Schachter Energy Report

Eye on Energy: March 13
Schachter's Eye on Energy

Ukraine Drone Attacks On Key Russian Refineries Boosts Crude Prices.

Global Economic, Political & Military Update

The hope that US inflation has been tamed was rebuked with the CPI data released yesterday. US CPI month over month rose 0.4% or 4.8% annualized, more than double the Fed’s target rate and the second month of hot data. Wage growth came in at up 4.3% from the year. Now market watchers will focus on the PPI which comes out tomorrow. While there was an increase in the Unemployment rate to 3.9% from a forecast of 3.7%, this rise was due to a large number of ‘illegal immigrants’ entering the workforce looking for part time jobs so that they can take care of their families while waiting for their immigration asylum hearings. There was a healthy increase in jobs in February (275K jobs) but all were part time jobs and many people have taken more than one job to make ends meet. Full time jobs fell again as layoffs across the US at large corporations continue. Of concern for the public is that necessities (like apparel which has seen a 9.8% increase) are rising in price faster than the CPI rate and that key high cost items like college and medical care (up 5.8%) are rising much faster than the official numbers. Add to that the recent increase in crude oil prices (up nearly US$8/b over the last month from US$71.41/b to today’s US$79.23/b) that has yet to hit the CPI and PPI data. 

Chairman Powell’s comment that the Fed ‘is getting close’ to start lowering rates which he mentioned in his Congressional testimony now looks premature. Unless upcoming inflation data cools off materially there may not be a rate cut ‘pivot’ in June. 

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. 

  • Of the increase in jobs over the last few months 1.2M came from ‘foreign born’ migrants who have taken jobs in the US to survive. Part-time jobs increased (921K) and full-time jobs have fallen (234K). Many companies that had hiring problems due to the type of job not wanted by local residents have gone to migrants. For example, Tyson Foods plans to hire over 180K migrant workers and already employs 42K immigrants. The non-profit ‘Tent Partnership For Refugees’ is leading this hiring initiative. The group is made up of large corporate entities. 
  • Softness in small business measures may be an early sign of a soft landing or recession. Recently Jamie Dimon of JPM said a recession is ‘not off the table’. As he runs the largest US bank he may be seeing things from his business as a warning to the current complacency. 
  • The US government’s spending spree continues with a spend of US$100B in just under a week. US debt has now risen to US$34.5T up US$11.2T since 2020. At the current pace of spending in this election year, the US deficit for this fiscal year could exceed US$3T. The interest cost alone will eat up the largest part of government spending, rising over US$1T annually. 

On the wars front:

  • Ukraine used drones to attack critical infrastructure in Russia. Military targets were hit but the most damage was done to three key refineries. These were the Ryazan, Kstovo and Kirishie oil refineries. Damage was significant but Russia says they are back working. How much capacity they can run at is the issue now. These moves by Ukraine or to show the Russians that they can’t attack Ukrainian infrastructure without fearsome retaliation. The attacks continue as the ground battle in eastern Ukraine seems to be moving in Russia’s favour as Ukraine has limited munitions as it awaits US and EU weaponry. 
  • The US and other nations have started a large move to increase shipments of food aid to Gaza. The first shipment arrived from Cyprus and was sent by a food NGO.
  • The Houthis continue to attack shipping in the Red Sea and the Gulf of Aden. 
  • President Biden is getting frustrated by Prime Minister Netanyahu who is not listening to US advice on how to handle the humanitarian crisis in Gaza. The US has warned him repeatedly that Israel should not attack Rafah unless the 1.5M refugees can be moved to a safe place. Netanyahu plans to attack in April if all Israeli and international hostages are not released in a prisoner exchange and a ceasefire of some duration. Biden is now mulling conditions on military aid if an attack occurs. The US ‘Red Line’ may be the first breach of the long standing US-Israeli relationship. Over the coming weeks the US will have installed a pier in Gaza to bring large regular shipments of food into Gaza.
  • Attacks by Hezbollah into Israel have escalated and their aggression is getting to an Israeli critical point that they say would necessitate significant retaliation. If it occurs we may be looking at a new phase of this war. This would be much worse than the battle against Hamas, as Hezbollah has more fighters and over 150K missiles and drones.  

Market Update:  We await general stock market weakness 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 13th showed a modest decline in inventories. US Commercial Crude Inventories fell 1.5 Mb to 447.0 Mb, while the Strategic Reserve showed an increase of 0.6 Mb on the week. Refinery levels rose 1.9 points to 86.8%. This compares to 88.2% last year. Motor gasoline inventories fell 5.7 Mb. Distillate fuels saw an increase of 0.9 Mb. Cushing inventories fell 200 Kb to 31.5 M. 

US Crude production fell 100 Kb/d to 13.1 Mb/d but are still 900 Kb/d above last year’s level. Motor Gasoline consumption rose by 30 Kb/d to 9.04 Mb/d while Jet Fuel saw a decline of 56 Kb/d to 1.58 Mb/d. Total Demand rose 510 Kb/d to 20.80 Mb/d as Other Oils saw a rise of 647 Kb/d to 5.04 Mb/d. Year-to-date demand is up 0.8% or at 19.83 Mb/d versus 19.67 Mb/d last year. This of course is bullish for energy prices. 

OPEC is extending its production cutbacks to the end of June and members are now 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. 

OPEC Monthly Report

The March 2024 report released yesterday showed that in February OPEC increased production by 203 Kb/d to 26.6 Mb/d as Libya saw an increase of 144 Kb/d to 1.17 Mb/d.  Others increasing production were Nigeria, up by 47 Kb/d to 1.48 Mb/d. The Saudis increased production by 18 Kb/d to 8.98 Mb/d. 

Using base production in June 2023 of 26.7 Mb/d, OPEC has cut back only 100 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

Russia continues to produce at record levels of 10.75 Mb/d made up of 9.5 Mb/d of crude oil and the rest NGL’s and condensate. Canada is seeing growing production as the TMX line starts taking crude next month. In 2023 Canada produced 5.7 Mb/d and the forecast is for 5.9 Mb/d this year and 6.1 Mb/d is forecast for 2025. The US  is forecast to produce 21.45 Mb/d of crude and liquids up 540 Kb/d from 2023. This may prove light as liquids production last week was 22.0 Mb/d (EIA data). 

EIA Weekly Natural Gas Data

The natural gas report out last Thursday showed a small decline in storage as warmer weather and LNG export facility problems impacted demand. The withdrawal last week was 40 Bcf versus 81 Bcf in 2023 and the five year withdrawal rate of 68 Bcf. Storage is now at 2.33 Tcf. The biggest decline was in the East (31 Bcf) due to their recent snow storms. US Storage is now 13.6% above last year’s level 2.05 Tcf and 30.9% above the five year average of 1.78 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. These shakeouts to uneconomic levels force producers to cut back drilling. We have seen numerous announcements by natural gas producers to this effect. 

NYMEX is today priced at US$1.68/mcf. US production is set to decline. 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. 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.

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 8th, the US rig count fell seven rigs to 622 rigs (it rose three rigs in the prior week). Rig activity is now 17% below the level of 746 rigs in 2023. Of the total rigs working last week, 504 were drilling for oil and this is 15% below last year’s level of 590 rigs working. The natural gas rig count is down 25% from last year’s 153 rigs, now at 115 rigs due to the depressed natural gas prices at this time. The Haynesville rig count is now at 38 rigs working and is down 43% from last year’s 67 rigs. This sharp decline in drilling should in the coming months produce material declines in natural gas production. 

In Canada, there was a decline of six rigs to 225 rigs (prior week no change). Canadian activity is up 1% from last year’s 223 rigs. Activity for oil is at 141 rigs compared to 139 last year or up by 1%. Activity for natural gas is at 84 rigs, flat versus last year. In our discussion with E&P companies they are planning on lower spending during Q1-Q3 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 $1.60/mcf now. 

Energy Stock Market

The S&P/TSX Energy Index today is at 271, up two points from last week. 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 $15/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 tomorrow Thursday March 14th. This report will cover 12 companies that have reported since our last SER report released on February 29th. Reports after this one will cover the remaining 18 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. We have received confirmation that the Honourable Brian Jean, Minister of Energy and Minerals of Alberta will be our opening Speaker. Next week we start meeting with Presenter energy companies to sign them up for this year's conference. As this list develops we will start providing you with the names of the Presenting entities in our upcoming reports as we did last year.

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