Schachter Energy Report

Eye on Energy: February 28
Schachter's Eye on Energy

OPEC Discussing Extending Its Production Cuts For One More Quarter Lifts Crude Prices Modestly.

Global Economic, Political & Military Update

Mixed economic data in the US continues with some data showing a slowing economy but others indicating inflation reversings to the upside. This stagflation pivot is not what the bond and stock market want to see. Forecasters are now indicating that the first cut would occur in June only if the data on inflation levels out and/or declines again. With crude oil prices rising, we have not seen their impact yet in the economic data so we don’t see a rate cut in June. If food, energy, rent and wages persist to the upside then we may not see a rate cut at all in 2024. That is not what the street is expecting. From an early 2024 view that there would be six or seven cuts in 2024, that view has changed to three cuts in 2024 after recent higher inflation data. Tomorrow’s PCE data will be closely watched as this is the Fed’s most favoured indicator of inflation. 

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

  • US Q4/23 GDP was revised to increase 3.2% from the prior forecast of increasing 3.3% and is below Q3/23 GDP growth of 4.9%. A slowing trend but still quite positive versus the rest of the OECD world. 
  • The GDP Price Index for Q4/23 rose 1.7% versus the forecast of a rise of 1.5%. 
  • The US Trade Balance came in at a negative US$90.2B versus US$88.5B in Q3/23. 
  • Friday we get the employment data for February and a number of 185,000 new jobs are expected. Will most of these jobs be part-time? How will this data point compare to the Household survey which showed a decline in January of 31,000 versus the nonfarm data which showed a rise of 353,000 jobs. 
  • US Household debt rose 14.5% over the last year to US$1.13T as consumers borrowed to keep up their standard of living. These are unprecedented borrowing levels and are unsustainable. 
  • Bank of America’s CEO, Brian Moynihan issued a warning that mortgage rates could rise further. He sees rates moving up to 7% if inflation persists. A more dire warning was that the Fed could opt to raise interest rates further posing a threat to the US economy and the stock markets. He sees higher interest rates as a lasting reality. If the CPI and PPI spike in future months then his dire warnings may become reality. The Atlanta Fed has a survey of ‘Sticky Prices’ which indicates that 70% are sticky (including rent, insurance and food away from home). 
  • We are watching sizable selling by insiders and this week we see that the Walton family (Walmart shareholders) sold US$1.5B of stock. 
  • US Durable Goods Orders fell 6.1% in January led by a sharp decline in orders for airplanes at Boeing due to their reliability concerns. Excluding transportation Durable Goods Orders fell just 0.3%. They were forecast to rise 0.2%, so a slowdown is occurring. 

On the wars front:

  • President Biden is pushing for a ceasefire deal in Gaza to commence before Ramadan starts on March 10th. The plan as outlined would see the releases of all civilian prisoners and all female soldiers in return for Hamas prisoners in Israeli jails and more food aid to enter Gaza on a regular basis. Israel and Hamas don’t seem to be on the same page as President Biden. Israel in the meantime continues to plan an invasion of Rafah to get the last of the Hamas leadership and battalions of terrorist fighters. Hamas in the meantime continues to fire missiles into Israel. 
  • Iran accuses Israel of bombing two gas pipelines in Iran to further destabilize the country’s economy. 
  • Israel striked Hezbollah targets in northeast Lebanon as it targets terrorist leaders in the area. 
  • The Houthis after being hit repeatedly by allied forces continue to have the capability of hitting targets in the Red Sea and the Gulf of Aden. So far the allied forces have not been able to degrade the fortified mountain hideouts of the Houthis. They are using these bases to launch effective missile and drone attacks. A cargo ship was hit in the Gulf of Aden and has a large oil slick creating an environmental disaster in the area.
  • There are reports that the Houthis have cut undersea internet cables connecting Europe and Asia. The Houthis have denied this yet traffic has been affected. 
  • Russia and North Korea have expanded their trade with North Korea getting food, fuel and parts used in weapons manufacturing and in return Russia is getting containers of munitions (ballistic missiles, artillery shells and other military equipment that Russia needs). The US believes that Russia has received containers holding 3M rounds of 152 mm shells for their artillery. Shipment of the containers is by sea to a Russian port 180 KM north of the North Korean shipyard handling the containers. This trade has been very important for North Korea due to the severe sanctions it faces. 
  • Some European countries have announced that they are considering sending troops into Ukraine. This has been confirmed by President Macron of France. If this occurs then we are looking at Russia fighting NATO and this would be a severe escalation of the war and could be considered the start of a world war.  

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 28th showed a material increase in inventories. US Commercial Crude Inventories rose 4.2 Mb to 447.2 Mb (forecast a rise of 3.1 Mb), while the Strategic Reserve showed an increase of 0.7 Mb on the week. Refinery levels rose 0.9% to 81.5%, but remain down from 85.8% last year as demand for products has waned and crude inventories are building. Motor gasoline inventories fell 2.8 Mb as refining activity picked up. Distillate fuels saw a draw of 0.5 Mb. Cushing inventories rose 1.5 Mb to 31.05 Mb highlighting that inventories are more than sufficient. Rising Cushing inventories have been seen as bearish for oil prices. 

Crude production remained at 13.3 Mb/d up 1.0 Mb/d above last year’s level. Motor Gasoline consumption rose by 267 Kb/d to 8.47 Mb/d while Jet Fuel saw a lift of 179 Kb/d to 1.60 Mb/d. Total Demand rose 610 Kb/d to 19.53 Mb/d as Propane demand rose 406 Kb/d to 1.44 Mb/d.. Year-to-date US demand is down 0.9% to 19.64 Mb/d from 19.82 Mb/d in 2023. 

EIA Weekly Natural Gas Data

The natural gas report out last Thursday 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$1.86/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 in March 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%. Many Canadian producers have announced plans to cut spending this year due to the low natural gas prices.

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 23rd, the US rig count rose five rigs to 626 rigs (it fell two rigs in the prior week). Rig activity is now 17% below the level of 753 rigs in 2023. Of the total rigs working last week, 503 were drilling for oil and this is 16% below last year’s level of 600 rigs working. The natural gas rig count is down 21% from last year’s 151 rigs, now at 120 rigs due to the depressed prices at this time. 

In Canada, there was a three rig decrease to 231 rigs (last week a two rig increase). Canadian activity is down 5% from last year’s 244 rigs. Activity for oil is at 141 rigs compared to 158 last year or down by 11%. Activity for natural gas is holding at 90 rigs versus 86 last year or up by 5% 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 natural gas 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. AECO prices are around $1.76/mcf now. 

Energy Stock Market

The S&P/TSX Energy Index today is at 258, up two points from last week. 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 tomorrow 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 also occur tomorrow 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. To be able to join this webinar become a subscriber. You can access the presentation live or via the archives from Friday.

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