June 5, 2024 | WTI Crude Plunges Over US$4/B To US$73.10/B As OPEC Plans To Open The Spigots in Q4/24

OPEC’s announcement to gradually phase out the 2.2 Mb/d of quota cuts (starting October 1st) was not received well by the markets. In the details an agreement to give the UAE a 300 Kb/d addition to their quota, and continued cheating by Iraq and Nigeria resulted in a knockout blow to crude prices over the last week. WTI reached a high in the last week of May at US$80.62/b and fell as US inventories rose. Those rose again (see section below), so we have a weaker demand picture in the US. Reuter’s noted this week that overall China demand was only up 100Kb/d from last year due to weak consumer demand and high commercial and strategic reserves (SPR). Their SPR according to reports now holds over 1Bb. China may throttle back crude imports if this situation of weak demand continues. So if the two largest consuming nations see weaker demand then crude prices could breach US$70/b in the coming weeks. Today’s low so far is US$72.82/b. We have been calling for a breach of US$75/b for the last few weeks and we now see rising evidence that it could breach US$70/b later this month. This should set up the next low risk BUY window for energy stocks. 

Some mixed data in the US is giving bulls a hope for a Fed rate cut later this year. Consumer spending is down materially for lower income Americans and Home Depot and Lowe’s are now reporting revenue misses as the consumer pulls back on discretionary purchases. Lowe’s revenues fell 17% in Q1/24 versus  the prior year. US credit card delinquency rates of 90+ days reached 7% of loans and is at the highest level since 2011. With US credit card debt at US$1.1T (a new record high) US$78B is near default. Offsetting this is that higher income Americans are doing well and have not slowed down their spending. This diverse situation will be the battleground for the upcoming US election season. Jobs are still growing in government and healthcare and construction. The May jobs report out Friday is expected to show a rise in new jobs of 180K, a slight uptick from April.

Many Fed watchers want to see a few more months of positive inflation data before voting for a cut. The Bank of Canada lowered its rate 25 BP to 4.75% and will look at the data going forward to determine if they will lower interest rates again this year. The Canadian dollar fell on this news by .20 to 72.92. The low for 2024 was in April when it fell to $0.7229.

The slowdown in the consumer side of the economy should drag the overall economy down into recession. However this is not occurring due to the generous largesse of deficit spending by governments. In the US they are posting growth of around 2% now but ignore the 6% or US$2T of deficit spending to get there. So areas that benefit from government largesse are growing and not feeling any pain (like military contractors) but other parts of the country may already be in recession.

On the wars front:

• OPEC’s plan to allow members to increase production later this year may cause some friction with Iran as it desperately needs the revenues to support its terrorist proxies.
• China is restricting the sale of nitrocellulose (an ingredient in gunpowder) needed to produce ammunition. This is to harm the US and other NATO countries providing war materials to Ukraine that is at war with Russia. Maybe more of the tit for tat on AI access or the near term battle for TikTok staying in the US.
• The NSA says China is readying destructive cyberattacks on critical US infrastructure.
• President Biden is pushing for a deal between Hamas and Israel but Israel is balking about some of the deal details that the Biden government is not disclosing.
• On the battlefront Israel is seeing more rocket barrage attacks from Hezbollah against targets in northern Israel. The Israeli government has put 250K reservists on standby if there is an incursion from the north.

Market Update:  We are watching the economic data carefully as it appears that consumers are getting tapped out and this could drag down the economy at some point. The offset is the 6% US deficit and large war spending that are keeping some areas of the US, with hot economies.  The military industrial complex are happy campers these days.

Energy stocks peaked in early April as crude reached its high of US$87.67 on the mideast war premium expansion. The run from early February was very rewarding and the ideas on our SER BUY List for the most part did very well. We see the general market and the energy sector as vulnerable. A correction is in its early stages and that would provide the next low risk BUY signal which we see occurring during Q3/24. The S&P/TSX Energy Index peaked at 308 in week two of April and has fallen today to a low of 281 today and down 14 points from last week’s report. A downside target below 240 in the coming months is likely. The overbought condition can be confirmed from the S&P Energy Sector Bullish Percent Index which rose from 39% bullish in February 2024 to 91% three weeks ago. Recent weakness has pulled this Index down to 54% yesterday. Over 90% is an overbought reading. It  should decline below 20% to give off an oversold level and a BUY window once again.

Josef Schachter June 5th, 2024

Posted In: Schachter's Eye On Energy

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