Global Economic, Political & Military Update
Weakening demand in China and the US for energy products accompanied by a shrinking of the Israel/Hamas/Hezbollah/Iran war premium has driven WTI down to as low as US$69.15/b today (last US$69.40/b). This is US$5/b below last week’s level and is nearing our bottom target of US$66-69/b. Once this occurs it would be the first of our three BUY indicators to be signaled and we will send out new SER Action BUY ideas to paid subscribers.
The Fed noted at their Jackson Hole retreat that the next move would be a cut in the Fed Funds rate at their upcoming FOMC meeting on September 17-18. The official announcement and the press conference occur on the 18th. Right now the forecasters are expecting between a 25 to a 50 BP cut, with the larger cut occurring if the jobs data out tomorrow is disappointing. More concern is coming out that the US may already have entered a consumer recession. Dollar General reported poor results and negative guidance from its discount store system as its customers are buying less (it said financially constrained) and at lower price points. The stock over the last week has fallen from US$127 per share to US$78 per share or down by 39%. Even high end fashion and jewelry retailers are seeing weaker sales so this is not just a lower income issue. The stock market decline and high end real estate softening is now causing retrenchment on spending.
Some of the recent global economic data points to consider are:
- On the good side Q2/24 GDP grew 3.0% quarter over quarter. The GDP price index rose 2.5% versus the forecast of 2.3% and the Q1/24 data of 3.1%.
- The Fed’s favourite inflation measure Core PCE rose at 2.6% the same as the prior month.
- AI profits appear to be elusive and the hype and valuations in the sector are getting slammed. After two years of hype, investors are now questioning when companies will make money from their US$Billions of spend. Over US$400B has been spent so far. The AI semi stocks are getting the brunt of the selling.
- The ADP report on the job market came out today and the rise was a miniscule 99K new jobs. The US Government jobs data comes out tomorrow and the forecast is for a rise of 161K jobs. This would be a better reading than the 114K jobs in July. It may be a worse number than the forecast as the JOLTS data (Job Openings data) showed only 7.67M job openings in July versus the 8.1M expected. If jobs tomorrow come in less than 100K then the market will want a 50 BP cut. That could be damaging for the stock market as a slowing economy or recessionary economy would likely see much lower earnings. Add to this multiples shrinking and we could see a 10-15% decline in the US major averages.
- The Bank of Canada lowered its benchmark rate by 25 BP (its third in a row) due to the slowing economy.
- China’s manufacturing PMI fell again. The survey expected 49.5 but it came in at 49.1. Month after month we are seeing weaker data out of China and their demand for commodities is declining including for crude oil.
Summarizing – We surmise that the Fed is boxed in by their 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. Recession may now be here and consumers are spending less while still facing an onslaught of higher prices making household budgeting tighter. We are likely in the early stage of a consumer recession which is nearly 70% of the US economy. Not a good situation during an election year.
Market Update: We are watching the economic data carefully as it appears that consumers are tapped out and this seems to be dragging economies around the world into recession. The offset for the US is the 6% US spending 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.
We see the Dow Jones Industrials falling to the 36,000 level from 40,608 today.
Energy stocks peaked in early April of this year 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$71.46/b in mid-August as no escalation occurred and global inventories grew. The war fears have evaporated as we talked about and WTI crude has fallen below US$70/b. From here we see one more downphase to a bottom in the US$66-69/b level. When this downthrust occurs we expect to swing to a fully bullish posture again and send out new SER Buy Recommendations.
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 September 5th showed mixed data. US Total Stocks fell 6.2 Mb with Commercial Stocks fell 6.9 Mb. The SPR continued to grow and was up 1.8 MB on the week and by 29.3 Mb above last year. The cause for the decline was a reduced amount of Net Imports which were down 853 Kb/d or 5.97 Mb on week. Refinery processing was flat at 93.3% for the week.. Motor gasoline inventories rose 0.8 Mb. Distillate fuels saw a decline of 0.4 Mb. Total Stocks including the SPR are now 44.4 Mb above last year. At 1,649.9 Mb US SPR storage is at a staggering 810 days of Net Imports. Cushing inventories fell 1.1 Mb to 26.4 Mb.
US Crude production remained at 13.3 Mb/d but is up 500 Kb/d from last year’s level. Motor Gasoline consumption fell 369 Kb/d to 8.94 Mb/d as the summer travel season ended. Jet Fuel saw a small rise of 22 Kb/d to 1.76 Mb/d. Total Product Demand fell 1.05 Mb/d to 20.5 Mb/d as Other Oils demand fell 677 K b/d to 4.71Mb/d. Year-to-date US Total Demand is up a miniscule 0.1% versus last year or at 20.13 Mb/d. Gasoline demand year-to-date however is down 0.6% from last year’s 8.91 Mb/d. US Consumers are clearly feeling the budgetary crunch.
EIA Weekly Natural Gas Data
The natural gas report out last Thursday showed a modest increase in storage. The increase was 35 Bcf, with the largest rise in the Midwest at 21 Bcf. This compares to an injection of 32 Bcf last year and the 5-year average injection rate of 30 Bcf. Storage is now at 3.33 Tcf. US Storage is now 7.3% above last year’s level 3.11 Tcf and is at 12.1% above the five year average of 2.97 Tcf. NYMEX is today priced at US$2.22/mcf. Demand should increase in the coming weeks as US LNG plants complete their maintenance and increase shipments.
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. 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 begin 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 which is imminent.
Baker Hughes Rig Data
In the data for the week ending August 30th, the US rig count saw a decline of two rigs to 583 rigs. Rig activity is now 8% below the level of 631 rigs last year. Of the total rigs working last week, 483 were drilling for oil and this is 6% below last year’s level of 512 rigs working. The natural gas rig count is down 17% from last year’s 114 rigs, now at 95 rigs. This decline in drilling and production should continue for a few more months as the industry wants to see natural gas inventories below average and for prices to recover over US$3.00/mcf.
In Canada, there was an increase of one rig to 220 rigs working. Canadian activity is up 18% above last year’s 187 rigs. Activity for oil is at 153 rigs compared to 115 last year or up by 33%. Activity for natural gas is at 67 rigs compared to 72 last year and condensate rich wells are the focus of this lower 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.
Catch the energy conference update
Tickets are now on sale for the public. Become a subscriber and get two free tickets to the conference (tickets to the public are on sale at $119 per ticket each during the early bird window until September 20th (they then move to $179 each). To find out more go to www.catchtheenergyconference.com . We did sell out last year so if you would like to attend please get your tickets as soon as possible.
We have received confirmation that the Honourable Brian Jean, Minister of Energy and Minerals of Alberta will be our opening Speaker and will be on the LNG panel at the end of the day. We are meeting with Presenter energy companies and have signed up most of the presenter slots for this year’s conference. We have space for 45 companies in the energy industry of today and for the TMX sponsored energy industry companies of the future (clean-tech, renewable energy, and critical minerals). We added two more companies in the last few days (Headwater Exploration and Tamarack Valley Energy).
As usual SER subscribers will receive two complimentary tickets to the event. We look forward to seeing you all there.
Here is our current list of Sponsors and Presenters. We are working hard to complete the agenda and will send updates regularly from now on as we fill the remaining few spots.
Thank you to our Sponsors, Exhibitors and Presenters. It is going to be a great lineup this year!
Energy Stock Market
The S&P/TSX Energy Index today is at 269 down 15 points or down over 5% from last week’s read 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 being ignored. That is starting to happen and bargains are clearly now in our focus for new recommendations.
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.
