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October 9, 2024 | Crude War Premium Shrinks As Investors Focus On Weak China Demand Data
Josef Schachter
Turbulent markets in China headline each day the challenges China is having to get its economy back on track for sustainable growth. It needs to write-off debt challenged fixed assets, move from an export economy to a consumer economy and stabilize government owned businesses. In addition, its focus and financial support of EV’s and battery manufacturers has gone overboard with too much capacity. Now they are seeing smaller entities go bankrupt and leaving suppliers and themselves with massive job losses. Those state and local governments that financed this massive growth are now taking severe financial losses. This is why we are seeing weaker economic data and lower demand for commodity inputs like crude oil (down 300 Kb/d from last year from the latest report).
On the war fronts the Middle East gets the attention now as every day there are bombs heading from Iran’s proxies, and one day last week around 200 directly from Iran. Israel so far has held back retaliation directly against Iran but has been actively hitting terrorists supported by Iran in Syria, Lebanon, Gaza and the Palestinian West Bank. The US has warned Israel not to hit Iranian nuclear facilities but with Iran close to having weapons grade materials this should not be removed from the target list. The coming days after the Jewish holiday of Yom Kippur could start the Israeli retaliation campaign and our expectation is that they will address the command and control centers for the IRGC and their military installations. Could they go after the oil fields and infrastructure? That is possible but a better target is Kharg Island which ships 90% of Iranian crude exports. Damaging them would cut the flow of money Iran needs for domestic use, and to support its proxies.
Russia has increased its takeover of the Donbas despite not regaining the Kursk area held by elite Ukrainian units. The Kremlin has warned the west that if they give permission for Ukraine to use their long range weapons to hit deep into Russia, then Russia would change its nuclear protocols. This would be a very dangerous escalation and would have Russia directly fighting NATO. This is a war of attrition. Ukraine is getting help (but not sufficient or timely help) from NATO and Russia from Iran and North Korea. Recently Ukraine announced that they killed some North Korean officers in recent fighting. Putin may want North Korean soldiers on the battlefield (North Korea has 1.2M disciplined and well trained troops) but language, equipment and command, and control challenges have to be resolved before large numbers of Kim’s troops will be integrated onto the Ukrainian battlefield.
In the US, a hot jobs report and an interim deal with the dockworkers ended a potentially debilitating strike just before the elections which has helped stocks continue their ascent. Greed is good again on Wall Street and the problems that can end this party are being ignored. The dock workers deal solved the pay issue (pay increase of 62%) but not automation which has been pushed into January so that this issue does not impact the chances for another Democratic and very pro union win. US ports need to automate to compete with other ports that modernized and this requires less workers. This is the same issue the automakers have in building EV’s which need less workers in these factories.
The Fed’ s next meeting is on November 6-7, and is expected to have a cut of only 25 BP due to a hot job number last Friday. The report showed an increase in jobs of 254,000 and the jobless rate fell to 4.1% from 4.2%. Average hourly earnings rose 0.4% versus the 0.3% forecast. Service industries added 202,000 of the jobs and most of these were low paying ones. A large number of these new jobs were needed for poll workers for the election.
Regarding energy, our 2H/24 WTI price target of US$66-69/b was reached. This triggered a BUY signal and we sent out an SER Action BUY Alert on September 10th of five companies from our Coverage List. We also reiterated BUYS on three names already on the Recommended List which had fallen to bargain levels. We expect a period of backing and filling for WTI crude in the coming weeks. A test of the recent lows (US$66-68/b) is expected and if this occurs we should see one of our other two BUY signals triggered. We plan to add additional BUY ideas at that time. Subscribers please watch your emails on weak market days as this is when such an Action Alert would be issued. Many of the ideas currently on our SER BUY List will be presenting at the 2024 ‘Catch The Energy’ Conference. We hope you will be able to attend.
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Today WTI is at US$72.43/b. Over the coming days any increase in fighting with Iran directly would lift prices. If Iran has been humbled and there is only a measured move by Israel then things should cool down and crude should retreat below US$70/b once again providing one more great buying opportunity for energy investors.
Market Update: We are watching the economic data carefully as it appears that consumers are tapped out and this seems to be dragging some economies around the world into recession. For the US the >US$2T of deficit spending with large war spending, is keeping some areas of the US, with hot economies. The military industrial complex and areas where weaponry are built are strong economic areas of the US these days. Earnings for Q3/24 start coming out later this week and if they show positive comparisons then the bulls will remain in charge. If there is weakness in earnings (our view) and if guidance is negative then the bloom will come off this rosy and dangerously overvalued general stock market. The AI and tech stocks have the most valuation air in them and will face severe declines if this outlook comes to pass.
Our SER issue feature called ‘TOP PICKS NOW’ highlights the best ideas at the time of each SER report. Not all stocks rise and peak at the same time nor do they bottom at the same time. If you want to see what our subscribers are looking at, sign up now for access to the Schachter Energy Research reports.
EIA Weekly Oil Data:
US Crude production rose 100 Kb/d to a new record high of 13.4 Mb/d and is up 200 Kb/d from last year’s level. Motor Gasoline consumption took off as consumers in the southeast filled their cars and storage tanks to handle the incoming new hurricane. Demand rose 1.13 Mb/d to 9.65 Mb/d and compared to a normal year last year of 8.58 Mb/d. Jet Fuel fell 220 Kb/d to 1.71 Mb/d. Total Product Demand rose 1.34 Mb/d to 21.19 Mb/d mainly due to the hurricane stocking. Year-to-date, US Total Demand is now up 0.1% compared to 2023. Gasoline demand year-to-date is up 0.2% from last year’s 8.84 Mb/d.
Crude oil had bounced over US$12/b from early October when the market was expecting all out war between Israel and Iran and its proxies. However, with no significant escalation, crude has retreated nearly US$6/b on weak demand in China and Libya returning to full production (up 700,000 b/d). We still expect to see the fundamentals drag WTI crude below US$70/b again. Today WTI is at US$72.43/b and down US$1.14/b.
EIA Weekly Natural Gas Data
Natural gas demand should increase as winter approaches and US LNG plants complete their maintenance. In addition, the Matterhorn Express Pipeline should come on shortly and bring more Permian gas (up to 2.4 Bcf/d) to the Gulf coast LNG plants.
Cold weather in Europe and forecasts of much colder winter weather than last year have lifted their November TTF futures contract to US$13.50 per MMBtu.
We recommend buying the very depressed natural gas stocks during periods of market weakness. These stocks are very cheap now, as we see higher natural gas prices in Q4/24. We see much much higher gas prices in 2025 as quite a number of new LNG plants come onstream over the next 12 months; one in Canada and three in the US. In Canada the first train of LNG Canada comes on and in the US, Plaquemines LNG Phase 1 and Corpus Christi Stage 3 begin production of LNG. In 2025, Golden Pass LNG plans on bringing on the first two trains of this new three train export facility.
Our LNG panel at our ‘Catch The Energy’ conference will cover this important topic and give investors an idea of how important this industry will be to Canada. Provinces (BC and Alberta) benefit from royalties and personal and corporate taxes, the Fed’s from taxes, more employment to add to the overall economy, and the producers should see a return to pricing that incentivizes the industry to add more molecules. Attendees will be able to meet and chat with producers and gain an understanding of the opportunity and how cheap the stocks are at this time. To learn more about the LNG panel, the conference, and get tickets click here.
Baker Hughes Rig Data
In Canada, there was a five rig increase to 223 rigs and this is 24% above last year’s 180 rigs. Activity for oil is at 157 rigs compared to 108 last year or up by 45% as companies add production for the increase in export capacity via the TMX pipeline. Activity for natural gas is down 13% to 63 rigs compared to 72 last year. Condensate rich wells are the focus of this activity. The industry needs north of $2.50/mcf to see the economics attractive to drill dry gas wells. As we get closer to LNG Canada ramping up in Q4/24 and natural gas fills the Coastal GasLink pipeline, prices should lift. AECO prices are at uneconomic prices below $0.50/mcf and some of the days have seen negative pricing as storage nears capacity. More companies are shutting in dry natural gas wells.
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Josef Schachter October 9th, 2024
Posted In: Schachter's Eye On Energy