Global Economic, Political & Military Update
OPEC’s announcement to gradually phase out the 2.2 Mb/d of quota cuts (starting October 1st) was not received well by the markets. In the details an agreement to give the UAE a 300 Kb/d addition to their quota, and continued cheating by Iraq and Nigeria resulted in a knockout blow to crude prices over the last week. WTI reached a high in the last week of May at US$80.62/b and fell as US inventories rose. Those rose again (see section below), so we have a weaker demand picture in the US. Reuter’s noted this week that overall China demand was only up 100Kb/d from last year due to weak consumer demand and high commercial and strategic reserves (SPR). Their SPR according to reports now holds over 1Bb. China may throttle back crude imports if this situation of weak demand continues. So if the two largest consuming nations see weaker demand then crude prices could breach US$70/b in the coming weeks. Today’s low so far is US$72.82/b. We have been calling for a breach of US$75/b for the last few weeks and we now see rising evidence that it could breach US$70/b later this month. This should set up the next low risk BUY window for energy stocks.
Some mixed data in the US is giving bulls a hope for a Fed rate cut later this year. Consumer spending is down materially for lower income Americans and Home Depot and Lowe’s are now reporting revenue misses as the consumer pulls back on discretionary purchases. Lowe’s revenues fell 17% in Q1/24 versus the prior year. US credit card delinquency rates of 90+ days reached 7% of loans and is at the highest level since 2011. With US credit card debt at US$1.1T (a new record high) US$78B is near default. Offsetting this is that higher income Americans are doing well and have not slowed down their spending. This diverse situation will be the battleground for the upcoming US election season. Jobs are still growing in government and healthcare and construction. The May jobs report out Friday is expected to show a rise in new jobs of 180K, a slight uptick from April.
Many Fed watchers want to see a few more months of positive inflation data before voting for a cut. The Bank of Canada lowered its rate 25 BP to 4.75% and will look at the data going forward to determine if they will lower interest rates again this year. The Canadian dollar fell on this news by .20 to 72.92. The low for 2024 was in April when it fell to $0.7229.
The slowdown in the consumer side of the economy should drag the overall economy down into recession. However this is not occurring due to the generous largesse of deficit spending by governments. In the US they are posting growth of around 2% now but ignore the 6% or US$2T of deficit spending to get there. So areas that benefit from government largesse are growing and not feeling any pain (like military contractors) but other parts of the country may already be in recession.
On the wars front:
- OPEC’s plan to allow members to increase production later this year may cause some friction with Iran as it desperately needs the revenues to support its terrorist proxies.
- China is restricting the sale of nitrocellulose (an ingredient in gunpowder) needed to produce ammunition. This is to harm the US and other NATO countries providing war materials to Ukraine that is at war with Russia. Maybe more of the tit for tat on AI access or the near term battle for TikTok staying in the US.
- The NSA says China is readying destructive cyberattacks on critical US infrastructure.
- President Biden is pushing for a deal between Hamas and Israel but Israel is balking about some of the deal details that the Biden government is not disclosing.
- On the battlefront Israel is seeing more rocket barrage attacks from Hezbollah against targets in northern Israel. The Israeli government has put 250K reservists on standby if there is an incursion from the north.
Market Update: We are watching the economic data carefully as it appears that consumers are getting tapped out and this could drag down the economy at some point. The offset is the 6% US deficit and large war spending that are keeping some areas of the US, with hot economies. The military industrial complex are happy campers these days.
Energy stocks peaked in early April as crude reached its high of US$87.67 on the mideast war premium expansion. The run from early February was very rewarding and the ideas on our SER BUY List for the most part did very well. We see the general market and the energy sector as vulnerable. A correction is in its early stages and that would provide the next low risk BUY signal which we see occurring during Q3/24. The S&P/TSX Energy Index peaked at 308 in week two of April and has fallen today to a low of 281 today and down 14 points from last week’s report. A downside target below 240 in the coming months is likely. The overbought condition can be confirmed from the S&P Energy Sector Bullish Percent Index which rose from 39% bullish in February 2024 to 91% three weeks ago. Recent weakness has pulled this Index down to 54% yesterday. Over 90% is an overbought reading. It should decline below 20% to give off an oversold level and a BUY window once again.
Our SER issue feature called ‘TOP PICKS NOW’ highlights the best ideas at the time of each SER report. The ideas have worked out very well as not all stocks rise and peak at the same time nor do they bottom at the same time. 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: US Inventories are Growing Sharply
The EIA data released today June 5th showed material increases in overall inventories. US Total Stocks rose 14.4 Mb. Commercial Stocks rose 1.2 Mb, The SPR was up by 0.9 MB on the week. The SPR is now 16.6 MB higher than last year. Motor gasoline inventories rose 2.1 Mb and are now 12.1 MB above 2023 levels. Distillate fuels saw a rise of 3.2 Mb and are 10.8 Mb above last year’s storage levels. Total Stocks including the SPR are now 37.5 Mb above last year or at 1,609.3 Mb. US refinery rates rose to 95.4% from 94.3% last week and are around the 95.8% level of 2023. Cushing inventories rose 800 Kb to 35.4 Mb. US Exports rose 276 Kb/d to 4.50 Mb/d.
US Crude production was flat at 13.1 Mb/d and is up 700 Kb/d above last year’s level. Motor Gasoline consumption fell by 203 Kb/d to 8.95 Mb/d while Jet Fuel saw a decline of 119 Kb/d to 1.73 Mb/d. Total Demand rose by 1.13 Mb/d to 20.51 Mb/d as Other Oils demand rose 1.48 Mb/d to 5.40 Mb/d. Year-to-date US demand is up 0.5% to 19.89 Mb/d. US inventories are more than sufficient for this summer’s pick-up in demand.
EIA Weekly Natural Gas Data
The natural gas report out last Thursday showed a lower storage rise than expected. The increase was 84 Bcf, with the largest rise in the East at 27 Bcf. This compares to an injection of 110 Bcf last year and the 5-year average injection rate of 80 Bcf. Storage is now at 2.42 Tcf. US Storage is now 15.7% above last year’s level (down 3.3% points in a week) and is at 26.5% (down 2.3% points in the week) and above the five year average of 2.21 Tcf.
NYMEX is today priced at US$2.67/mcf. The recovery was due to the Freeport Texas LNG facility reopening and exports rising. Demand in Asia is picking up with record heat waves. Spot cargos are in strong demand with 41% of US exports going to Asia. Europe is facing delivery cutbacks from Norway as an undersea pipeline crack cuts back deliveries. It is not known how long this will take to repair. European prices have reached 2024 highs.
We recommend buying the very depressed natural gas stocks during periods of market weakness (these stocks are very cheap now) as we see higher natural prices in Q4/24 (above US$3.00/mcf) 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 May 31st, the US rig count finally saw no change in rigs at 600 rigs (they fell four rigs in the prior week). Rig activity is now 14% below the level of 696 rigs in 2023. Of the total rigs working last week, 496 were drilling for oil and this is 11% below last year’s level of 555 rigs working. The natural gas rig count is down 27% from last year’s 137 rigs, now at 100 rigs. This decline in drilling should continue for a few more months as the industry is seeing declining production and balance could be seen this summer. Recent data shows US daily natural gas production for May at 95.5 Bcf/d down from the high in December 2023 of 105.5 Bcf/d. Once storage comparisons improve we should see natural gas prices lift even faster.
In Canada, there was an increase of eight rigs to 128 rigs working (versus an increase of six rigs last week). Canadian activity is up 32% from last year’s 97 rigs. Activity for oil is at 74 rigs compared to 51 last year or up by 45% as companies add more oil to meet TMX pipeline heavy crude demand and diluent to move the crude. Activity for natural gas is at 54 rigs compared to 46 last year and condensate rich wells are the focus of this activity. The industry needs north of $2.50/mcf (AECO $1.40) to see the economics attractive to drill more gas wells. As we get closer to LNG Canada ramping up in Q4/24 and natural gas fills the Coastal GasLink pipeline, prices should lift.
Energy Stock Market
The S&P/TSX Energy Index today is at 282 (down 14 points or nearly 5% lower than last week). We would not chase the sector here but wait for the developing correction to lower prices and then add to portfolios. We are bulls but we don’t want to chase stocks. We like to BUY when stocks are cheap and are being ignored. That is not the case now. There still are some stocks that are BUYS but that list has shrunk. We cover those that remain cheap in our TOP PICKS NOW section of our SER reports.
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.
