions under water. NY Community Bancorp (NYCB) is the latest casualty. Their stock has fallen 65% in a week (from US$10.52 to US$3.64 per share). Moody’s cut their credit rating to junk a few days ago. With many real estate loans maturing in 2024 there will likely be other US regional banks that get in trouble. More bank failures could be the catalyst for the market bubble bursting. 
  • The US Non-Farm Payroll report for January was a whopper number. Job gains were 353 K versus the forecast of a 187K gain. Private Non-Farm jobs rose 317K versus a forecast of 155K. Most of the job gains were in part-time jobs. Wage growth was at 4.5% (consensus 4.1%). Both of these are hot numbers and reinforce the Fed’s not lowering rates at this time.  
  • US consumers are getting tapped out with their credit card delinquencies rising. Total consumer debt swelled to US$17.5T according to the New York Fed. 

On the war front:

  • After the killing of three US soldiers at a base in Jordan, the US launched retaliatory raids against over 100 targets in Yemen, Syria and Iraq to knock out Iranian proxy war targets. Thereafter the Houthis announced that the US attacks will not stop their efforts in the Red Sea and Gulf of Aden. More ships were attacked by the Houthis after the announcement. 
  • President Biden is trying to keep the war scope as narrow as possible. However the message is not being taken seriously by Tehran. Republicans and many Democrats want a more aggressive posture taken against Iran. Options include attacking the two Iranian warships in the Red Sea and direct attacks against IRGC military facilities in Iran. Some also want financial and trade sanctions reinstated against Iran. The most hawkish want to see attacks against energy export terminals and refineries to severely disrupt the Iranian economy. 

Market Update:  We expect general stock market weakness in 1H/24 as markets are extremely overbought. As the general stock market retreats energy stocks, which are high beta, should weaken further 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 February 7th showed a full recovery from shut in production due to the cold weather in January. Commercial Crude Inventories rose 5.5 Mb while the Strategic Reserve showed an increase of 0.6 Mb on the week. This exceeded the forecast of a 1.7 Mb rise in Commercial stocks. The difference was due to a rise in Imports and a decline in Exports. Refinery levels declined 0.5% points to 82.4% and are down from 87.9% last year. Distillate fuels saw a draw of 3.2 Mb due to the ongoing winter weather albeit not as cold. Cushing inventories stayed at 28.1 Mb. US inventories remain sufficient to meet winter 2023-2024 needs. 

Crude production rose 300 Kb/d to the recent high of 13.3 Mb/d as Texas and North Dakota regained full production. Motor Gasoline consumption rose 663 Kb/d last week to 8.81 Mb/d. Jet Fuel saw a rise of 14 Kb/d to 1.60 Mb/d. Total Demand rose 108 Kb/d to 20.23 Mb/d as Propane demand fell 691 Kb/d to 1.24 Mb/d. 

EIA Weekly Natural Gas Data

The natural gas report last Thursday was quite positive for natural gas prices as it showed a withdrawal of 197 Bcf. Storage is now at 2.66 Tcf. The biggest decline was in the South Central  (71 Bcf). This compares to the five-year withdrawal of 162 Bcf and the 2023 decline of 151 Bcf. US Storage is now 2.1% above last year’s level 2.61 Tcf and only 5.1% above the five year average of 2.53 Tcf. 

NYMEX is today priced at US$1.99/mcf due to warmer weather into the US Midwest. The US is expecting another Arctic Polar Vortex after this brief above normal weather period. We suspect that prices will rise above the 2024 highs of US$3.39/mcf if the next cold spell goes down to the Texas area. US production has flattened out so further cold weather should knock storage down meaningfully. In January the EIA had US natural gas production at 99.1 Bcf/d. In February they forecast 98.9 Bcf/d. In the largest producing area of Appalachia they had January production at 35.6 bcf/d and forecast 35.4 Bcf/d for February. This is good news for higher prices going forward.  

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 February 2nd the US rig count fell two rigs to 619 rigs (it rose one rig in the prior week). Rig activity is now 18% below the level of 759 rigs in 2023. Of the total rigs working last week, 499 were drilling for oil and this is 17% below last year’s level of 599 rigs working. The natural gas rig count is down 26% from last year’s 158 rigs, now at 117 rigs. 

In Canada, there was a two rig increase to 232 rigs (up 7 rigs last week). Canadian activity is down 7% from last year’s 249 rigs due to the slower ramp up by E&P companies because of weak commodity prices. Activity for oil is at 141 rigs compared to 159 last year or down by 11%. Activity for natural gas is at 91 rigs versus 90 last year or up by 1%. 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 and our bullish crude price forecast arrives. 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 234, down 10 points from last week. The US$6/b decline in crude prices is the catalyst for this sharp decline. We expect the S&P/TSX Energy Index to fall below 230 (not too far away), and should trough around 220-225, during a spike bottom, and provide the next low risk BUY signal. We expect to be able to add 4-6 new BUY ideas if this view unfolds. 

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. 

The World Outlook Financial Conference (WOFC) was another success for Michael Campbell of MoneyTalks. Our Energy Presentation with our very Bullish Outlook for later this year and then into the end of the decade was extremely well received. In conjunction with the conference we offered a special deal for new subscribers which provides $100 off the first year of the annual subscription or the first quarter of the quarterly subscription. To access this special deal use the coupon code of WOFC24 at in the payment page at the top.

Our next SER Report comes out on February 15th. The following reports will cover the Q4/23 results of the 37 companies that we cover. If interested in these upcoming reports and the detailed review of their results, become a subscriber.

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