Global Economic, Political & Military Update
Military tensions are picking up around the world and any miscalculation could expand the war fronts. It is not just the Middle East and Ukraine. China and North Korea are flexing their military muscles and worrying their neighbors.
US pressure on Israel has succeeded in getting the IDF to agree not to attack Iran’s nuclear or energy infrastructure. In return, the US will provide new long range ballistic missile interceptors ‘Thaad systems’ and US military personnel to operate the equipment in Israel. The interceptors will be used if Iran makes another mass missile and drone attack into Israel. The markets liked this news that Iran’s energy facilities would not be destroyed and production will not be impacted so crude prices eased from their expanded war premium levels (from US$78.46/b more than a week ago to US$70.58/b at yesterday’s close). So now expectations are that Israel will attack and degrade IRGC military infrastructure, missile bases and ammunition depots when they decide to retaliate for the last 200 missiles fired at Israel. Israel’s cyber warriors hit Iran’s nuclear, government, ports and infrastructure sectors on October 12th as part of their retaliatory measures.
The US is getting worried that Iran is close to having weapons grade uranium and is close to making the fuel into bombs. The US may be late in this view as Iran undertook its first underground nuclear test last week according to EuroNews. The firebrands in Iran are calling for strong military force against Israel and this action is being led by Hassan Khomeini the grandson of Iran’s first Supreme Leader.
Hezbollah has been very busy attacking Israel daily including 300 rockets on Yom Kippur. A retirement home was hit in Herzliya. A deadly drone attack on a Golani training base was the worst of this strike. Over 60 were injured and four Israeli soldiers were killed. In retaliation, Israel attacked Hezbollah bases and they suffered significant personnel losses. Lebanese civilians were warned by the IDF to move north so that Israel could destroy Hezbollah’s offensive capacity close to the Israeli border.
Turbulent markets in China headline each day the challenges China is having to get its economy back on track for sustainable growth. It needs to write-off debt challenged fixed assets, move from an export economy to a consumer economy and stabilize government owned businesses. Recently it has increased its pressure on Taiwan and on Monday deployed a record 125 warplanes and its Liaoning aircraft carrier on a large-scale military drill around the island, increasing tensions in the area.
North Korea has been saber rattling with South Korea and tensions on the border are elevated and military units are on alert. Leader Kim is annoyed that South Korea flew drones over his capital Pyongyang and in retaliation blew up sections of roads and rail routes that had linked the two countries. In support of Russia, North Korea has deployed some combat soldiers alongside Russian troops in the Donetsk region to help Russia target Ukraine with North Korean built ballistic missiles. More ammunition is flowing into the area by North Korea as the alliance with Russia expands. There have been rumors that North Korea is planning to send a few army brigades to the front so that their personnel can learn from Russia about tactics and fighting skills. Ukraine has foreign mercenaries fighting against Russia and now Russia is accessing the massive army of North Korea. If true this increases the chance of direct fighting between Russia and its ally and NATO forces in the region.
On the economic side, the following new data points were released over the last week.
- The Eurozone manufacturing PMI fell to 45, signaling a significant contraction in the manufacturing sector and was the lowest reading since the pandemic.
- Core US CPI rose 0.3% versus the 0.2% forecast. Core PPI came in at a modest 0.2% reaching the Fed’s target.
- Canada added 46,700 jobs in September (above consensus) and the rate fell to 6.5%.
- China had weak exports as the US and the EU added tariffs on China made EV’s and other products. Overall, China exports rose only 2.4% in September.
- We have been concerned about the overvalued AI chip stocks and we got two more data points that competition is heating up. The first is that AMD has launched a new AI chip to compete against Nvidia’s ‘Blackwell’ chip with its own chip, the ‘Instinct MI325X’ chip that will be available in early 2025. The 90% margins that Nvidia has been making are likely to come under pressure as AMD’s chip supply ramps up. The second is that semiconductor equipment maker ASML noted in its earnings release yesterday that demand and sales outlook were disappointing. The stock fell 16% yesterday to US$730 per share, down US$142 per share on the day.
The Fed’ s next meeting is on November 6-7, and is expected to have a cut of only 25 BP due to recent strong data. Some Fed watchers are noting that any further strong data could mean they pass on any change at this next meeting.
Regarding energy, our 2H/24 WTI price target of US$66-69/b was reached once and is likely to do so again. When we got the first decline it triggered a BUY signal and we sent out an SER Action BUY Alert on September 10th of 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 and another test of the recent lows (US$66-68/b). If this occurs we should see another BUY signal 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. Many of the ideas currently on our SER BUY List will be presenting at the 2024 ‘Catch The Energy’ Conference. We hope you will be able to attend.
If you want to see what our subscribers are looking at, sign up now for access to the Schachter Energy Research reports at https://bit.ly/2FRrp6k.
Today WTI is at US$70.46/b. WTI crude should retreat towards US$66-US$68/b once again providing the next great buying opportunity for energy investors. It could occur in the next few weeks or during tax loss selling season between mid-November into mid-December.
Our SER issue feature called ‘TOP PICKS NOW’ highlights the best ideas at the time of each SER report. 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 last week on October 9th was a mixed report for oil. US Total Stocks fell 7.7 Mb, however Commercial Stocks rose 5.8 Mb. The SPR continued to grow and was up 0.4 MB on the week and by 31.7 Mb above last year. Refinery processing declined 0.9% to 86.7% for the week due to the back to back severe hurricanes. Motor gasoline inventories fell 6.3 Mb as southeast coast US consumers stocked up. Some Florida gas stations are now empty and have closed. Distillate fuels saw a decline of 3.1 Mb. Total Stocks including the SPR are now 12.6 Mb above last year. At 1,642 Mb US SPR storage is at a staggering 672 days of Net Imports. Cushing inventories rose 1.2 Mb to 24.9 Mb compared to 21.8 Mb in 2023.
US Crude production rose 100 Kb/d to a new record high of 13.4 Mb/d and is up 200 Kb/d from last year’s level. Motor Gasoline consumption took off as consumers in the southeast filled their cars and storage tanks to handle the incoming new hurricane. Demand rose 1.13 Mb/d to 9.65 Mb/d and compared to a normal year last year of 8.58 Mb/d. Jet Fuel fell 220 Kb/d to 1.71 Mb/d. Total Product Demand rose 1.34 Mb/d to 21.19 Mb/d mainly due to the hurricane stocking. Year-to-date, US Total Demand is now up 0.1% compared to 2023. Gasoline demand year-to-date is up 0.2% from last year’s 8.84 Mb/d.
Crude oil had bounced over US$12/b from early October when the market was expecting all out war between Israel and Iran and its proxies. However, with no significant escalation, crude has retreated nearly US$6/b on weak demand in China and Libya returning to full production (up 700,000 b/d). We still expect to see the fundamentals drag WTI crude below US$70/b again. Today WTI is at US$70.46/b.
OPEC Monthly Report
The October 2024 report released Monday October 14th showed that in September, OPEC saw a production decrease of 604 Kb/d due to Libya’s production falling to 540 Kb/d from 950 Kb/d in August or down by 410 Kb/d. The fight over revenues between the eastern and western thugs running separate areas of the country lowered sales but this should see a reversal in upcoming data to 1.2 Mb/d as a revenue sharing deal has been obtained. Other cuts were from Iraq (down 155 Kb/d to 4.11 Mb/d) and from Saudi Arabia (down 23 Kb/d to 8.97 Mb/d).
Canada now is number four in the world production rankings. First is the US at 22.8 Mb/d, then Russia at 9.0 Mb/d, then Saudi Arabia at 8.97 Mb/d and then Canada at 5.9 Mb/d. Below us is China at 4.5 Mb/d. We could be producing so much more if there was support at all levels of government and we could add more takeaway capacity.
China demand continues to weaken (imports down 3% from last year to 10.99 Mb/d) and the data for India showed a decline of 1.5% in August as Naptha, Diesel and other products showed declines.
EIA Weekly Natural Gas Data
The natural gas report out last Thursday showed an increase in storage of 82 Bcf, with the largest rise in the East at 27 Bcf. This compares to an injection of 84 Bcf last year and the 5-year average injection rate of 67 Bcf. Storage is now at 3.63 Tcf. US Storage is now 3.5% above last year’s level of 3.50 Tcf and is 5.1% above the five year average of 3.45 Tcf. The percent differences are clearly shrinking and when they go negative natural gas prices should rise materially. NYMEX is today priced at US$2.43/mcf. Current weakness is due to the back to back hurricanes lowering demand.
Natural gas demand should increase as winter approaches and 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.
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.
Our LNG panel at our ‘Catch The Energy’ conference this Saturday will cover this important topic and give investors an idea of how important this industry will be to Canada. Provinces (BC and Alberta) benefit from royalties and personal and corporate taxes, the Fed’s from taxes, more employment to add to the overall economy, and the producers should see a return to pricing that incentivizes the industry to add more molecules. Attendees will be able to meet and chat with producers and gain an understanding of the opportunity and how cheap the stocks are at this time. To learn more about the LNG panel and the conference click here.
Baker Hughes Rig Data
In the data for the week ending October 11th, the US rig count saw an Increase of one rig to 5865 rigs. Rig activity is now 6% below the level of 622 rigs last year. Of the total rigs working last week, 481 were drilling for oil and this is 4% below last year’s level of 501 rigs working. The natural gas rig count is down 14% from last year’s 117 rigs, now at 101 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 four rig decrease to 219 rigs but this is 13% above last year’s 193 rigs. Activity for oil is at 154 rigs compared to 116 last year or up by 33% 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 and some of the days have seen negative pricing as storage nears capacity. More companies are shutting in dry natural gas wells.
Catch the energy conference update
We are looking forward to seeing all of you at the Catch the Energy Conference this Saturday in Calgary. We are officially sold out but if you would like to still attend, join the waitlist here:
https://gravitypull.swoogo.com/catchtheenergy2024/waitlist
There have been some cancellations in attendee tickets so there is a chance to still attend.
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 276, down 6 points from last week as energy stocks fell as the crude war premium shrank. 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.
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.
