Schachter Energy Report

Eye on Energy: July 10
Schachter's Eye on Energy

US And China Crude Demand Sluggish. WTI Should Decline Below US$80/b In The Near Term.

Global Economic, Political & Military Update

The US Presidential election continues to keep observers riding a roller coaster as they watch the Democrats agonize over keeping current President Biden or forcing him to resign due to his age and mental lapses. The ‘ring of power – the oval office’ then goes to his Vice-President Kamala Harris and she then gets to pick a VP to be her running mate. It may take a few weeks to see if Biden has the stamina for electioneering. Many leaks are coming out of how many daily naps he needs and concern that neurologists who specialize in movement disorders (Parkinsons) have been visiting (logs show 10 times) the White House. The White House at first denied the doctor visits then changed their answer as reporters checked the visitor logs. What a change for the protective eastern media over the last year. Only the bad debate made them realize they were complicit in  hiding the fact of the drastic and deteriorating health changes Biden was having. Even stallworth Nancy Pelosi is signaling that Biden should re-examine his decision to stay in the race. Democrats in swing districts are the most aggressive in wanting him gone as they see their likelihood of defeat if he leads the tickets. Senator Michael Bennett (Democrat – Colorado) sees Trump winning in a landslide and taking control of the House and Senate in his massive win. Next week is the Republican convention and in August the Democratic. Trump has challenged Biden to another debate and a golf game with the winner donating US$1M to their favourite charity. 

The first hurricane of 2024 has roared towards the US Gulf coast and now 1.4M Texans are without power. The heat across the continent is increasing electricity usage and this should help to increase use of natural gas. At some point this could lift prices over US$3.00/mcf. 

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 and defense spending. 

Data of note:

  • The Canadian economy lost 1,400 jobs in June versus the expectation of a rise of 25,000. The jobless rate is now 6.4%. The Bank of Canada will likely lower rates again if we see another decline in jobs in upcoming reports. The dollar may breach US$0.70 if rates in Canada diverge materially from those in the US. 
  • The US economy in June added 206,000 jobs better than the 195,000 forecast. The jobless rate rose to 4.1% but rose as more people entered the workforce looking for jobs. The elderly cannot make out on their social security pensions and are coming back to get part-time work to make ends meet. The problem for the Fed was that average hourly earnings rose 3.9% making it tough for the Fed to cut rates before the US elections. Also lots of the part-time jobs are being taken by illegal immigrants. Very few of the new jobs were full-time. Private sector job growth in June was only 136K of this total compared to 193 K new jobs in May. 
  • US credit card delinquency rates are spiking and reaching levels seen just before the financial crisis of 2008.
  • The Fed is now providing massive liquidity to banks which dwarf its 2008 efforts as it tries to prevent bank failures. 
  • US corporate bankruptcies in June reached their highest level since early 2020. Reasons given were high interest rates and rising wages.  
  • A US health and beauty aid company Helen of Troy (brands: Oxo, Revlon, Hot Tools, Bed Heads, Vicks and Pur) fell 32% today as it announced a 12% drop in revenues and a 72% drop  in earnings per share. The consumer is clearly retrenching and the early stages of a consumer recession may be underway. 
  • China factory activity contracted for the second straight month in June. Imports of crude declined due to the price rise. Another large property developer Guangzhou R&F Properties failed to repay its Singapore lender US$614M. It is now in liquidation by its creditors. 
  • Transportation/shipping costs are rising materially due to lack of access to the Red Sea. Ocean rates are rising at double digit rates. 
  • Weaker spending by the rich can be seen from Porsche’s announcement that deliveries dropped 7% in 1H/24. China demand alone dropped by one-third. 

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 if inflation reverses to the upside. 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 are 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:

  • China is holding joint military exercises with Belarus near the Polish and Ukrainian borders. These are the first exercises involving Chinese military personnel on Belarusian territory. It coincides with the 75th NATO meeting in Washington and closer ties between China and Russia. China has a 2.0M man military – the largest in the world. 
  • Russia is aggressively destroying the Ukrainian air force and their bases before NATO sends in US made F-16’s. Putin warned that a nuclear war would likely commence if NATO deployed troops in Ukraine. 
  • Poland has signed a 10-year security agreement with Ukraine to shoot down Russian missiles and drones launched in the direction of Poland within Ukrainian airspace. This means any attacks against Kiev and Lvov could see Poland defend Ukraine. With the air force losses Ukraine has suffered Poland is considering sending 14 more MIG-29 fighters that Ukraine has pilots for. 
  • Hezbollah has launched more big attacks against northern Israel (rockets and drones). In return Israel is bombing the Beirut area and targeting Hezbollah leaders. It killed a Hezbollah general in the recent fighting. 
  • Bloomberg reports that the Saudis threatened to SELL European bonds if Russian assets were confiscated. Russia has US$300B of assets that are frozen in France, Germany and Belgium. 

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. Inventory growth on a repeated basis should drive WTI near term below US$80/b and likely lower in coming months.  

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 282 today.

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 10th showed mixed data. US Total Stocks rose 3.0 Mb. Commercial Stocks fell 3.4 Mb as refinery activity picked up to 95.4% from 93.5% in the prior week. The SPR continued to grow and was up 0.5 MB on the week. The SPR is now 26.3 MB higher than last year. Motor gasoline inventories fell 2.0 Mb but are still up 10.2 MB above 2023 levels. Distillate fuels saw a rise of 4.9 Mb. Total Stocks including the SPR are now 33.8 Mb above last year or at 1,658.7 Mb. Cushing inventories fell 700 Kb to 33.5 Mb. 

US Crude production rose 100 Kb/d to 13.3 Mb/d (the year high so far) and is up 1.0 Mb/d from last year’s level. Motor Gasoline consumption fell 26 Kb/d to 9.40 Mb/d despite the July 4th long weekend. Jet Fuel saw a rise of 3 Kb/d to 1.84 Mb/d. Total Product Demand fell 334 Kb/d to 20.7 Mb/d. Year-to-date US total demand is up 0.7% to 20.0 Mb/d. Gasoline demand year-to-date however is down 1.2% from last year’s 8.88 Mb/d. 

OPEC Monthly Report

The July 2024 report released today showed that in June OPEC saw a production decline of 80 Kb/d to 26.57 Mb/d. The biggest decrease was from the Saudis who lost market share to China and India, to Russia and Iran. They saw production fall by 76 Kb/d to 8.93 Mb/d compared to their 9.99 Mb/d in June 2023 before they initiated production cuts. Lifting production were Libya (added 24 Kb/d to 1.20 Mb/d) and Venezuela (added 21 Kb/d to 851 Kb/d as they gained more access to diluent to move their heavy crude). 

OPEC’s rhetoric of having cut 2.2 Mb/d is just ‘BS’. Using base comparable production in June 2023 of 26.8 Mb/d, OPEC has cut back only 261 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. The largest increase that shafted OPEC’s targets was from Iran which is now producing 3.25 Mb/d versus 2.75 Mb/d in June 2023. Others are increasing production but at lower amounts over June 2023. 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.

EIA Weekly Natural Gas Data

The natural gas report out last Thursday showed a lower storage rise than expected. The increase was a very low 32 Bcf, with the largest rise in the Midwest at 21 Bcf. This compares to an injection of 76 Bcf last year and the 5-year average injection rate of 42 Bcf. Storage is now at 3.13 Tcf. US Storage is now 9.6% above last year’s level (down 1.7% points in a week) and is at 18.8% (down 1.8% points in the week) and above the five year average of 2.86 Tcf. 

NYMEX is today priced at US$2.30/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 quite a number of new LNG plants come onstream over the next 12 months; one in Canada and three in the US. In Canada the first train of LNG Canada comes on and in the US Plaquemines LNG Phase 1 and Corpus Christi Stage 3 begins production of LNG. In 2025 Golden Pass LNG plans on bringing on  the first two trains of this new three train export facility. 

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 July 5th, the US rig count saw a rise of four rigs to 585 rigs (down seven rigs in the prior week). Rig activity is now 14% below the level of 680 rigs last year. Of the total rigs working last week, 479 were drilling for oil and this is 11% below last year’s level of 540 rigs working. The natural gas rig count is down 25% from last year’s 135 rigs, now at 101 rigs. This decline in drilling and production should continue for a few more months as the industry wants to see inventories below average and for prices to recover over uS$3.00/mcf. 

In Canada, there was a decrease of one rig to 175 rigs working (versus an increase of 10 rigs last week). Canadian activity is now flat with last year’s 175 rigs. Activity for oil is at 115 rigs compared to 111 last year or up by 4%. Activity for natural gas is at 60 rigs compared to 64 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 282. 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 adding several new attractive company ideas to our Coverage List in our upcoming issue. These will be released to subscribers in our July 11th SER issue. That would take our team coverage to 39 entities. One is focused on income oriented energy investors and the other two are on growth stories trading at significant discounts to reserve values. 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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