Schachter Energy Report

Eye on Energy: October 2
Schachter's Eye on Energy

Iran's Threat To Use It's Largest And Most Lethal Ballistic Missiles To Attack Israel Lifted The Crude Oil War Premium by US$5/b.

Global Economic, Political & Military Update

The first major issue to be concerned about is the Middle East: 

Israel’s multi-phased removal of the top military and leadership of the terrorist group Hezbollah has moved the northern Israeli war front to a more deadly phase. Starting with the killing of longtime Hezbollah leader, Nassan Nasrallah (believed to be a direct descendant of the prophet Mohammad’s family) has incensed Shia believers across the world. Nasrallah’ death was rejoiced in the US as it has taken 41 years to get revenge against the leader that authorized the attack on the marine base in Beirut that killed 241 marine personnel and 58 French paratroopers. President Biden and many US military leaders applauded Israel’s audacious move against a long standing target of the US.

In addition the decapitation of the military leaders of Hezbollah has thrown the terrorist organization into chaos. Who will lead them now and how quickly can they get rearmed and have new command structures? This can take time. Iran yesterday fired 200 conventional missiles at Israel (reaching Tel Aviv) and most were shot down by Israeli and US forces. Damage occurred at schools and homes for those that landed. There were three Israelis wounded and only one casualty, that of a Palestinian civilian in the West Bank. The US announced that they are sending thousands of extra troops and weaponry to the area to deter Iran. Some of the additional forces will be sent to the Red Sea to stop the Houthis from firing at US Navy warships (three were attacked last week). Also, last week a US Navy refueling ship was disabled near Oman by Houthi missiles. So, the danger is also to US forces in the region, as Iran keeps the US and Israel wondering from where the next attack will come from. 

The US continues to see signs that Iran is planning to fire its most accurate Ballistic Missiles against Israel. If they do, the US is concerned that these missiles may not be able to be shot down with current technologies and could cause severe casualties in Israel. Israelis have been warned to stay close to bomb shelters. Countries around the world are ordering their citizens to leave the area of Lebanon and Israel. Israel has ground troops in southern Lebanon to target Hezbollah weapons depots and to test the strength of Hezbollah units in place in the area before a major assault could start. Israel wants to obtain a 10 Km ‘clean zone’ so that its citizens chased out of their northern Israel homes can return home and not be faced with daily short range weapons fired by Hezbollah militants into their communities. One sign that Iran may raise the weapons stakes is that they have moved their Supreme Leader, Ayatollah Ali Kammenei to a secure location so that he would survive any Israeli retaliation from a ballistic attack. If Iran uses their newest Ballistic Missiles it could do significant damage and kill large numbers of Israeli civilians and this is what Israel is now concerned about.  

The second major issue to be concerned about is the Dockers Strike:

Yesterday, nearly 50,000 port workers went on strike affecting 36 ports on the east and gulf coasts. Some forecasters see this impacting the US economy by up to US$4B per day. This is the first strike by the International Longshoremen’s Association (ILA) since 1977. Any length of the strike could raise inflation and worsen supply chains just before the Christmas holiday season. Shelves may be bare if the cargos cannot be delivered to their buyers. Companies like Walmart, Home Depot, Ikea and Amazon who import tens of thousands of containers a year could be the worst hit. Items like clothing from Europe, cars and other consumer goods may be disrupted for some time. These ports move half of US trade. So both importers and exporters will be impacted. 

With a close election battle in the US, the markets are gyrating due to domestic reasons as well as the international military challenges. Our view remains that the US stock market is overvalued and any significant negative economic, military or political news could drive the Dow Jones Industrial’s Index down quickly to the 36,000 level from 42,145 today. 

Regarding energy, our WTI price target of US$66-69/b was reached a few weeks ago. This triggered one of our BUY signals and we sent out on September 10th, an SER Action BUY Alert on five companies from our Coverage List. We also reiterated BUYS on three names already on the Recommended List which had fallen to bargain levels. We expect a period of backing and filling for WTI crude in the coming weeks. A test of the recent lows (US$66-68/b) is expected and if this occurs we should see one of our other two BUY signals triggered. We plan to add additional BUY ideas at that time. Subscribers please watch your emails on weak market days as this is when such an Action Alert would be issued. 

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Today WTI is at US$72.22/b as it rose US$5/b over the last few days on the recent Middle East escalating confrontations. 

Some of the other global economic points to consider are:

  • China lowered interest rates (three times in the past 30 days) and lending constraints to stimulate the economy. The stock market rocketed higher but historically this has been a short term juicing that was not sustainable. China has a real estate sector with assets that need to be written off and not the lowering of lending standards to entice individual investors to load up on more overvalued and excess properties. This appears to be a desperate attempt to get the economy back on track. In reality they need to cleanse the system of the overvalued assets by taking a hit on their valuations to move the product to stronger investor hands and at prices that make sense now. 
  • China’s Industrial Profits fell 17.8% in August from a year ago. This will dampen companies responding to the government’s stimulus call. 
  • US government spending continues to outpace revenues by a significant margin. It now looks like the 2024 deficit will exceed US$2.1T. The gap alone in August was US$380B or US$12.3B per day.
  • The US economy remains resilient with Durable Goods Orders rising 0.5% in August and GDP quarter over quarter rising 3.0%. The GDP Price Index rose 2.5% in Q2/24. Core PCE rose 2.7% (above the Fed’s target). 
  • The jobs data out on Friday will be closely watched to see if this shows modest growth or weakness as seen from some of the recent sluggish manufacturing data.
  • Insiders in US companies are selling at record rates. Insiders at NVIDIA, DELL, and Carvana have filed or have already sold record amounts of stock. Michael Dell alone sold over US$1B of Dell stock. This is clearly a move to take advantage of parabolic stock moves to record valuations. 

Market Update:  We are watching the economic data carefully as it appears that consumers are tapped out and this seems to be dragging some economies around the world into recession. For the US the >US$2T of deficit spending with large war spending, is keeping some areas of the US, with hot economies. The military industrial complex and areas where weaponry are built are strong economic areas of the US these days. 

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 October 2nd was a mixed report for oil as storage levels increased, moderately offset by demand declines. US Total Stocks fell 0.2 Mb.  Commercial Stocks rose 3.9 Mb. The SPR continued to grow and was up 0.7 MB on the week and by 31.3 Mb above last year. Refinery processing declined 3.3% to 87.6% for the week due to Hurricane Helene and is slightly above last year’s level of 87.3%. Motor gasoline inventories rose 1.1 Mb. Distillate fuels saw a decline of 1.3 Mb. Total Stocks including the SPR are now 26.7 Mb above last year. At 1,650 Mb US SPR storage is at a staggering 600 days of Net Imports. Cushing inventories rose 900 Kb/d to 23.7 Mb compared to 22.1 Mb in 2023.  

US Crude production rose 100 Kb/d to  13.3 Mb/d but is up 400 Kb/d from last year’s level. Motor Gasoline consumption fell 683 Kb/d to 8.52 Mb/d. Jet Fuel saw a rise of 250 Kb/d to 1.93 Mb/d. Total Product Demand fell 1.54 Mb/d to 19.85 Mb/d mainly due to the devastating Hurricane. Year-to-date, US Total Demand is now flat with 2023. Gasoline demand year-to-date is down 0.1% from last year’s 8.85 Mb/d. 

Crude oil has bounced nearly US$7/b from the low three weeks ago at US$65.27/b due to the escalation of the war between Israel and Hezbollah in Lebanon and Iran’s recent attack. WTI is up US$2.35/b today to US$72.20/b on concern about what happens with Iran next.

EIA Weekly Natural Gas Data

The natural gas report out last Thursday showed an increase in storage. The increase was 47 Bcf, with the largest rise in the Midwest at 20 Bcf. This compares to an injection of 90 Bcf last year and the 5-year average injection rate of 71 Bcf. This positive comparison aided the price rebound for NYMEX. Storage is now at 3.49 Tcf. US Storage is now 4.8% above last year’s level of 3.33 Tcf and is 7.1% above the five year average of 3.26 Tcf. The percent differences are clearly shrinking and when they go negative natural gas prices should rise materially. NYMEX is today priced at US$2.97/mcf. Demand should increase in the coming weeks as US LNG plants complete their maintenance. In addition, the Matterhorn Express Pipeline should come on shortly and bring more Permian gas (up to 2.4 Bcf/d) to the Gulf coast LNG plants.  

Cold weather in Europe and forecasts of much colder weather than last year have lifted their November TTF futures contract to US$13.50 per MMBtu. 

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 gas 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. 

Baker Hughes Rig Data

In the data for the week ending September 27th, the US rig count saw a decline of one rig to 587 rigs. Rig activity is now 6% below the level of 623 rigs last year. Of the total rigs working last week, 484 were drilling for oil and this is 4% below last year’s level of 502 rigs working. The natural gas rig count is down 15% from last year’s 116 rigs, now at 99 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 and stay over US$3.00/mcf. Weak WTI prices should slow energy companies drilling plans for 2025 and maybe see them cut back drilling on lower productivity wells over the remainder of this year.

In Canada, there was a seven rig increase to 218 rigs but this is 14% above last year’s 191 rigs. Activity for oil is at 152 rigs compared to 115 last year or up by 32% as companies add production for the increase in export capacity via the TMX pipeline. Activity for natural gas is down 14% to 65 rigs compared to 76 last year. 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. AECO prices are at uneconomic prices below $0.50/mcf. Many companies are shutting down dry natural gas wells. 

Catch the energy conference update

Tickets are still available for the public. Become a subscriber and get two free tickets to the conference (tickets to the public are available at $179 per ticket).  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. 

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 42 Presenters 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 are working to complete the program and fill the last Presenter slot. Last week we added one more Presenter (Revolve Renewables). We are now at 41 Presenter slots taken down and have one more spot to fill out our program. 

As usual SER subscribers receive two complimentary tickets to the event. We look forward to seeing you all there. Please take them down ASAP as tickets are moving ahead of last year and we expect the event to be sold out before the event. 

Here is our current list of Sponsors and Presenters. We are working hard to complete the agenda and will send updates regularly in these Eye On Energy reports. 

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 272, up 8 points from last week as energy stocks lifted on the increase in the crude war premium. Our downside target for this indicator is below 240 (range 230-240) and we see this happening in the coming weeks as crude tests recent lows. This would occur once the current war premium evaporates again. We like to BUY when stocks are cheap and being ignored which is now occurring. Bargains are clearly now our focus for new recommendations. 

One new positive for the sector is that hedge funds have shorted energy stocks at the fastest pace in five years. Short bets outpaced long positions roughly six to one according to the report released by Goldman Sachs. This short selling has been substantial over the last five weeks. I see this as another great contrarian indicator. They were very long shares when the sector peaked in April. At that time we began to see weak demand and recommended caution. Now we await the next low risk BUY signal. 

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 2H/25 and demand should exceed supplies at that time. We see WTI prices above US$100/b consistently during 2026. 

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