Each week Josef Schachter will give 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 27 energy and energy service companies with regular updates. He holds quarterly subscriber webinars and provides Action BUY and SELL Alerts for paid subscribers. Learn more and subscribe.
EIA Weekly Data: The arrival of the first major Hurricane Laura (category 4), last week shut down most of the US offshore oil and natural gas production in the Gulf of Mexico. The EIA data on Wednesday September 2nd showed the significant impact on Gulf coast production and on overall US demand. Lower 48 production fell 1.2Mb/d to 9.7Mb/d due to the shut-ins. At the same time demand fell by 2.6Mb/d to 17.0Mb/d or down 13.5% in the week. With imports down by 1.0Mb/d or by 7.1Mb on the week as the gulf coast facilities were shut down, overall inventories of commercial stocks fell by 9.4Mb, with gasoline inventories down by 4.3Mb and distillate inventories down by 1.7Mb as refinery runs fell 5.3 points from 82.0% to 76.7%. Some of the gulf coast refineries have now reopened as the damage to facilities was less than feared.
Demand for all products fell 2.6Mb/d on the week to 17.0Mb/d and is down 4.6Mb/d or 21.5% from last year’s level of 21.6Mb/d consumed. Gasoline demand fell 374Kb/d on the week to 8.8Mb/d and is down 685Kb/d or 7.2% from 9.5Mb/d consumed last year. Jet fuel demand fell 202Kb/d on the week to 940Kb/d and is down 939Kb/d or 50% from 1.9Mb/d consumed last year. Overall product stocks remain high at 1.94Bb or 136.7Mb (7.0%) above the previous year. These product inventories are way too high for this time of year as demand falls off with the end of the summer driving season. Next week should see a moderate swing back in the numbers as the hurricane impact ends. However once we are into mid-September we should see numbers that reflect what ongoing demand will be in this pandemic era.
Demand for energy will be impacted by the level of employment in the US. The ADP report out today showed private payrolls rose by 428,000 in August much below the 1.17M consensus. This should put the Friday August monthly nonfarm payrolls report under the microscope. The forecast is for a rise of 1.49M jobs and an unemployment rate of 10.0%. If there is a big miss (lower numbers) that would be a negative for the stock market and for energy prices.
Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed no change in the US rig count after a rise of 10 rigs in the prior week. The US rig count is now at 254 rigs working, but remains down 72% from 904 rigs working a year ago. The Permian basin had a decline of two rigs. This basin’s activity is now down by 71% from a year earlier level of 429 rigs. The US oil rig count fell by three rigs to 180 rigs and now is down 76% from 742 rigs working last year.
Canada saw a reversal of the rise in rigs that we have seen for the last few weeks. Last week there was a decline of two rigs to 54 rigs working. This level is down 64% from 150 rigs working at this time last year. Canada’s recent improvement was due to the pick up in the liquids rich Montney and Duvernay natural gas basin activity. AECO today is C$2.56/mcf which is a very strong price for natural gas at this time of year. The recent hot weather and heavy demand for electricity for air-conditioning is the main reason for this nice price improvement. Natural gas prices should retreat now and may back off below C$2.00/mcf in the period up to the start of winter 2020-2021. This winter we see pricing exceeding C$3.00/mcf due to the decline in overall production levels in the basins and the low storage level in Canada.
Conclusion: As we write this, WTI for October is at US$41.65/b down US$1.11/b on the day and down US$1.77/b from US$43.42/b at this time last week. Crude prices should continue to decline in September after the long weekend as US consumption normally declines by 1.0-1.5Mb/d. Further pressure will come from OPEC as they raised production by 2.0Mb/d in August. Near term the psychological level of US$40/b will be important but for us a decline below US$38.72/b would confirm a top. Later it is likely that a breach of US$34.36/b will put the sector under heavier pressure. As a result we see most energy stocks have significant downside risk. The most vulnerable companies are those energy and energy service companies with high debt loads, high operating costs, declining production, current balance sheet debt maturities of some materiality within the next 12 months and those that produce heavier crude barrels. Results for Q3 and likely Q4/20 for most energy and energy service companies should be short of the prior year’s level.
Hold cash and remain patient for the next low risk BUY window expected during Q4/20.
The S&P/TSX Energy Index is down nearly 4% on the week from the 82 level to below 79 now. We see much more downside over the coming months. A breach of 74.67 would set up the next downside target for this index to the 50 level. Further lows are likely in Q4/20 as tax loss selling could be very nasty this year.
The service sector is seeing major activity with Schlumberger exiting the frack business with a sale to competitor Liberty Oilfield Services. Others that have exited are Baker Hughes and Weatherford. Halliburton remains the largest player now. This consolidation is a positive as older equipment of lower horsepower will be removed from the industry. Over time when the price of crude recovers a smaller footprint frack industry will see better pricing and a strong recovery. In Canada, the battle for Calfrac well service continues. This side of the border is also likely to see consolidation and a smaller fleet going forward. We see the energy service sector doing better in 2021 when we are forecasting US$55/b for WTI up from US$40/b for this year.
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