Schachter Energy Report

Eye on Energy: July 3
Schachter's Eye on Energy

US Commercial Stocks Fell Sharply Last Week Lifting WTI Prices. Exports Rose To 4.4 Mb/d.

Global Economic, Political & Military Update

Politics is front and center as the debate last week showed President Biden is not up to the job now and definitely not for a second term. Even members of his own party are disillusioned and are looking for someone to grab the baton at the August Democratic convention (August 19-22). Elections in the UK and France add to the focus of the news cycle. Parties in power are facing rebuke around the world. In Canada, our Prime Minister is uncomfortable coming to the Calgary Stampede as he knows how unpopular he is. Skipping this event is a first for him since becoming Prime Minister. 

The first hurricane of 2024 has roared towards the US after devastating the southeast Caribbean. Hurricane Beryl reached a Category 5 strength the first time this early in the season. Weather forecasters are worried about a severe season. If this Hurricane moves into the Gulf of Mexico it could force the shut in of producing oil and gas fields as well as coastal refineries. Crude has gained US$4/b to US$82.85/b over the last week. Adding to upside pressure is the increasing concern that Israel and Lebanon’s Hezbollah may enter a full out war. This would have Israel fighting a two front war with Hezbollah a much tougher opponent than Hamas. 

Mixed economic data continues to sway North American markets as each data piece is scrutinized for signs of the health of the economies. It is clear that the consumer is having a tougher time and that overall manufacturing is slower than last year. What is holding the two economies up is government deficit spending. 

Data of note:

  • Canadian manufacturing softened for the 14th straight month. New orders declined and for the first time in five months firms cut jobs. 
  • US Consumer Confidence fell again as sentiment was more cautious due to the higher cost of living, higher borrowing costs, and some softening in the labor market. Restaurants are closing, trucking and logistics companies are shutting their doors. Levi Strauss saw its stock fall 15% last week after revenues came in below forecast for the second fiscal quarter.  Walgreens Boots fell over 22% last week as it announced the closure of 25% of its underperforming stores. It is the largest pharmacy chain and had around 8,600 stores and 300,000 employees before this announcement.
  • Core Durable Goods Orders in the US fell 0.1% in May. 
  • The Fed’s key inflation indicator showed a rise of 2.6% in May from a year ago. This was taken positively and hopes rose that the Fed would move quicker to lower rates. One cut is now in the forecast. This optimism may prove wanting as the biggest help to the number was lower crude oil and product prices which are now rising as summer peak demand is starting. 
  • China announced yesterday that its factory activity shrank for a second month. 

Summarizing – We surmise that 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 which is nearly 70% of the US economy. Not a good situation during an election year. 

On the wars front:

  • Lebanon’s Hezbollah backed by Iran has used precise missiles against Israel’s north that can hit all of Israel. It is now gearing up for all out war with Israel. Israel is moving troops from Gaza to be rearmed and then sent to the north to prepare for any offensive on that border. The Israelis have warned that they would even attack Beirut if the war widened. They have intelligence that this airport is where Hezbollah has its major weapons storage. Over 100,000 fresh Israeli soldiers are being prepared for the plan to knock out Hezbollah for good. Great plan – however they have not succeeded in doing this to Hamas and Hezbolllah has more troops and the latest Iranian weapons. There are reports that Israel may not have sufficient munitions if this is a prolonged war. 
  • 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. 
  • 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. China is building the world’s largest nuclear arsenal increasing its stockpile from 410 to 500, according to the Stockholm International Peace Institute. 
  • China and Russia are developing large numbers of attack drones based on Iranian models. European officials are worried that this may be a sign that Beijing is moving closer to providing direct lethal aid to Russia. 
  • Ukraine will be getting more air defense missiles (Patriot air defense systems) from the US to protect Kiev and Kharkiv. The US is 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. 
  • Russia is gearing up for a new offensive in eastern Ukraine. It has built a new railroad to handle the logistics needed for the offensive in the Zaporizhzhya region. 
  • Russia is very annoyed that the US used its satellites to guide long range ATACMS missiles that hit Crimea last week. They blame the attack on the US which provided the targeting information. US use of spy drones in the Black Sea is another irritant and shows how close the two superpowers are to a direct confrontation.

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.

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. It recovered thereafter to US$84/b on optimism of a strong summer driving season. We continue to believe that the weekly EIA storage data will be key to near term crude price action. 

We remain concerned that the general market and the energy sector are vulnerable. The market is getting narrower and narrower as the AI stocks continue to take markets higher but the underlying market is deteriorating. A correction may be in its early stages. The S&P/TSX Energy Index peaked at 308 in week two of April and has fallen to 290 today. It has risen over 15 points over the last two weeks as crude has rebounded.

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:

The EIA data released today July 3rd showed material stock declines. US Total Stocks fell 12.6 Mb. Commercial Stocks fell 12.26 Mb as refinery activity picked up to 93.5% from 92.2% in the prior week. The SPR continued to grow and was up 0.4 MB on the week. The SPR is now 25.4 MB higher than last year. Motor gasoline inventories fell 2.2 Mb but are still up 12.2 MB above 2023 levels. Distillate fuels saw a decline of 1.5 Mb but are 6.4 Mb above last year’s storage levels. Total Stocks including the SPR are now 47.3 Mb above last year or at 1,655.7 Mb. Cushing inventories rose 300 Kb to 34.2 Mb. 

US Crude production remained at 13.2 Mb/d and is up 800 Kb/d from last year’s level. Motor Gasoline consumption rose 455 Kb/d to 9.42 Mb/d as the summer driving season commenced. Jet Fuel saw a rise of 151 Kb/d to 1.83 Mb/d. Total Demand rose 395 Kb/d to 21.1 Mb/d, but this is down 152 Kb/d from last year. Year-to-date US total demand is up 0.3% to 19.99 Mb/d. Gasoline demand year-to-date however is down 1.5% from last year’s 8.75 Mb/d. 

EIA Weekly Natural Gas Data

The natural gas report out last Thursday showed a lower storage rise than expected. The increase was 52 Bcf, with the largest rise in the Midwest at 17 Bcf. This compares to an injection of 76 Bcf last year and the 5-year average injection rate of 60 Bcf. Storage is now at 3.10 Tcf. US Storage is now 11.3% above last year’s level (down 2.6% points in a week) and is at 20.6% (down 3.3% points in the week) and above the five year average of 2.57 Tcf. 

NYMEX is today priced at US$2.43/mcf. Spot cargos are in strong demand in Asia with 41% of US exports there. 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. India is also buying more LNG due to the hotter-than-normal weather. Japan is also looking to buy spot cargo. 

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 and spikes above US$3.50/mcf this summer. We see much much higher prices in 2025 as new LNG plants come onstream. 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 28th, the US rig count saw a decline of seven rigs to 581 rigs (down two rigs in the prior week). Rig activity is now 14% below the level of 674 rigs last year. Of the total rigs working last week, 479 were drilling for oil and this is 12% below last year’s level of 545 rigs working. The natural gas rig count is down 22% from last year’s 124 rigs, now at 97 rigs. This decline in drilling should continue for a few more months as the industry wants to see inventories declining and prices higher. Once storage comparisons improve we should see natural gas prices lift even faster. 

In Canada, there was an increase of 10 rigs to 176 rigs working (versus an increase of six rigs last week). Canadian activity is now up 2% from last year’s 167 rigs. Activity for oil is at 116 rigs compared to 109 last year or up by 6%. Activity for natural gas is at 59 rigs compared to 58 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 dry 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 290. 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 winter 2024-2025 as demand should exceed supplies at that time. 

We are working on introducing reports to add several new attractive company ideas to our Coverage List. These should be released to subscribers in our July 11th SER issue. That would take our team coverage to 39 entities.

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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