Schachter Energy Report

Eye on Energy: June 12
Schachter's Eye on Energy

Total US Stocks Grew 11.8 Mb Last Week. Lower WTI Prices Ahead.

Global Economic, Political & Military Update

Economic data in the US so far is not supportive of the Fed lowering their Fed Funds rate. Today’s CPI report was benign coming in at 3.4% for core, so the Fed is likely to continue its view that it wants to see a few months of slower economic growth and declining price pressure before contemplating a rate cut. In our view no cut should occur before December. 

Economic data of note:

  • Core CPI rose 3.4% year over year in May and was down from a forecast of up 3.5%. A slight cooling but as we head into the summer holiday season prices could reverse and go up again. Next inflation releases are PPI and PCE which may not be so benign.
  • US Labour costs rose 4.0% in Q1/24 versus 0.4% in Q4/23. Clearly going in the wrong direction.
  • Nonfarm Productivity rose only 0.2% in Q1/24 versus 3.2% in Q4/23. Again going in the wrong direction. 
  • Nonfarm payrolls for May rose by 229K jobs versus 170K expected and above the 158K jobs in April. Most of this growth was in part time workers. Full time jobs fell. Bottom line again is a hot number for the Fed. The Household survey however showed a weaker number with jobs falling by 408K. 
  • Average hourly earnings for May rose 4.1% year-over-year. Another too hot number.
  • On the positive side for those wanting lower rates were: Chicago PMI fell to 35.4 (the lowest level since Covid). This is a contraction for the sixth consecutive month. Consumers are feeling a budgetary crunch and are going out to eat less often and are spending less on home improvements (Home Depot/Lowe’s). Many lower middle class and below feel the US is now in recession. 
  • Regional and local banks are facing renewal of commercial real estate loans and the value of many of these loans is below the debt as office building values have plummeted. We may see in the coming months more and more of these banks being taken over by the FDIC. Reports show that US$929B of the US$4.7T of outstanding commercial mortgages mature in 2024. 
  • Interest rates are coming down in parts of the world where the data is supportive of such a move. Switzerland, Canada and the EU have lowered rates by 25 BP. 
  • Canada’s decline was due to a read of GDP of 1.7% down from the prior 2.8% annualized. With a 3.2% increase in population year over year, per capita GDP has contracted by 2.6%, a decline not seen outside of recessions. Canada had job growth of 22,500 in May and the rate ticked up to 6.2% from 6.1%.

Summarizing – The Fed is boxed in by their own policy mistakes. They kept saying in 2023 that inflation was transitory and we now know this as false. Note again the wage pressure issue. They also erred by prematurely calling a pivot in December 2023. If inflation persists and goes higher in the coming months Fed voting members may want to raise rates again. So the most likely case is ‘higher for longer’. 

On the wars front:

  • Lebanon’s Hezbollah backed by Iran has used precision missiles against Israel’s north. Yesterday they fired 170 of their more accurate rockets at northern and central Israel. These Iranian produced weapons are the most accurate used against Israel. Some have hit Israeli military bases. Israel has retaliated with attacks against Hezbollah in southern Lebanon. 
  • Russia is conducting naval operations in the Caribbean Sea to warn the US about allowing Ukraine to use new equipment that is longer range and being fired deep into Russia. It appears the only hold on Ukraine is that they cannot fire these weapons at Moscow.  During this exercise Russia will go to ports in Cuba and Venezuela. Russia is bringing up a warning reminding the US of the Cuban missile crisis of October 1962. By sending ships full of hypersonic weapons to nations hostile to the US, they send notice that they can send weaponry that can hit most of the US. It is a tit for tat of the US providing offensive weapons to nations on the border of Russia. If you can do it, so can we!
  • Iran’s elections for a new President may see increased tensions as the likely successor could be more militant and supportive of the IRGC’s desire to be more confrontational with the West. 

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 and areas where weaponry is built are happy campers these days.

China has throttled back crude imports as weak domestic demand and refinery margin pressure persists. So if the two largest energy consuming nations see weaker end user demand then crude prices could breach US$75/b once again and we may see prices breach US$70/b in the coming weeks. This should set up the next low risk BUY window for energy stocks. 

Energy stocks peaked in early April as crude reached its high of US$87.67 on the mideast war potential to expand with direct fighting between Israel and Iran. Prices retreated to US$72.48/b in early June as no escalation occurred and global inventories grew. We continue to believe that the weekly EIA storage data will be key to the near term price action. If we see a breach of US$70/b then we should  get another low risk BUY signal, the first since early February 2024. At that low risk entry point we added some new BUY recommendations. The run from early February was very rewarding and the ideas on our SER BUY List for the most part did very well. 

We now see the general market and the energy sector as vulnerable. A correction is in its early stages and we expect the next low risk BUY signal to occur during Q4/24. The S&P/TSX Energy Index peaked at 308 in week two of April and has fallen today to a low of 284 today. Our downside target is below 240. The overbought condition in April  can be confirmed from the S&P Energy Sector Bullish Percent Index which rose from 39% bullish in February 2024 to 91%. Recent weakness has pulled this Index down to 50% yesterday. Over 90% is an overbought reading. It should decline below 20% to give off an oversold level and a BUY window once again. We show a chart of this in our SER report coming out tomorrow for subscribers. 

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. We have four ideas in the issue out tomorrow. 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 12th showed material increases in overall inventories. US Total Stocks rose 11.8 Mb. Commercial Stocks rose 3.7 Mb, The SPR was up by 0.3 MB on the week. The SPR is now 18.8 MB higher than last year. Motor gasoline inventories rose 2.6 Mb and are now 12.6 MB above 2023 levels. Distillate fuels saw a rise of 0.9 Mb and are 9.5 Mb above last year’s storage levels. Total Stocks including the SPR are now 39.1 Mb above last year or at 1,619.5 Mb. US refinery rates fell to 95.0% from 95.4% last week but are above the 93.7% level of 2023. Cushing inventories rose 1.6 Mb to 33.8 Mb. US Exports fell 1.3 Mb to 3.19 Mb/d. 

US Crude production grew 100 Kb/d to 13.2 Mb/d and is up 800 Kb/d above last year’s level. Motor Gasoline consumption rose 94 Kb/d to 9.04 Mb/d but is down from 9.19 Mb/d consumed in 2023. Jet Fuel saw a decline of 35 Kb/d to 1.70 Mb/d. Total Demand fell by 1.29 Mb/d to 19.22 Mb/d as Other Oils usage fell 1.53Mb/d to 3.87 Mb/d. Year-to-date US demand is up 0.2% to 19.86 Mb/d. US inventories are more than sufficient for this summer’s pick-up in demand.

OPEC Monthly Report

OPEC’s announcement last week that they would allow members to increase production and end the quota cut in Q4/24 drove crude prices down US$8/b to US$72.48/b for WTI. After this rout they reversed their message to say production increases would only occur if demand warranted it. Since then prices have recovered to US$78/b. We see inventories being the driver of prices in the near term so the data from the EIA and economic updates from China should be carefully perused. This week’s EIA data was very negative for prices. The key note is that US gasoline demand is now below 2023 levels. 

The June 2024 report released yesterday showed that in May OPEC increased production by 29 Kb/d to 26.63 Mb/d as Nigeria saw an increase of 74 Kb/d to 1.42 Mb/d. The Saudis had a decrease of 32 Kb/d to 9.00 Mb/d. Russia lowered production by 119 Kb/d to 9.18 Mb/d as Ukrainian attacks on refineries impacted their sales of refined products.

OPEC’s rhetoric of having cut 2.2 Mb/d is just BS. Using base production in June 2023 of 26.7 Mb/d, OPEC has cut back only 458 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 significant margin. These excess barrels are the reason we have adequate supplies

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 due to the TMX expansion. The EIA forecasts that the US will produce 21.45 Mb/d of crude and liquids in 2024, 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 lower storage rise than expected. The increase was 98 Bcf, with the largest rise in the East at 37 Bcf. This compares to an injection of 104 Bcf last year and the 5-year average injection rate of 79 Bcf. Storage is now at 2.89 Tcf. US Storage is now 14.8% above last year’s level (down 0.9% points in a week) and is at 25.1% (down 1.4% points in the week) and above the five year average of 2.31 Tcf. 

NYMEX is today priced at US$3.06/mcf. The recovery was due to demand rising in Asia which is facing 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$3.50/mcf this summer) 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 June 7th, the US rig count saw a decline of six rigs to 594 rigs (no change in the prior week). Rig activity is now 15% below the level of 695 rigs in 2023. Of the total rigs working last week, 492 were drilling for oil and this is 12% below last year’s level of 556 rigs working. The natural gas rig count is down 27% from last year’s 135 rigs, now at 98 rigs. This decline in drilling should continue for a few more months as the industry wants to see inventories declining and prices higher. Recent data shows US daily natural gas production 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 15 rigs to 143 rigs working (versus an increase of eight rigs last week). Canadian activity is up 5% from last year’s 136 rigs. Activity for oil is at 89 rigs compared to 85 last year or up by 5% 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 51 last year and condensate rich wells are the focus of this activity. 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 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 284. 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 Q4/24 as winter 2024-2025 demand should exceed supplies at that time and we see recovering economies globally. 

Our new ‘TOP PICKS NOW’ section in each report has been very well received and has had significant positive performance. It covers the best ideas from our five groupings that we cover (Pipelines/Infrastructure/Royalty Companies. Domestic Natural Gas Companies, Domestic Liquids Producers, International E&P Companies and Energy Service Companies). Not every issue will have an idea in every grouping if the stocks in such a group are not at bargain buy levels. If interested in these reports, 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. We are meeting with Presenter energy companies and have signed up most of the presenter slots for this year's conference. As this list completes we will start providing you with the names of the Presenting companies in our upcoming reports as we did last year. We have space for 35 companies in the energy industry of today and 10 spots for the TMX sponsored energy industry companies of the future (clean-tech, renewable energy, and critical minerals).

As usual SER subscribers will receive two complimentary tickets to the event. We look forward to seeing you all there.

We review the Q1/24 results of the last 16 companies (the first 20 companies were covered in our report released on May 30th) in our report out tomorrow. If interested in the reports and our review of the 36 companies that we cover, become a subscriber.

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