Schachter Energy Report

Eye on Energy: February 22
Schachter's Eye on Energy

Weak US Demand And Rising Commercial Stocks Likely To Cause Near Term Correction In WTI Price.

Global Economic, Political & Military Update

Mixed economic data in the US, with some indicators like manufacturing weakening are being offset by rising inflation after many months of declines. The Fed meeting notes out this week (from the last FOMC meeting) noted that they are concerned about lowering rates too quickly due to persistent price pressures. So the market desired pivot and 5-6 cuts this year now has moved to maybe three cuts with the earliest cut in June; if the data warrants a cut at that time. So far in February the yield on the 10-year Treasury has risen from 3.87% to 4.32% or by 45 BP.  If higher for longer and no cuts by the summer than the general stock market is quite overvalued. The AI love affair continues after the very robust results by NVIDIA. The key US averages have climbed to new highs led by the Magnificent Seven (M7). 

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

  • US Core PPI rose 0.5%, much above the forecast of a 0.1% rise and last month’s decline of 0.1%. With crude prices up 15% (from US$68/b to US$79/b) over the last two months we can expect inflation numbers to get worse and not better in the coming months. 
  • Housing starts in the US for January fell 14.8% to 1.33M from 1.56M in the prior month.
  • US Retail Sales fell 0.8% versus a forecast of a modest decline of 0.2% as consumer budgets are stretched.
  • US small banks are now under pressure from withdrawals versus last year’s problem in Regional banks. If this becomes widespread then a financial crisis could be seen again and the Fed and the FDIC will force mergers but guarantee all deposits once again. 
  • Large bank leaders like Jamie Dimon of JP MorganChase are warning that the large federal deficits and financing requirements are crowding out other borrowers and are a drag on the US economy despite the US$2T deficits adding 6% to GDP. If official growth comes in at 2-3% then without the deficit spend the US economy would be in recession now. Does such large deficit spending make Bidenomics a good thing for the US economy on a long term basis? That is why his marketing of a strong economy does not get support from most Americans. 
  • Japan and the UK both now have two negative quarters of economic performance meeting the technical definition of recession. With China still struggling there are quite a few soft spots around the world. Are we facing a mild recession in Europe? 
  • Insiders are selling their stock holdings in record amounts which should be a warning signal to investors. Jeff Bezos sold US$8.5B of Amazon stock (50M shares). Warren Buffett’s favourite metric for assessing stock market valuations has hit a new record high of 221% of GDP. He loves to buy when under 100%. His company is now sitting on record cash. 
  • US truckers are holding off driving into New York city with a boycott due to progressive restrictions. This could affect supply chains soon and add to the cost of daily consumables. FYI – truckers transport 70% of all freight in the US so this could be a big hit to NYC if it persists. 
  • Canadian retail sales for December rose 0.9% but retailers like Canadian Tire reported horrible results in their fourth quarter of 2023. Profits in Q4/23 fell 68% while sales fell 6.8%. 

On the wars front:

  • The Houthis announced today that they will increase their attacks on shipping despite the US seizing a ship from Iran that was loaded with missiles and drones. With the US using US$32M Reapers to observe Houthi attack sites they are firing US$20K drones provided by Iran to knock down the US drones. Great economics for the terrorists.
  • Egypt is building a wall enclosure (8-square-miles) to keep refugees from swarming across the Gaza border and causing a migrant crisis that they can ill afford due to their very weak economy. 
  • The US carried out a cyberattack against the Iranian intelligence warship in the Red Sea used to target international shipping. 
  • Russia is calling its seizure of the city of Avdiivka a major breakthrough and a disaster for Ukraine. Russia is keeping up the pressure as Ukraine’s munitions are running low due to no new supplies from the US. President Biden and President Zelensky are working tirelessly to get Congress to sign off on the bill.  However, the Republicans won’t concur unless Biden does something to stop the onslaught of migrants coming across the southern border. 
  • Russia is now back on the offensive as it is planning to put in space a nuclear powered vehicle and maybe with nuclear weapons, as the space race picks up again. This weapon would be able to knock out communication satellites used by the US and NATO. This would blind them as they move more aggressively in Ukraine or other targets in the future.


Market Update:  We await general stock market weakness in the coming months as markets are extremely overbought due to the AI craze. When 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 22nd showed a material increase in inventories and demand weakness in the US. Commercial Crude Inventories rose 3.5 Mb to 443.0 Mb, while the Strategic Reserve showed an increase of 0.7 Mb on the week. Refinery levels remained at 80.6% and are down from 85.9% last year as demand for product waned and crude inventories are building. Motor gasoline inventories fell a modest 0.3 Mb while Distillate fuels saw a draw of 4.0 Mb. Cushing inventories rose 700 Kb to 29.5 Mb. Rising Cushing inventories are usually seen as bearish for oil prices. US inventories are sufficient for this time of year. 

Crude production remained at 13.3 Mb/d. Motor Gasoline consumption rose by a modest 32 Kb/d to 8.20 Mb/d while Jet Fuel saw a lift of 72 Kb/d to 1.43 Mb/d. Total Demand fell 336 Kb/d to 18.92 Mb/d. This softer US demand should bring crude prices down when the war premium in the Middle East abates. Year-to-date US demand is down 0.4% to 19.65 Mb/d from 19.74 Mb/d in 2023. 

EIA Weekly Natural Gas Data

The natural gas report out today was once again disappointing for natural gas prices as it showed a low withdrawal of 60 Bcf. Storage is now at 2.47 Tcf. The biggest decline was in the Midwest (31 Bcf). This compares to the five-year withdrawal of 128 Bcf and the 2023 decline of 100 Bcf. US Storage is now 12.0% above last year’s level 2.21 Tcf and 22.3% above the five year average of 2.02 Tcf. The warm weather of the last few weeks has caused natural gas prices to plunge to lows seen in past years when demand waned and supplies were abundant. 

NYMEX is today priced at US$1.68/mcf. US production has flattened out. Hedge funds have gone massively short of the commodity so any good news could cause prices to elevate quickly as the shorts cover. The EIA forecasts shale production falling to 100.43 Bcf from 100.45 Bcf in February. The largest decline is expected from the largest producing area the Appalachian region and some growth is forecast to come from the Permian area as associated gas is produced to get the lucrative oil volumes. 

The current depressed natural gas prices have been seen before and the industry has slowed drilling which will move inventories into balance later this year. The EIA forecasts LNG demand at 12.1 Bcf/d this year and 14.43 Bcf/d in 2025. This compares to 11.8 Bcf/d in 2023. Companies in the US are slashing budgets to drill for shale gas. Chesapeake this week said they would lower capex by 20% and would cut production to 2.7 bcf/d from 3.5 Bcf/d in 2023. Other producers have announced plans to cut between 10% and 20%. 

We recommend buying the very depressed natural gas stocks during periods of market weakness as we see higher prices in Q4/24 and much higher prices in 2025.  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 16th, the US rig count fell two rigs to 621 rigs (it rose four rigs in the prior week). Rig activity is now 18% below the level of 760 rigs in 2023. Of the total rigs working last week, 497 were drilling for oil and this is 18% below last year’s level of 607 rigs working. The natural gas rig count is down 20% from last year’s 151 rigs, now at 121 rigs due to the depressed prices at this time. 

In Canada, there was a two rig increase to 234 rigs (last week no increase). Canadian activity is down 6% from last year’s 248 rigs. Activity for oil is at 144 rigs compared to 163 last year or down by 12%. Activity for natural gas is holding at 90 rigs versus 85 last year or up by 6% as Montney drilling for condensate and oil provides the returns and the low income from natural gas does not hurt the economics. In our discussion with E&P companies they are planning on lower spending during Q1-Q3 at this time due to low natural gas commodity prices. They have mentioned that they would increase activity later in the year, if commodity prices rise materially.  The industry needs north of $2.50/mcf to see the economics attractive to drill more gas wells. As we get closer to LNG Canada ramping up and needing gas in the Coastal GasLInk pipeline later this year, then prices should lift.  

Energy Stock Market

The S&P/TSX Energy Index today is at 256, up 19 points from last week due to the war premium lift from recent Houthi attacks and the general stock market rise to new all time highs as the parabolic AI craze has the bulls running rampant. We still expect the S&P/TSX Energy Index to fall below 230, and should trough around 220-225 in the coming months 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. 

Our next SER Report comes out on February 29th. This report will cover the first seven companies that have reported by our cut-off date. Reports thereafter will cover the 30 other 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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