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. Learn more.
Global Economic, Political & Military Update:
The market is being see-sawed by the conflict between the bulls, seeing the China reopening as very positive for the world economic growth in 2023, and the data coming out showing weakening economies around the world, especially in the US.
The reopening view lifted stock markets in early January with the Dow Jones rising by 1,500 points and WTI lifting US$10/b from US$72.46/b to US$82.60/b.
Since the weakening economic data has been released, the Dow has declined around 1,300 points in three days and WTI has fallen >US$2.80/b in the same time frame.
Some of the negative economic data include:
- US Retail Sales fell 1.1% in December as consumers were stretched to handle higher inflation.
- NY Empire State Manufacturing Index fell 33 points to a 2.5 year low (the pandemic low).
- The US PMI for manufacturing and services was below 50. A decline below 50 has a perfect’ eight for eight’ track record for predicting US recessions.
And, China’s economy slowed to a 3% GDP growth pace in 2022 but was flat in Q4/22.
On top of this the US is facing a contentious fight over the debt limit (US$31.4T) which was reached today. Getting it extended may take some time and the Republicans want spending cuts on discretionary spending. Democrats don’t want cuts so partisan warfare may occur over the coming months and could destabilize markets. While the Treasury Secretary has some leeway to fund the government for a few months, a government shutdown risk remains.
The positive moves in the CPI and PPI in December were due to lower fuel prices and lower used car prices. The car price issue may continue as there are now sufficient new cars in lots, but we see energy prices rising in 2H/23 to over US$90/b. This will turn the inflation numbers back up. Food prices, shelter costs and wage pressures from strong unions remain problematic. The Fed wants inflation down to 2% and yet it remains even with the recent falloff to 6.5% at >3x what the Fed sees as sustainable. More Fed speakers and the ECB President Christine Lagarde have continued to say that the inflation battle has not been won and interest rates will continue to rise at future Central Bank meetings.
We think that a recession in the US is inevitable as the bond market is forecasting falling rates despite the Fed’s plans to raise short term interest rates to cool inflation and to increase the supply of labour. The Unemployment rate at 3.5% (a 50-year low) is seen to need to rise above 5% to provide slack in the labour market thus needing a recession. The Fed is likely to raise interest rates by 25 BP at their next meeting and the peak rate may be over 5%, or 100 BP higher than the current official rate.
Bullish pressure for crude prices continues with the production cutbacks by OPEC and winter weather demand for heating oil and propane. Russia is selling less oil to Europe but China and India are taking up these barrels at much lower prices than Brent. If China does reopen this would increase demand this year by over 1.0 Mb/d. The data so far does not support this growth in demand view.
Bearish pressure for crude comes from the slowdown in the economy in China as Covid-19 spreads. Demand destruction due to weakening economies could be in the range of 5-7 Mb/d during 2023, more than offsetting any supply cutbacks from OPEC. Nigeria seems to be making progress in getting its production back up and Venezuela is seeing production rising as Chevron and ConocoPhillips have US government permission to restart fields.
EIA Weekly Oil Data: The EIA data of Wednesday January 19th (data from January 13th) was bearish for oil prices. US Commercial Crude Stocks rose by 8.4 Mb to 448.0 Mb. This compares to 413.8 Mb last year, so storage is up by 34.2 Mb from a year ago. The SPR saw no release of crude this week. This build would have been higher if not for Net Imports declining by 1.22 Mb/d or by 8.6 Mb last week. Motor Gasoline inventories rose by 3.5 Mb while Distillate Fuels fell 1.9 Mb. Refinery Utilization rose 1.2% to 85.3%. US production was flat at 12.2 Mb/d. Cushing inventories rose 3.6 Mb to 31.4 Mb. US total product demand rose last week by 2.69 Mb/d as Other Oils demand rose by 1.8 Mb/d. Motor Gasoline consumption rose 496 Kb/d to 8.1 Mb/d while Jet Fuel saw a rise of 92 Kb/d to 1.5 Mb/d.
Demand destruction is real in the US. Total consumption fell by 1.6M b/d to 20.3 Mb/d or down by 7.3% from last year while Motor Gasoline demand fell by 169 Kb/d to 8.1 Mb/d or down by 2.1% from a year ago. These numbers gyrate weekly but the important point is that demand is falling versus 2022.
EIA Weekly Natural Gas Data: The EIA data released today showed a decline of 82 Bcf for the week ending January 13th. Storage is now at 2.82 Tcf, still sufficient to meet US needs this winter. The biggest decrease was in the East (38 Bcf) and Midwest (38 Bcf). The five-year average for last week was a withdrawal of 120 Bcf. The largest withdrawals typically occur in January and February of each year and the largest weekly withdrawal so far was 359 Bcf in January 2018. US Storage is now only 0.7% below last year’s level of 2.84 Tcf and 1.2% above the five year average of 2.79 Tcf. With the recent warmer weather and the healthy storage position NYMEX has retreated from US$7.10/mcf in mid-December to US$3.28/mcf today. AECO is at $4.97/mcf. European prices have also declined due to warmer weather across the continent and sufficient storage. Germany has opened its first LNG import facility and has more coming online in the coming months.
Baker Hughes Rig Data: In the data for the week ending January 13th the US rig count rose three rigs to 775 rigs (decline of seven rigs in the prior week). Of the total rigs working last week, 623 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 29% from 601 rigs working a year ago. The US oil rig count is up 27% from 492 rigs last year at this time. The natural gas rig count is up 38% from last year’s 109 rigs, now at 150 rigs. The industry continues to respond to higher international natural gas prices with materially more activity than last year. This should continue to lift US natural gas production in upcoming quarters as more LNG exports are expected. Companies divulging their plans for 2023 plan to spend more, with capex plans showing growth in production as well as funds to offset higher drilling and completion costs.
In Canada, there was an increase of 38 rigs (increase of 105 rigs in the prior week) to 227 rigs as crews returned from holidays. Canadian activity is up 19% from 191 rigs last year. Activity for oil rose 17% to 141 rigs versus 121 rigs last year. Natural gas rigs were up 23% or 10 rigs to 86 rigs. Peak potential for staffed rigs is likely around 260 this winter. The industry is having a quick start in this New Year.
OPEC Monthly Report:
The January 2023 report was released on Tuesday and showed that in December OPEC increased production by 91 Kb/d to 28.97 Mb/d. The surprise increase was due mainly to Nigeria recovering from production difficulties. Overall OPEC cuts are now only 587 Kb/d, way below their announced 2.0Mb/d official cut. Both OPEC and the IEA now see Q1/23 demand and production in balance. The issue going forward is whether there will be a recession or not. If not, then the view is that demand will rise this year by 2.2 Mb/d to a record 103.5 Mb/d in Q4/23. If there is a slowdown or recession, which we think is likely, there should be a build in supplies in 2023.
The biggest reduction came from Kuwait with a cut of 35 Kb/d to 2.65Mb/d. Others cutting production included Congo (18 Kb/d) and Algeria (11 Kb/d). Lifting production were Angola (42 Kb/d), Libya (17 Kb//d), Venezuela (13 Kb/d), Iran (9 Kb/d) and surprisingly Saudi Arabia (4 Kb/d to 10.48 Mb/d).
OPEC sees global demand in Q1/23 of 101.0 Mb/d and that the call on OPEC is 28.85 Mb/d so with production at 28.97 Mb/d in December and shipments rising to Europe due to the Russian sanctions, there is likely going to be a supply build this quarter. If recession unfolds then the build could be material unless OPEC cuts back production materially or Russia sales fall off which so far has not been the case as the price they are selling at is below the US$60/b sanction threshold.
CONCLUSION:
Historically, as a global recession unfolds, crude prices typically 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 is priced now at US$79.77/b (up US$3.00/b from last week). Watch for a breach of six weeks ago’s low of US$70.08/b for the next (and probably last) decline phase of this correction/bear market phase. We continue to expect a panic spike bottom in the US$65-70/b area in the coming weeks. Below US$70/b we become bullish again.
Energy Stock Market: For the overall stock market we expect a focus on Q4/22 earnings and negative guidance from companies to take hold of the market and see significant erosion. Earnings from Goldman Sachs and Wells Fargo have hit the market. Overall US bank earnings are expected to decline by >10% as loan loss reserves are ratcheted up. The inflation watch on food, shelter and wages will also be a focus of the markets. A breach of December 2022 low of 32,600 on the Dow Jones Industrials Index should speed up the fear phase and generate an important bottom in Q1/23.
The upcoming weeks should see further pressure on the energy sector and we intend to take advantage of this to add ideas to our Action Alert BUY list. Many ideas we cover are down more than 50% and are entering our BUY ranges. We currently have eight ideas on our Action Alert BUY list and we expect to have over 20 names on this list in the coming weeks.
We now cover 33 companies and are working to add four new ideas. Coverage introduction of these new ideas should occur in our February Interim Report due out on February 16th.
The S&P/TSX Energy Index today is at 242 (up 8 points from last week’s level of 234) on the China reopening optimism. This bounce has ended (peaked at 252) and as more weak economic and earnings data is released the next significant decline should ensue. This should pull crude oil below US$70/b. Accompanying this should be some nasty down days for energy stocks which should set up a wonderful opportunity to buy great companies at bargain prices.
Late September’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 the fabulous buying opportunity. These BUY windows are infrequent so please decide what you want your energy weighting to be for the next major up-leg in this long energy super cycle. Our Coverage 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 large to small caps in our Growth and Entrepreneurial categories.
We are having our Q1/23, 90 minute quarterly webinar, on Thursday February 23rd at 7PM MT. This should be a very important webinar for subscribers as we go over the new ideas on our Action BUY list and why they have been added.
Once we see the market showing climatic bottom signals we intend to send out Action Alert BUY ideas to subscribers. Become a subscriber to get these timely BUY Action Alerts and our Fearless Forecasts for 2023. Go to https://bit.ly/2FRrp6k.
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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