Schachter Energy Report

Eye on Energy: March 6
Schachter's Eye on Energy

OPEC Contemplating Extending Its Quota Cuts To Year End Bouys Crude Prices.

Global Economic, Political & Military Update

The Bank of Canada announced that they would keep their overnight rate at 5% as underlying inflation still persists. They also plan on keeping their quantitative tightening (QT) measures. The C$ improved 31 ticks to 73.88 on this announcement.  

Chairman Powell is before Congress today and tomorrow and markets are watching for any indication of when the pivot to lower rates will occur. So far in his testimony he remains concerned about inflation persisting and that the timing in 2H/24 of any lowering of interest rates was data dependent. The Q&A over the next two days will see how he handles the political attacks and pressure to start the pivot early to keep the economy strong into the fall election cycle. So far he has kept above the political fray. He recently commented in Congress that a soft landing was his goal for the economy this year. 

The US economy is growing and Biden wants to run for the Presidency again with his success with ‘Bidenomics”. However, when you consider that the US federal debt level has gone up US$834B during the last fiscal quarter to create US$335B of GDP growth, Bidenomics needs US$2.50 of additional debt to create US$1.00 of GDP. Effectively a net growth of -US$1.50. NUTS! At some point bond vigilantes will want higher yields to justify the fiscal profligacy. The bottom line is that the US is not growing by economic fundamentals but by deficit spending. The US debt is now US$34T and is growing each 100 days by US$1T. By year end the debt could rise to US$37T. The interest cost alone on this debt will rise over US$1T this year eating into a large portion of the US government revenues. This debt squeeze could halt the Fed from any rate decreases in 2024 which the market is not discounting.  

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

  • The US Core Services PCE index spiked to 7.15% in January. This was the worst month-to- month jump in 22 years, according to the Bureau of Economic Analysis. Core PCE (MoM) rose 0.4% up from 0.1% in the prior month. 
  • US regional and local banks are under duress again due to problematic commercial real estate. New York Community Bancorp (NYCB) is the problem child now. The stock has cratered and its bonds have plunged. It had a recent US$2.4B goodwill impairment for commercial office buildings and rent controlled apartments. The bank controls US$114B of assets and is the 30th largest bank in the US. If it fails then we could see another run on banks like we saw last year this month. The firing of its CEO, Chief Audit Officer and Chief Risk Officer are red flags. Today the stock is down 45% to US$1.76 per share. The bank has hired investment bankers to shore up its balance sheet. An FDIC takeover is more and more likely. Hopefully it doesn’t lead to large deposit runs at regional and local banks that creates another banking crisis.
  • Investors are worried about their bank deposits and have moved to Money Market Funds which have increased their assets to US$6T. This level had only been reached before during the Dot-Com bubble, the Financial Crisis and during the Pandemic. Parking money in safe areas has been an early signal of duress and worry. 
  • The Conference Board Consumer Confidence showed a plunge to -3.9, a fourth month of decline. 
  • The recent fires in Texas have raised concerns about the US food supply going forward. Over a million cattle perished, 1M acres were burned destroying crops and gutting infrastructure. Drought and high costs to produce now have the US headcount (USDA) at 87M, the lowest level since 1951. Statistics Canada shows our headcount at 11M (cattle and calves), the lowest level in more than 30 years. Beef costs will be much higher this summer. Stock up now if you can!
  • US car inventories have soared and a collapse in some vehicle prices is now occurring. Clearly EV prices have collapsed and vehicles are being sold at large losses for the manufacturers as they work to get the cars moving off the dealer lots. Inventories at dealer lots are now full and customers are down due to the high prices for popular vehicles (mostly conventional trucks) and the high cost of financing. More buyers are now missing payments which is adding to inventories of repossessed vehicles. 
  • Apple is facing a slump in business in China as the Chinese government pushes Huawei products and requires government employees not to use Apple products and support the local producer which is making cell phones similar to the iPhone product at a  lower price. 

On the wars front:

  • President Biden is working to get a hostage deal before the start of Ramadan on March 10th. He is waving a carrot of recognizing Palestine (PLA controlled under new leadership). Israel wants an accurate count of the hostages (alive and dead) and wants a release of the elderly, the ill and all females. Hamas wants a longer ceasefire and a large number of militant prisoners in Israeli prisons released. It also wants large aid convoys to come into the country that would be distributed by them. This latter issue is a non-starter for Israel. Biden needs some progress for his election chances. He needs to get a ceasefire to appease his leftist members.
  • The US and Jordan have made numerous air drops of Halal foods (35,000 meals per day) for Gaza residents. It has been a bit of a debacle as many of the deliveries have ended up in the Mediterranean Sea and have not been recovered. Hamas of course wants to control these supplies. Biden has admitted it has been a botched mission. 
  • The Hezbollah leader Nasrallah is getting closer to releasing his troops to attack and then invade Israel if Israel invades the southern Gaza city of Rafah. Part of his stance change could be because his grandson was killed in an IDF attack in southern Lebanon. If this front opened in all out war it would be a horrific expansion and the death toll would be very high. The question would be are there going to be Iran’s Quds fighters in the country helping in the command and control of this expansion of the war. Iran has supposedly given its blessing for the war to expand from Lebanon if Rafah is invaded by the IDF.  
  • President Zelensky is traveling around the world to get munitions and funds to keep his country in the war with Russia. He went to several European countries and even to Saudi Arabia with an open palm. The Saudis could help with a prisoner swap as they are close to Russia and could help financially. The recent success by Russia in eastern Ukraine taking new territory has been offset by Ukrainian special forces hitting and sinking Russian warships with navel drones. It is a stalemate for now but Ukraine needs more munitions ASAP if the Russians start a new offensive. Europe has made a lot of verbal commitments but actual munitions arriving in Ukraine is another matter.
  • Russia is getting ‘protection’ requests from breakaway area Transnistria (from Moldova) to take it over and add it to their country. As it is west of Ukraine it could become another front in the war if Russia brings in troops and weaponry. 

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 March 6th showed a modest increase in inventories. US Commercial Crude Inventories rose 1.4 Mb to 448.5 Mb, while the Strategic Reserve showed an increase of 0.7 Mb on the week. Refinery levels rose significantly, up 3.8 points to 84.9%. This compares to 86.0% last year. Motor gasoline inventories fell 4.5 Mb as refining activity picked up. Distillate fuels saw a draw of 4.1 Mb. Cushing inventories rose 700 Kb to 31.7 Mb highlighting that inventories are more than sufficient. Rising Cushing inventories historically have been seen as bearish for oil prices. 

US Crude production fell 100 Kb/d to 13.2 Mb/d but are still up 1.0 Mb/d above last year’s level. Motor Gasoline consumption rose by 547 Kb/d to 9.01 Mb/d while Jet Fuel saw a lift of 35 Kb/d to 1.64 Mb/d. Total Demand rose 765 Kb/d to 20.29 Mb/d. Year-to-date demand has tightened up with last year. Demand this year is now at 19.71 Mb/d versus 19.74 Mb/d last year. 

Global crude demand in 2024 is forecast to grow by 1.9 Mb/d at Wood MacKenzie while OPEC sees demand growth of 2.25 Mb/d. We are using 2.0 Mb/d growth in our 2024 forecast. OPEC is considering extending its production cutbacks to the end of June and some members are talking about extending the official cuts to the end of 2024 to curtail inventories and firm prices up even further. OPEC will decide their next move at a face-to-face meeting in Vienna on June 1st. 

EIA Weekly Natural Gas Data

The natural gas report out last Thursday was encouraging for natural gas prices as it showed a decent withdrawal of 96 Bcf. Storage is now at 2.37 Tcf. The biggest decline was in the East (52 Bcf) due to their recent snow storms. This compares to the five-year withdrawal of 138 Bcf and the 2023 decline of 71 Bcf. US Storage is now 11.7% above last year’s level 2.13 Tcf and 26.5% above the five year average of 1.88 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$1.97/mcf. US production has flattened out and is set to decline as major natural gas producers have announced budget and production cuts. Hedge funds have gone massively short of the commodity so any good news could cause prices to elevate quickly as the shorts cover. An outage at a Freeport Texas facility has been out for a month but should be back shipping LNG later this month. Last week LNG shipments were 13.9 Bcf/d or at 95% of capacity. Europe is getting around half of all shipments at this time. This export level is down from the monthly record in December 2023 of 14.7 Bcf/d.

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.

EQT, the largest US natural gas producer, cut production by 1.0 Bcf/d to 2.7 bcf/d in March by cutting capex by 20%. It will reduce its rig count from seven to five and suspended its dividend until prices recover sufficiently. They need US$3.50/mcf to make an adequate return.  

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 March 1st, the US rig count rose three rigs to 629 rigs (it rose five rigs in the prior week). Rig activity is now 16% below the level of 749 rigs in 2023. Of the total rigs working last week, 506 were drilling for oil and this is 15% below last year’s level of 592 rigs working. The natural gas rig count is down 23% from last year’s 154 rigs, now at 119 rigs due to the depressed natural gas prices at this time. 

In Canada, there was no change in the rig count at 231 rigs (last week a three rig decrease). Canadian activity is down 6% from last year’s 246 rigs. Activity for oil is at 144 rigs compared to 158 last year or down by 9%. Activity for natural gas is at 87 rigs versus 88 last year or down by 1% 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 to fill the Coastal GasLInk pipeline later this year, prices should lift. AECO prices are around $1.80/mcf now. 

Energy Stock Market

The S&P/TSX Energy Index today is at 269, up 11 points from last week. This rise was based on the euphoria of the TMX taking crude next month to fill its pipeline. Large oil sands and SAGD energy companies have been the strongest performers. Natural Gas stocks have laboured due to soft prices. We still expect the S&P/TSX Energy Index to fall in the next month or so to below 230, and should trough around 220-225 and provide the next low risk BUY signal. We expect to be able to add 4-6 new BUY ideas if this view unfolds. 

The TMX pipeline plans on taking 2.1 Mb of crude oil in April and May as they prepare to commence regular shipping on the line. The industry hopes that the WCS differential now around $16/b will fall below $10/b and increase the profitability of the oil sands and SAGD producers. Overall the TMX line will add 590 Kb/d of takeaway capacity for the industry. Most of the crude now moved by rail will now go in pipelines once this is officially running. 

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 next Thursday March 14th. This report will cover 10 companies that have reported since our last SER report released on February 29th. Reports after this one will cover the remaining 20 or so other companies that we cover. If interested in these upcoming reports and the detailed review of their results, become a subscriber.

Please save the date for our 2024 ‘Catch The Energy’ conference on Saturday October 19th at MRU. Today we received confirmation that the Honourable Brian Jean, Minister of Energy and Minerals of Alberta will be our opening Speaker. In the coming weeks we plan on meeting with Presenter energy companies and as this list develops we will start covering the conference with more details in this weekly report.

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