Schachter Energy Report

Eye on Energy: June 20
Schachter's Eye on Energy

Crude Prices Lift On Expectation Of Strong Summer Driving Season. We Are Skeptical!

Global Economic, Political & Military Update

Economic data in the US so far is not supportive of the Fed lowering their Fed Funds rate the three times previously assumed. The FOMC meeting last week concluded with officials penciling in just one rate cut. This one cut is likely after the election. In order to cut rates in December they will need to see more good data on inflation. The good news (down 0.2%) on the PPI was mostly due to a 4.8% cut in the price of crude and gasoline. With the recent 10% recovery in WTI to >US$82/b (from US$72.48/b at the beginning of June) the good inflation reports will be reversed in upcoming data. 

Economic data of note:

  • University of Michigan Consumer Sentiment plunged to 62.5 from 69.6. This is the lowest level in two years. 
  • US Retail Sales fell 0.1% versus a forecast of a rise of 0.2%. 
  • The Philadelphia Fed Manufacturing Index fell from 4.5 to 1.3 and below the forecast of 4.8. 
  • Europe upped tariffs on imports of Chinese EV’s to protect their local EV makers. 
  • Russia has become the largest supplier of natural gas to Europe once again as some countries flaunt EU sanctions. The US is now the second largest supplier. Norway has lost market share due to its pipeline rupture. 
  • China’s economy is weakening as housing and manufacturing disappoint. Manufacturing is down due to the tariff threat and actions in Europe. Chinese consumers are also not spending as their net worth declines as real estate plummets. This will impact energy consumption.

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. They also erred by prematurely calling a pivot in December 2023. If inflation persists and goes higher in the coming months, some FOMC voting members have indicated that they may want to raise rates. So the most likely case is ‘higher for longer’. Stagflation is here and consumers are spending less while still facing an onslaught of higher prices making household budgeting tighter. We may be in the early stage of a consumer recession. Not a good situation during an election year. 

On the wars front:

  • Lebanon’s Hezbollah backed by Iran has used more precision missiles against Israel’s north. It is now gearing up for war with Israel. The Hezbollah Red Beret Brigade have been training for an invasion of northern Israel. 
  • Hezbollah has shown drone footage of the Israeli naval base in Haifa showing Israel’s naval vessels and sensitive bases and factories. A warning to Israel of its capabilities. 
  • Israel has prepared for war with Hezbollah with operational plans to knock out their facilities and weaponry in southern Lebanon. 
  • The US wants to restrain Israel from invading Lebanon and widening the war in the Middle East. Netanyahu has blasted President Biden and the White House has lashed back. The US has restricted sending 2,000 pound bunker busting bombs out of concern Israel is using them in Rafah and endangering civilians. This break in the relationship with Israel is due to Netanyahu not listening to US advice any longer but rather is meeting the more aggressive stance of his right wing coalition. 
  • The US forecasted today that there may only be 50 living hostages in Gaza. 
  • A coal carrier was sunk by the Houthis in the Bab-el-Mandeb chokepoint increasing navigation risk. This continues to lift insurance costs for shippers. 
  • Cairo has agreed to contribute troops to an Arab force to secure parts of Gaza after Israeli troops are removed. These troops would remain until a new Palestinian government was set up to take over. 
  • Russian naval ships have left Cuba and are now in Venezuela. This waving of the flag has infuriated the US. Hypersonic missiles were on the submarine and other ships in the small fleet. Russia is warning the US that they are still a factor and should not be ignored. 
  • China has seen more naval challenges in the Spratly Islands against the Philippine navy. More saber rattling in this contested area that may have significant energy reserves. 
  • Ukraine will be getting more air defense missiles from the US to protect Kiev and Kharkiv. They are redirecting this aid from other allied countries. Such armaments are in high demand yet the manufacturing of these weapons is difficult due to supply chain and limits to the western defense industrial base. 

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. 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 strong economic centers 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 even 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 279 today (down five points from last week). 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 45% yesterday (down five points from the prior week). 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. 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 20th showed material minimal declines in inventories as Net Imports fell 2.48 Mb/d or 17.4 Mb on the week. US Total Stocks rose 0.2 Mb. Commercial Stocks fell 2.5 Mb, The SPR was up by 0.4 MB on the week. The SPR is now 20.9 MB higher than last year. Motor gasoline inventories fell 2.3 Mb and are now 9.8 MB above 2023 levels. Distillate fuels saw a decline of 1.7 Mb and are 7.4 Mb above last year’s storage levels. Total Stocks including the SPR are now 39.6 Mb above last year or at 1,619.1 Mb. US refinery rates fell 1.5% to 93.5% but are above the 93.1% level of 2023. Cushing inventories rose 300 Kb to 34.1 Mb. 

US Crude production remained at 13.2 Mb/d and is up 1.0 Mb/d above last year’s level. Motor Gasoline consumption rose 346 Kb/d to 9.39 Mb/d but is up modestly from 9.38 Mb/d consumed in 2023. Jet Fuel saw a modest rise of 9 Kb/d to 1.71 Mb/d but is down 129 Kb/d from 1.83 Mb/d in 2023. Total Demand rose by 1.86 Mb/d to 21.1 Mb/d as the volatile Other Oils component usage rose 1.14 Mb/d to 5.01 Mb/d. Year-to-date US demand is up 0.2% to 19.91 Mb/d. US inventories are more than sufficient for this summer’s pick-up in demand.

The next few weeks through the end of July will tell if the demand optimists are right or that household spending challenges will restrict a material pick up in gasoline demand this summer. 

EIA Weekly Natural Gas Data

The natural gas report out last Thursday showed a lower storage rise than expected. The increase was 74 Bcf, with the largest rise in the East at 28 Bcf. This compares to an injection of 84 Bcf last year and the 5-year average injection rate of 55 Bcf. Storage is now at 2.97 Tcf. US Storage is now 13.9% above last year’s level (down 0.9% points in a week) and is at 23.9% (down 1.2% points in the week) and above the five year average of 2.40 Tcf. 


NYMEX is today priced at US$2.81/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 gas 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 14th, the US rig count saw a decline of four rigs to 590 rigs (down six rigs in the prior week). Rig activity is now 14% below the level of 687 rigs in 2023. Of the total rigs working last week, 488 were drilling for oil and this is 12% below last year’s level of 552 rigs working. The natural gas rig count is down 25% from last year’s 130 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 17 rigs to 160 rigs working (versus an increase of 15 rigs last week). Canadian activity is up 1% from last year’s 159 rigs. Activity for oil is at 104 rigs compared to 103 last year or up by 1% as companies add more oil to meet TMX pipeline heavy crude demand and diluent to move the crude. Activity for natural gas is at 55 rigs compared to 56 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. Current AECO prices are below $1.00/mcf.

Energy Stock Market

The S&P/TSX Energy Index today is at 279. 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.

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