Schachter’s Eye on Energy: US Crude Exports Rise 1.2Mb/d Or 8.6Mb On The Week, Pulling Down Commercial Stocks

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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: Wednesday August 26th’s EIA data was supportive of the current WTI price of US$43.42/b. Commercial stocks fell 4.7Mb on the week, due to a big increase in exports of 1.2Mb/d or 8.6Mb. With strong demand for product last week motor gasoline inventories fell 4.6Mb, as consumption rose 531Kb/d to 9.16Mb/d due to strong end of summer driving season demand. Total product demand rose by 2.46Mb/d to 19.6Mb/d but is still down 2.6Mb/d from a year ago. Gasoline demand rose last week, but is still down from 9.9Mb/d last year. Distillate inventories rose by 1.4Mb as refinery runs rose by 1.1 points from 80.9% utilization to 82.0%. Jet Fuel demand rose 162Kb/d to 1.14Mb/d but is down 708Kb/d from consumption of 1.85Mb/d last year. US lower 48 production rose by 100Kb/d to 10.8Mb/d as industry activity picked up with a rising rig count and some low cost producers profitable at current WTI crude prices over US$40/b. Cushing inventories fell last week 300Kb to 52.4Mb from 52.7Mb in the prior week.

Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a rise of 10 rigs last week, the first increase in a long time compared to a decline of 3 rigs in the prior week. The US rig count is now at 254 rigs working, but remains down 72% from 916 rigs working a year ago. A bottoming process in activity in the US is now occurring. The Permian basin had all of the increase of 10 rigs following a rig loss of 5 rigs in the prior week. This basin’s activity is now down by 71% from a year earlier level of 434 rigs. The US oil rig count rose by 11 rigs  to 183 rigs and now is down 76% from 754 rigs working last year. 

Canada saw a continuation of more activity with a rig count increase of 2 rigs (last week 7 rigs were added) to 56 rigs working. It is still down 60% from 139 rigs working at this time last year. Canada’s improvement is due to the pick up in the liquids rich Montney and Duvernay natural gas basin activity. Canadian natural gas producer stocks have been strong performers and are outpacing oil stocks. AECO today is $2.54/mcf which is a very strong price for natural gas at this time of year. The hot weather and heavy demand for electricity for air-conditioning is the main reason for this nice price improvement. 

Conclusion: As we write this, WTI is at US$43.42/b for the October contract up slightly on the day. Prices are holding up due to the end of summer driving season and Hurricane Laura which should hit the US Gulf Coast shortly. Energy firms according to Reuters have shut-in over 1.0Mb/d of offshore production as well as 1.2Bcf/d of natural gas. This is nearly 58% of US offshore oil production and 45% of US offshore natural gas production. Over 500,000 people have been ordered to flee low lying areas. This hurricane is expected to impact both Louisiana and Texas. The National Hurricane Center projects this to be a category three to maybe a category four level. 

While this is near term positive for crude prices we still expect prices to fall after the September long weekend and US demand to decline by 1.0-1.5Mb/d, at the same time as OPEC is raising production by 2.0Mb/d. For crude we see a decline below US$38.72/b as confirming the top. Later, when we see a breach of US$34.36/b the sector will fall under much heavy pressure. Energy stocks have significant downside risk. The most vulnerable stocks 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. Hold cash and remain patient for the next low risk BUY window. 

The S&P/TSX Energy Index is flat with last week’s level of 82. We see material downside risk over the coming months. A breach of 74.67 would set up the next downside target for this index at the 50 level. Further lows are likely in Q4/20 as tax loss selling could be very nasty this year.

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