Each week Josef Schachter gives you his insights into global events, price forecasts and the fundamentals of the energy sector. Josef offers a twice monthly Black Gold newsletter covering the general energy market and 33 energy, energy service and pipeline & infrastructure companies with regular updates. We also hold quarterly webinars and provide Action BUY and SELL Alerts for paid subscribers. http://bit.ly/2Y4pdex” target=”_blank” rel=”noopener”>Learn more.
Global Economic, Political & Military Update:
Yesterday’s missile that landed in Poland killing two civilians caused an uproar. The fear was that an attack on a NATO country by Russia, would have expanded the war. This has now been determined (confirmed by the President of Poland’s Andrzej Duda and by NATO leader Jens Stoltenberg) to be a Ukrainian air defense missile that was fired to destroy an incoming Russian missile and ended up misdirected towards Poland. The US stock market was in a bullish mood before this was first announced by AP but then retreated as more details emerged.
Yesterday’s US PPI at 8% was initially rejoiced as it was below the prior month, but it is still four times higher than the Fed’s inflation target. However the top line number was the focus and in the detail, the data was disconcerting. The PPI for finished goods rose year over year by 11.3% and the monthly annualized change was 13.1%, not levels for the Fed to consider a pivot. The Fed also reported that household debt rose at the fastest pace since 2008. It rose 8.3% year over year rising by over US$1.3T. Much of the increase came from variable rate home equity lines which are tied to the prime rate. This rate is now at 7% more than double the rate from the beginning of the year. This total debt for households now sits at US$16.5T. It has grown at four times the inflation adjusted GDP growth rate. The strain of paying back this debt will crunch discretionary spending. Some are ignoring this financial problem and continue to borrow to maintain their lifestyles. A problem for another day may catch up quickly if the Fed keeps pushing up rates and a recession unfolds with rising unemployment. Target (one of the US largest retailers) highlights this difficulty for its consumer base as it announced a 50% decline in profits today and warned of a soft holiday quarter. The stock is down today by 15% or US$27 per share to US$152 per share.
UK inflation is getting worse. Their CPI for October came in at a 41-year high of 11.1% as food and energy prices continued to soar. Food increased at a 16.4% pace, the highest annual rate since 1977. More and more unions in the UK are talking about strike action to get double digit wage increases.
Donald Trump still wants the limelight and last night announced his third go at becoming President. His MAGA followers rejoiced but Republican leadership and large RNC donors want to move past him and go to a younger, less offensive and more inclusive candidate. The election season in the US for the 2024 Presidential election has now started and will be rancorous and divisive. The media will love Republicans’ battle for the mantle but the discourse and possible violence could make this election very nasty and possibly violent. I hope this forecast is wrong but what President Trump did and did not do on January 6th cannot be forgotten or forgiven.
Bullish pressure for crude prices continues due to the proposed 2.0Mb/d cutback by OPEC starting this month. Additionally, the low US SPR storage levels and the onset of winter should increase overall energy demand.
Bearish pressure for crude also comes from the lockdowns in China and low imports of crude (down 6% year over year to 9.4Mb/d). China’s retail sales have gone negative and industrial activity is declining. Europe has filled up its storage of crude, natural gas and products so it will not be a big buyer of additional energy until it uses up this winter what it has in onshore and offshore storage. US Industrial Production came in today at negative 0.1% missing estimates of a positive 0.2%. With the two largest economies showing weakness, energy demand growth will be constrained.
EIA Weekly Oil Data: The EIA data of Wednesday November 16th was mostly bearish for oil prices. US Commercial Crude Stocks fell by 5.4Mb to 435.4Mb and are above last year’s level of 433.0Mb. The decline was due to Exports lifting 341Kb/d, or by 2.4Mb on the week. The SPR saw a release of 4.1Mb. Motor Gasoline inventories rose by 2.2Mb and Distillate Fuels by 1.1Mb. US production remained flat at 12.1Mb/d. Refinery Utilization rose by 0.8% to 92.0% on the week.
Overall US demand fell by 179Kb/d to 21.1Mb/d as Propane demand fell by 262Kb/d. Motor Gasoline saw a decline of 269kb/d to 8.74Mb/d while Jet Fuel saw a rise of 101Kb/d to 1.65Mb/d.
Demand destruction was seen in the Total consumption versus last year or by 542K from 21.6Mb/d. Motor Gasoline demand fell 499Kb/d or by 5% from 9.24Mb/d.
OPEC Monthly Report: The November 2022 report released on Monday showed that in October OPEC lowered production by 210Kb/d to 29.5Mb/d. The biggest decreases came from the Saudis with a cut of 149Kb/d to 10.8Mb/d and Angola a decline of 78Kb/d to 1.1Mb/d (likely field decline issues here). While OPEC plans to cut production in November by 2.0Mb/d, the quota cuts likely means only 500Kb/d of real production cuts because most members are not using their current quota allocations. The Saudis are likely to make the most of any cuts. In November, Iraq raised production by 20Kb/d to 4.6Mb/d and Nigeria raised production by 33Kb/d to 1.1Mb/d. Both are desperate for revenues to run their economies and both are still under their quota’s.
OPEC sees a call on their production of 28.9Mb/d in Q4/22 so there is sufficient supply even before SPR releases by OECD members. In 2023 they see average demand from OPEC at 29.3Mb/d. So with OPEC producing 29.5Mb/d there are sufficient supplies. OPEC’s forecast for consumption was lowered for Q4/22 and for all of 2023. Their forecast still appears to be too high as they see a global slowdown but not a global recession. We see a recession as Central Banks need to defeat inflation that is now at double digits in many parts of the world.
EIA Weekly Natural Gas Data: US Natural gas storage has been built up for winter 2022-2023 and withdrawals should start this week as winter has commenced across most of North America. The US data released last Thursday showed a build for the week ending November 4th of 79 Bcf. This should be the last build of any consequence for this year. Storage is now at 3.58 Tcf sufficient to meet US needs this winter. The biggest increase was in the South Central (33 Bcf) followed by the Midwest (26 Bcf). The five-year average for last week was a withdrawal of 4 Bcf while in 2021 it was an injection of 26 Bcf. So this injection was significant and prices have retreated as a result. US Storage is now 1.0% below last year’s level of 3.62 Tcf and 2.1% below the five-year average of 3.66 Tcf. NYMEX is trading at US$5.78/mcf today while AECO is at $5.05/mcf. US NYMEX prices have retreated as the Texas Freeport LNG export terminal which was expected to restart exports this month is facing delays getting approvals and may not restart now until late Q1/23. This has pulled US gas prices down US$1/mcf over the last week.
Baker Hughes Rig Data: In the data for the week ending November 10th the US rig count rose nine rigs to 779 rigs (up two rigs last week). Of the total rigs working last week, 622 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 40% from 556 rigs working a year ago. The US oil rig count is up 37% from 454 rigs last year at this time. The natural gas rig count is up 52% from last year’s 102 rigs, now at 155 rigs. The industry this year has been responding to higher US and international natural gas prices with materially more activity than last year. This should continue to lift US natural gas production in coming quarters.
In Canada, there was a decrease of nine rigs (last week a decrease of three rigs) to 200 rigs. Canadian activity is up 19% from 168 rigs last year. Peak potential for staffed rigs is likely around 260 – 280 this winter. Activity for oil grew 32% to 133 rigs up from 101 last year and natural gas rigs were flat at 67 rigs. Capex budgets for 2022 appear to have been spent so the Canadian data should decline into year end but pick up quickly in the New Year as 2023 budgets should be moderately higher than this year’s.
CONCLUSION:
As a global recession unfolds, crude prices plunge sharply. In 2008-2009 during the financial crisis, demand fell by over 5Mb/d from over 88.5Mb/d to 83Mb/d. The price of crude fell from US$147.27/b to US$33.55/b in eight months. During Iraq’s invasion of Kuwait, prices rocketed from US$16.16/b in July 1990 to a high of US$41.15/b in October and then plunged in four months to US$17.45/b as recessionary demand destruction occurred. WTI today is priced at US$84.41/b (down >US$2.50/b on the day). Watch for a breach of US$76.25/b (the late September low) for the next onslaught to commence.
The final overall stock market corrective low (the ‘pause that refreshes’) for this new nascent energy super cycle, should occur during Q4/22 as WTI prices breach US$70/b. This upcoming climactic low should provide fabulous buying opportunities at great prices (Table Pounding BUY levels) for energy related stocks.
Energy Stock Market: Over the last few months the Dow Jones Industrials Index has fallen >5,600 points to a new intraday low of 28,661. The Dow is now following a normal bear market bounce which is nearly exhausted and should back down shortly. Once the Dow reverses, we should start the next painful phase of the overall decline from the start of the year down to the 24,000 – 25,000 area. This bottom is likely to occur during the tax loss selling season into mid-December.
The S&P/TSX Energy Index today is at 265. Last month’s low of 200.97 is now the support level to watch. A bust of this level should drive the Index below 200 and get us into the climactic bottom liquidation area of 160-180 that will set up a fabulous buying opportunity.
Once we see the market showing climatic bottom signals we intend to send out Action Alert BUY ideas to subscribers. Ideas are likely during tax loss selling season (late-November to mid-December). Become a subscriber to get these timely BUY Alerts. Go to https://bit.ly/2FRrp6k” target=”_blank” rel=”noopener”>https://bit.ly/2FRrp6k
Our Q3/22 90-minute webinar takes place on Thursday November 24th at 7PM MT. We intend to cover the recent crypto collapse and tax loss selling and the markets reaction to both. There will be two Q&A sessions. The main part of the webinar will be focused on the best BUYS to watch for in the coming weeks as the tax loss selling market pressure provides attractive BUY levels. We intend to add quite a few ideas to our Action Alert BUY list during this window into week two or three of December. One needs to be a subscriber to access the webinar live or access the archive thereafter.
Please feel free to forward our weekly ‘Eye on Energy’ to friends and colleagues. We always welcome new subscribers to our complimentary energy overview newsletter.
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