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 EIA data on Thursday September 16th showed a production recovery from the impact of Hurricane Laura on Gulf coast production. Lower 48 production rose by 900Kb/d to 10.9Mb/d (last week it rose 300Kb/d after the Hurricane passed by to 10.0Mb/d) but is still down 1.54Mb from 12.4Mb/d at this time last year. Production was once again curtailed as Hurricane Sally (a category two with 160 kph winds) hit the gulf coast and caused the shut-in of 3-6M boe/d of offshore oil and gas production. Commercial crude stocks fell 4.4Mb to 496.0Mb (versus a rise expected of 1.3Mb). Total commercial stocks are now at 417.1Mb or 78.9Mb or 18.9% above last year. The current high stock level and rising OPEC production has been putting pressure on WTI crude prices which fell to a low of US$36.13/b last week. Total product demand fell by 1.65Mb/d to 17.0Mb/d or down by 8.8%. Inventories of gasoline fell by 0.4Mb/d despite refinery runs rising by 4.0 points to 75.8% from 71.8% in the prior week. Distillate fuel oil inventories rose by 3.5Mb to 179.3Mb as the industry gets ready for winter 2020-2021.
Overall total stocks (excluding the Strategic Petroleum Reserve) remain high at 1.43Bb or 136.5Mb or 10.6% above the previous year’s level. Total product demand now at 17.0Mb/d is down 3.25Mb/d from a year ago or by 16.8%. Gasoline demand rose a modest 87Kb/d to 8.48Mb but is down 5.2% from 8.94Mb/d consumed last year. Jet fuel consumption rose 83Kb/d to 947Kb/d but is still down 959Kb/d or 50.0% from a year ago. With coronavirus cases picking up again as schools and as more businesses reopen, the US caseload has risen to 6.6M cases (6.4M cases last week) with a new high of 197K fatalities. The next few weeks will be critical for the forecasts as the colder weather and normal flu season starts. If we see a Wave Two situation as is being seen in France, Israel, South Korea and some places in China, then the increased lockdowns will hit energy demand even further and depress crude prices further. The US and World economies are facing fits and starts over the next few quarters as we see if there is a Wave Two and if vaccines can be available and widely distributed in the coming quarters.
World demand now seems to be around 91-92Mb/d now that the summer driving season is behind us. This is below the 100Mb/d demand seen just before the pandemic. Trafigura Group, the giant trading company and second largest independent oil trading entity, is now forecasting that a glut in the oil market is about to occur as the demand recovery stagnates and OPEC raises production into year end taking us back into a surplus situation.
Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a two rig decline in the US land rig count. The US rig count is now at 254 rigs working, but remains down 71% from 886 rigs working a year ago. The Permian basin had a one rig loss last week to 124 rigs and is now down by 70% from a year earlier level of 419 rigs. The US oil rig count fell by one rig to 180 rigs but is down 75% from 733 rigs working last year.
Canada had no change of the week at 52 rigs working. This level is down 61% from 134 rigs working at this time last year.
OPEC September Monthly Oil Market Report: The monthly report came out this past Monday and showed that OPEC raised production by 763Kb/d to 24.045Mb/d. The biggest increases came from Saudi Arabia (+475Kb/d to 8.89Mb/d), UAE (+180Kb/d to 2.705Mb/d) and Kuwait (+127Kb/d to 2.288Mb/d). This after an OPEC increase of 1.04Mb/d in July to 23.283Mb/d versus 22.243Mb/d in June. This data does not include the increases from OPEC+ member Russia which also raised production in July and August. Of interest in the report was that OPEC lowered 2020 demand by 400Kb/d to 90.6Mb/d and lowered 2021 demand by 770Kb/d to 97.6Mb/d with the highest quarterly demand in Q4/21 at 99.3Mb/d – not expecting demand to return to pre-pandemic levels of over 100Mb/d next year.
OECD inventories are now reported at 109 days down from 124 days during Q1/20 but up from the normal 93-94 days or by nearly 300Mb of excess inventory, which needs to be worked down. The most damaging part of the report was that OPEC projected the call on OPEC for 2020 at 22.6Mb/d for the year. Current production in August of 24.0Mb/d is clearly in excess. As we see storage building once again that should put meaningful pressure on crude prices in the coming weeks unless OPEC reverses course and cuts back quotas and production levels once again.
Conclusion: As we write this, the nearby October WTI contract is at US$39.43/b up $1.13/b on the day as the weekly report showed a drawdown larger than expected and concern is building on how long US gulf coast production may be shut-in. WTI in the last three weeks has traded between US$43.78/b and US$36.13/b. Crude prices should continue to decline in September and October as US consumption normally declines by 1.0-1.5Mb/d when the summer driving season ends. Further pressure is coming from OPEC which raised production In July and August. They meet virtually tomorrow, September 17th, and if they don’t reverse their increases then prices are likely to erode further. The psychological level of US$40/b was breached last week and the low of last week at US$36.13/b is now the next breach level. The break last week of US$38.72/b has now occurred and confirmed a top for WTI crude. The next key support level for WTI is US$34.36/b and then US$30.72/b. If these are breached in the coming weeks then the energy sector will face renewed and increased downside pressure. We see most energy stocks have significant downside risk. The most vulnerable companies are 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 which when reported will add to the downside pressure.
Hold cash and remain patient for the next low risk BUY window expected during Q4/20.
The S&P/TSX Energy Index is flat with last week’s 72 level as Hurricane Sally and EIA report lifts WTI by US$3/b temporarily. From the June high at 96 (when we recommended profit taking) the index is down by 25%. We see much more downside over the coming months. The support at 74.67 has been breached and the next near term downside target is last week’s low of 69.40. Other downside targets in the coming weeks are 58.05 and then the 50 level. Further lows are likely in Q4/20 as tax loss selling could be very nasty this year. Use days of market strength to take profits and build up cash reserves.
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