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July 10, 2024 | US and China Crude Demand Sluggish – WTI Should Decline Below US$80/B in The Near Term

Josef Schachter

As a 40 year veteran of the Canadian Investment Management Industry, Josef Schachter has experienced several exceptional and turbulent global economic and stock market cycles. With his primary focus on the Energy Sector, Josef is able to weave global political, economic and monetary issues with current energy data into a compelling story of what's going on in the sector, what is to come, and why.

The US Presidential election continues to keep observers riding a roller coaster as they watch the Democrats agonize over keeping current President Biden or forcing him to resign due to his age and mental lapses. The ‘ring of power – the oval office’ then goes to his Vice-President Kamala Harris and she then gets to pick a VP to be her running mate. It may take a few weeks to see if Biden has the stamina for electioneering. Many leaks are coming out of how many daily naps he needs and concern that neurologists who specialize in movement disorders (Parkinsons) have been visiting (logs show 10 times) the White House. The White House at first denied the doctor visits then changed their answer as reporters checked the visitor logs. What a change for the protective eastern media over the last year. Only the bad debate made them realize they were complicit in  hiding the fact of the drastic and deteriorating health changes Biden was having. Even stallworth Nancy Pelosi is signaling that Biden should re-examine his decision to stay in the race. Democrats in swing districts are the most aggressive in wanting him gone as they see their likelihood of defeat if he leads the tickets. Senator Michael Bennett (Democrat – Colorado) sees Trump winning in a landslide and taking control of the House and Senate in his massive win. Next week is the Republican convention and in August the Democratic. Trump has challenged Biden to another debate and a golf game with the winner donating US$1M to their favourite charity.

The first hurricane of 2024 has roared towards the US Gulf coast and now 1.4M Texans are without power. The heat across the continent is increasing electricity usage and this should help to increase use of natural gas. At some point this could lift prices over US$3.00/mcf.

Mixed economic data continues to sway North American markets as each data piece is scrutinized for signs of the health of the economies. It is clear that the consumer is having a tougher time and that overall manufacturing is slower than last year. What is holding the two economies up is government deficit and defense spending.

Data of note:

  • The Canadian economy lost 1,400 jobs in June versus the expectation of a rise of 25,000. The jobless rate is now 6.4%. The Bank of Canada will likely lower rates again if we see another decline in jobs in upcoming reports. The dollar may breach US$0.70 if rates in Canada diverge materially from those in the US.
  • The US economy in June added 206,000 jobs better than the 195,000 forecast. The jobless rate rose to 4.1% but rose as more people entered the workforce looking for jobs. The elderly cannot make out on their social security pensions and are coming back to get part-time work to make ends meet. The problem for the Fed was that average hourly earnings rose 3.9% making it tough for the Fed to cut rates before the US elections. Also lots of the part-time jobs are being taken by illegal immigrants. Very few of the new jobs were full-time. Private sector job growth in June was only 136K of this total compared to 193 K new jobs in May.
  • US credit card delinquency rates are spiking and reaching levels seen just before the financial crisis of 2008.
  • The Fed is now providing massive liquidity to banks which dwarf its 2008 efforts as it tries to prevent bank failures.
  • US corporate bankruptcies in June reached their highest level since early 2020. Reasons given were high interest rates and rising wages.
  • A US health and beauty aid company Helen of Troy (brands: Oxo, Revlon, Hot Tools, Bed Heads, Vicks and Pur) fell 32% today as it announced a 12% drop in revenues and a 72% drop  in earnings per share. The consumer is clearly retrenching and the early stages of a consumer recession may be underway.
  • China factory activity contracted for the second straight month in June. Imports of crude declined due to the price rise. Another large property developer Guangzhou R&F Properties failed to repay its Singapore lender US$614M. It is now in liquidation by its creditors.
  • Transportation/shipping costs are rising materially due to lack of access to the Red Sea. Ocean rates are rising at double digit rates.
  • Weaker spending by the rich can be seen from Porsche’s announcement that deliveries dropped 7% in 1H/24. China demand alone dropped by one-third.

Summarizing – We surmise that the Fed is boxed in by their own policy mistakes. They kept saying in 2023 that inflation was transitory and we now know this as false. They also erred by prematurely calling a pivot in December 2023. If inflation persists and goes higher in the coming months, some FOMC voting members have indicated that they may want to raise rates if inflation reverses to the upside. So the most likely case is ‘higher for longer’. Stagflation is here and consumers are spending less while still facing an onslaught of higher prices making household budgeting tighter. We are in the early stage of a consumer recession which is nearly 70% of the US economy. Not a good situation during an election year.

On the wars front:

  • China is holding joint military exercises with Belarus near the Polish and Ukrainian borders. These are the first exercises involving Chinese military personnel on Belarusian territory. It coincides with the 75th NATO meeting in Washington and closer ties between China and Russia. China has a 2.0M man military – the largest in the world.
  • Russia is aggressively destroying the Ukrainian air force and their bases before NATO sends in US made F-16’s. Putin warned that a nuclear war would likely commence if NATO deployed troops in Ukraine.
  • Poland has signed a 10-year security agreement with Ukraine to shoot down Russian missiles and drones launched in the direction of Poland within Ukrainian airspace. This means any attacks against Kiev and Lvov could see Poland defend Ukraine. With the air force losses Ukraine has suffered Poland is considering sending 14 more MIG-29 fighters that Ukraine has pilots for.
  • Hezbollah has launched more big attacks against northern Israel (rockets and drones). In return Israel is bombing the Beirut area and targeting Hezbollah leaders. It killed a Hezbollah general in the recent fighting.
  • Bloomberg reports that the Saudis threatened to SELL European bonds if Russian assets were confiscated. Russia has US$300B of assets that are frozen in France, Germany and Belgium.

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. 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 and areas where weaponry is built are strong economic centers these days.

Energy stocks peaked in early April as crude reached its high of US$87.67 on the mideast war potential to expand with direct fighting between Israel and Iran. Prices retreated to US$72.48/b in early June as no escalation occurred and global inventories grew. It recovered thereafter to US$84/b on optimism of a strong summer driving season. We continue to believe that the weekly EIA storage data will be key to near term crude price action. Inventory growth on a repeated basis should drive WTI near term below US$80/b and likely lower in coming months.

We remain concerned that the general market and the energy sector are vulnerable. The market is getting narrower and narrower as the AI stocks continue to take markets higher but the underlying market is deteriorating. A correction may be in its early stages. The S&P/TSX Energy Index peaked at 308 in week two of April and has fallen to 282 today.

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July 10th, 2024

Posted In: Schachter's Eye On Energy

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