An unambiguous result for the US Presidency (winning the electoral college and the vote count) has removed some of the concerns about getting decisions made after inauguration day on January 20th. Incoming President Trump will have support from the Senate for appointments with his clear majority. We are still waiting to see who controls the House. Trump has said he would announce his cabinet and senior position choices before January. What he does on tariffs and if they are targeted just at China or at Mexico and Canada as well, is uncertain. His tax policies should get passed quickly and his closing the border and starting deportation of criminals should be quick moves to show he plans to meet his commitments to the electorate. What he likely will do with his nemesis in the Justice and State Departments means many of the antagonistic staffers are updating their resumes and have started the job search process.
Global Economic, Political & Military Update
The Fed meeting ended today and the expected 25 BP cut was announced. I would keep an eye on the 10-year US Treasury now at 4.43%. It was down to 3.60% in mid-September. The high for 2024 has been 4.74% in April. If we exceed 4.74% then the Fed may be boxed in from further rate cuts. The market would be worried about borrowers being crowded out. Under this scenario inflation could rise again and jeopardize the ecstasy of stock market enthusiasts.
Some of the interesting economic and market data points over the last week are:
- US Durable Goods Orders rose 0.4% compared to a forecast of a decline of 0.1%
- US full time employment has declined year over year since February. The October US Jobs Report showed a meager 12,000 new jobs versus the forecast of 100,000. The decline was seen as due to the Boeing strike (now over) that shed 44,000 jobs. Wage inflation persists with hourly earnings rising 4.0% year over year, that would keep the Fed from cutting more aggressively. Private sector jobs fell 28,000 jobs (Boeing strike). The unemployment rate stayed at a very low level of 4.1%.
- The Fed’s favorite inflation measure, the PCE Price Index rose 2.7% in September.
- Unit Labour cost in Q3/24 rose 1.9% versus the forecast of a rise of 1.1%.
- Another restaurant chain filed for bankruptcy. TGI Fridays filed for Chapter 11 in Texas. It had not seen a sufficient recovery since the Covid lockdowns.
- Warren Buffett continues to raise cash and had US$325B at the end of September up from US$277B at the end of Q2/24. He sold down his Apple (about 25% of his holdings) and Bank of America positions. What does he see from all the corporate holdings he still has?
On the military front:
North Korea, in support of Russia, has deployed over 12,000 North Korean troops (including 500 officers and three generals) in the Ukrainian occupied areas of the Kursk region of western Russia. Russia has pushed back the Ukrainian offensive forces and may soon be able to recapture all the occupied lands. Korean troops have already been killed in recent skirmishes. This would be a problem for President Zelensky, who needed the Russian lands whenever diplomatic talks resumed and he could trade Russian land for occupied Ukraine land. With President Trump taking office on January 20th 2025 Ukraine could be forced to accept a difficult diplomatic resolution that lets Russia hold on to many parts of Ukraine that it has annexed already. Trump’s threat of cutting back military support would force Europe to meet Ukraine’s needs or a painful negotiated deal would be the likely resolution.
Moscow has gained increased support from North Korea as Russia has agreed to pay Pyongyang US$200M per year and provide it with 700,000 tons of food supplies. As part of the deal Russia is helping North Korea with advanced space technology. North Korea flaunted this advanced technology by launching a test missile which had a range that could strike the continental US.
A surprise announcement today by the Houthis was that they unilaterally declared a ceasefire and that no further missile or drone attacks against commercial and military vessels in the Red Sea would occur. This cessation was declared after Trump won the US Presidency. Let’s hope they keep to their word and stay afraid of facing the wrath of Trump.
Regarding energy,
Our 2H/24 WTI price target of US$66-69/b was reached once and is likely to do so again in the coming weeks. It could occur during the tax loss selling season between mid-November into mid-December.
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) from today’s level of US$72.51/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 presented at the 2024 ‘Catch The Energy’ Conference.
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 yesterday was a bearish report for oil. US Commercial Stocks rose 2.1 Mb and the SPR continued to grow and was up 1.4 MB on the week and by 35.9 Mb above last year. Refinery processing rose 1.4% to 90.5% and is up from 85.2% seen last year. Motor gasoline inventories rose 0.4 Mb. Distillate fuels saw a rise of 2.9 Mb. Total Stocks including the SPR are now 19.5 Mb above last year. At 1,634 Mb US SPR storage is at a staggering 482 days of Net Imports. Cushing inventories rose 500 Kb to 25.9 Mb compared to 23.1 Mb in 2023.
US Crude production remained at a record of 13.5 Mb/d and is up 300 Kb/d from last year’s level. Gasoline demand fell 331 Kb/d to 8.83 Mb/d. Jet Fuel demand rose 151 Kb/d to 1.78 Mb/d. Total Product Demand fell 1,899 Kb/d to 19.7 Mb/d as Propane demand fell 600 Kb/d. Year-to-date, US Total Demand is now flat versus 2023. Gasoline demand year-to-date is up 0.1% from last year’s 8.86 Mb/d.
EIA Weekly Natural Gas Data
The natural gas report out today showed an increase in storage of 69 Bcf, with the largest rise in the South Central area at 27 Bcf. This compares to an injection of 79 Bcf last year and the 5-year average injection rate of 43 Bcf. Storage is now at 3.93 Tcf. US Storage is now 4.2% above last year’s level of 3.78 Tcf and is 5.8% above the five year average of 3.72 Tcf. The percent differences are clearly shrinking and when they go negative natural gas prices should rise materially. NYMEX is today priced at US$2.70/mcf.
Natural gas demand should increase in the coming weeks as we have entered the draw down season which starts during November. 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 during winter 2024-2025. We see much much higher gas prices in 2H/25 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 November 1st, the US rig count saw no change in the rig count now at 585 rigs. Rig activity is now 5% below the level of 618 rigs last year. Of the total rigs working last week, 475 were drilling for oil and this is 3% below last year’s level of 496 rigs working. The natural gas rig count is down 14% from last year’s 118 rigs, now at 102 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 three rig decrease to 213 rigs but this is 9% above last year’s 196 rigs. 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 1H/25 and natural gas fills the Coastal GasLink pipeline, prices should lift. AECO prices are at uneconomic prices below $1.50/mcf.
Energy Stock Market
The S&P/TSX Energy Index today is at 279, up 5 points since our report two weeks ago. Our downside target for this indicator is below 240 (range 230-240) and we see this happening during tax loss selling season during Q4/24. We like to BUY when stocks are cheap and being ignored which is now occurring. Bargains are clearly now our focus for new recommendations. WTI has traded between US$65.27/b and US$78.46/b over the past two months. The higher end when there are war actions in the Middle East with Iran involved and the lower end when weak demand data is released as we saw from the US data yesterday.
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.
One of our favourite energy service ideas on our Coverage List and Recommended BUY list is being taken over. STEP Energy is being taken over at $5 per share by major shareholder ARC Financial. We added the idea to our Recommended List on March 13, 2023 at a price of $3.44 per share when we got one of our BUY signals. A very nice 45% return in 20 months. This is our second energy takeover this year. The prior stock rose over 100% from the recommended BUY price to the takeover. If you would like to keep up with our recommended BUY list become a subscriber. https://schachterenergyreport.ca/subscriptions/
