Schachter Energy Report

Eye on Energy: February 14
Schachter's Eye on Energy

Crude Oil War Premium Expands US$3.50/b Over The Last Week As Houthis Continue Attacks In Red Sea.

Global Economic, Political & Military Update

The surprisingly hot US CPI data yesterday drove the Dow down over 520 points to 38,273 and at its worst was down over 700 points, before a late afternoon recovery. The US Treasury 10-Year yield rose to 4.31%, up 44 BP in just over a week, which spooked investors who were betting on 4-6 rate cuts. Now the market is pricing in only three cuts, which was what the Fed had been directing. The March and May meetings for rate cuts are off the table and the first window for the Fed to cut the Fed Funds rate is now June. In June if inflation and wage data weaken then the first cut and the pivot would occur then. I am skeptical the data will support a cut at that time.

So let’s go through the recent economic & political releases of significance. 

  • Instead of going down to below 3% and heading to the Fed’s target of 2% the US CPI data for January went up. The core CPI month over month rose 0.4% (4.8% annualized) while the yearly (year over year number) rose 3.9% above the forecast of 3.7%. This pivot in the direction of inflation spooked markets.
  • Service costs were the main culprit as wages rose. Services rose 0.8% in the month (the most since April 2022). Motor Insurance rose 20.6%, transportation inflation 9.5%, hospital services 6.7%, Car repairs 6.2% and rent inflation 6.1%. 
  • Shoppers are seeing this in the stores. Coca-Cola reported revenue growth as it raised prices but volumes fell in the US by 1%. Kellogg, the cereal maker saw prices rise 7.5% in Q4/23 but volume fell 10.1% as shoppers balked at the price levels.The watchdog group Accountable says the US food industry is engaged in ‘gross profiteering’ at the expense of consumers. 
  • Americans are shunning food giants like McDonald’s, KFC, Pizza Hut, Taco Bell, etc. as they start to shun once-affordable menu items. Mcdonald’s had its first quarterly miss in four years. It faced backlash from consumers for raising their prices so high. One location even had the nerve to charge US$18 for a Big Mac combo.
  • While the US had great February job numbers the data now available shows that full time job losses in February were 1.4M full time jobs which was offset by more part-time job growth. A large number of the part-time job growth was Federal workers. 
  • Wage pressure continues in the UK with pay excluding bonuses rising 6.2%, making the Bank of England’s job tougher. 
  • The rising US debt level and interest payments are now spooking bond investors who  want more yield to finance this year’s US$2T deficit and nearly US$20T of financings.  
  • The banking crisis is spreading around the world as commercial real estate is ‘marked to market’ and losses are taken. We have seen this in China, the US and now in Germany. The Bundesbank warned that the present value of the banking book was negative for 15 savings banks and 37 credit cooperative banks. The Bundesbank sees the current warning signals for real estate as greater than before the financial crisis. German industrial production fell 1.6% in December worse than expected. 
  • President Biden’s gaffes on TV and his recent guilt in mishandling classified US documents was let off the hook due to his age, and the worry that he could not be convicted (too forgetful to prosecute), has again raised the issue of the Justice Departments unequal treatment. It also calls into question why he continues to run. The debates between Biden and Trump will be must-see TV. Who is more cognitively challenged?
  • Canada is now seeing nasty job cuts. BCE announced a workforce cut of 9% or 4,800 positions. BCE is doing this restructuring so it can defend its dividend of $3.87 annually ($0.9675 quarterly) providing a yield of 7.7%. 

On the wars front:

  • President Zelensky shook up his military, firing his top general and replacing him with one he will push to move from a defensive fighting posture to an offensive one. Two problems: lack of trained manpower and a shortage of munitions. The EU plans to send support but the US may not as it has political gridlock with the Republican party not willing to support Ukraine until Biden does something significant to secure the US southern border. 
  • Israel freed two Argentianian hostages but is under pressure to not invade Rafah until it has a safe place for the 1.5 M refugees to go. President Biden is showing more and more irritation with President Netanyahu of Israel over his ignoring US advice. Some military equipment is now being withheld. 
  • Shipping in the Red Sea is getting worse as the Houthis attack more civilian shipping and have the gumption to attack warships of the US and UK. The UK warship HMS Diamond was seriously damaged last week. 
  • Lebanon is heating up as Hezbollah retaliates for the killing of one of its leaders. They are now firing rockets at Safed. IAF jets have responded. If a ground operation is launched by either party this would be a major escalation in the region.
  • The US Senate has approved aid for Ukraine and Israel with a US$95.3B package but it is dead on arrival in the House as the Speaker will not hold a House vote as the package has nothing to solve the migrant crisis on the southern border.

Market Update:  We have expected general stock market weakness in 1H/24 as markets were extremely overbought and downside momentum is picking up. 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 14th showed a large increase in inventories and significant demand weakness in the US. Commercial Crude Inventories rose 12.0 Mb to 439.4 Mb, while the Strategic Reserve showed an increase of 0.7 Mb on the week. This exceeded the forecast of a 3.0 Mb rise in Commercial stocks. Refinery levels declined 1.8% points to 80.6% and are down from 86.5% last year. Distillate fuels saw a draw of 1.9 Mb due to the ongoing winter weather albeit not as cold. Cushing inventories rose 700 K to  28.8 Mb. US inventories remain sufficient to meet winter 2023-2024 needs. 

Crude production remained at 13.3 Mb/d. Motor Gasoline consumption fell 639 Kb/d last week to 8.17 Mb/d. Jet Fuel saw a decline of 251 Kb/d to 1.35 Mb/d. Distillate demand fell 303 K b/d to 3.51 Mb/d. Total Demand fell 973 Kb/d to 19.26 Mb/d. This softer US demand should bring crude prices down once the war premium in the Middle East abates.  

OPEC Monthly Report

The February 2024 report released yesterday showed that in January OPEC saw a modest decrease in production of 350 Kb/d to 26.3 Mb/d as Iraq saw a decrease of 98K b/d to 4.2 Mb/d, Kuwait down 109 K b/d to 2.4 Mb/d and Libya saw a decrease of 162 Kb/d to 1.0 M b/d.  Increasing production was UAE up 31 Kb/d to 2.9 Mb/d and Saudi Arabia at up 25 K b/d to 9.0 mb/d. 

Using base production in June 2023, OPEC has cut back only 900 Kb/d and not the 2.2 Mb/d that they repeatedly broadcast. 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 have been repeatedly 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 when the war premium subsides. 

EIA Weekly Natural Gas Data

The natural gas report last Thursday was disappointing for natural gas prices as it showed a low withdrawal of 75 Bcf. Storage is now at 2.58 Tcf. The biggest decline was in the Midwest  (38 Bcf). This compares to the five-year withdrawal of 144 Bcf and the 2023 decline of 100 Bcf. US Storage is now 7.8% above last year’s level 2.40 Tcf and 10.6% above the five year average of 2.34 Tcf. 

NYMEX is today priced at US$1.65/mcf due to warmer weather. The US is expecting another Arctic Polar Vortex after this brief above normal weather period. US production has flattened out so further cold weather could knock storage down meaningfully. 

The current depressed natural gas prices have been seen before and the industry has slowed drilling which has moved inventories into balance. Remember we have two new LNG plants coming on stream later this year in the US and one, LNG Canada, on our west coast. Shell projects global growth to grow by 50% before 2040 with most of that growth coming from China as it switches from coal to natural gas and to renewable energy. 

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 9th, the US rig count rose four rigs to 623 rigs (it fell two rigs in the prior week). Rig activity is now 18% below the level of 761 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 19% from last year’s 150 rigs, now at 121 rigs. 

In Canada, there was no rig increase which held at 232 rigs. Canadian activity is down 7% from last year’s 250 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 161 last year or down by 12%. Activity for natural gas is holding at 91 rigs versus 89 last year or up by 2%. In our discussion with E&P companies they are holding to lower spending at this time due to low natural gas commodity prices. They should increase activity in the summer of 2024 if commodity prices rise materially.  In addition we will be closer to LNG Canada ramping up and our bullish crude price forecast arriving. 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 237, up three points from last week due to the war premium lift on recent Houthi attacks on four warships over the last two weeks. 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 tomorrow 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.

Our Q1/24 SER Webinar will occur on Thursday February 29th at 7PM. We will go over the companies that have reported results and who we see outperforming our forecasts and those that missed. In addition we are starting a new feature ‘TOP PICKS NOW’ in our webinars and upcoming SER issues. In each issue for subscribers, I will be recommending the best ideas depending upon the stock price at that time. We will try to recommend one idea in each of Pipeline/Infrastructure/Royalty, Domestic Natural Gas, Domestic Liquids, International E&P and Energy Service.

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