Crude Observations

A Canadian Con…

So I was away this past week – squeezed in one last summer trip, to my hometown of Montreal. A short trip, enough time to turn off the brain, gobble some smoked meat, visit friends and family and get caught in what appears to be the largest series of construction projects in Canadian history (yes, I know, equalization).


But I’m home now and before cleaning my skeleton of a blog, I decided to check the news feed to see if anything interesting happened while I was away since I had elected not to look too hard.


Clearly that was a bad idea. It was a busy week on the eventful news front.


I totally missed out on the fun and hijinks of the federal conservative party using every tool in the kit to sewer its admittedly thin path to victory in the next general election. How did they manage this? By allowing the twin loser issues of immigration and supply management to create a schism in the party between the mainstream Conservatives and the grab-bag of pretend-Libertarians and anti multiculturalists who follow or claim to follow Maxime Bernier. I’m not suggesting there are a lot, but the numbers that supported Max (can I call him Max?) in the leadership context were pretty robust so there has to be someone apart from his own reflection nodding in approval at the stunt he pulled late this week – ditching a party that has a chance of coming back from the dead to form the next government to start his own party. Yet it all sounds so strangely familiar. Where has that happened before? Oh wait. Alberta. Where the PC’s spawned the Wild Rose Party, pulled it back together under the UCP banner only to see one-time rising star Derek Fildebrand get punted from the UCP and start his own party ahead of the next provincial election. And the Federal Conservatives of the late 1980’s who split not once, but twice – giving rise to the Reform Party AND the Bloc Quebecois, leading of course to more than a decade of obscurity. Wow. Conservatives. Get it together. Do I see parallels in Alberta and Canada – small ones, but not likely to develop the same way. Party unity in Alberta is very high. Nothing except self-destruction is going to stand in the way of Jason Kenney. Federally? Not so sure. The Liberal brand is strong and this type of division is exactly the wedge they have been looking for. Why stand on your record when you can point a finger and yell “farmer-hating racist!”


It all comes down to what I have been saying for years – you can maybe win a nomination on social issues; perhaps a seat. But you cannot win a general election on social issues in Canada – ever. Park your kooks and dive to the centre or you are a footnote. While it is extremely likely that Maxime Bernier will be a footnote by this time next year, there are a lot of opposition strategists paid a lot of money to not to let the story fade away – this is going to be around for a while.


Conservatives: Get. It. Together.


Also in the newsreel this week, the Supreme Court has thrown out the City of Burnaby’s challenge of the TransMountain Pipeline Expansion. This is not the big “duty to consult” ruling everyone has been waiting for, that has been imminent since April. No, this is a side challenge where the City of Burnaby challenged the NEB’s right to short-circuit permitting process to get the project going. This was always expected as a win, but it is nice to see it chalked up on the “proceed” side of the ledger.  Perhaps we can move on to other things in BC, like putting out forest fires.


I see that Saudi Aramco has officially called off its IPO as the government itself knuckled under to the human rights pressure being exerted on it via Twitter by the Canadian government. Wait – that wasn’t it? No, we will never know when or why the decision was made. Likely a year ago when prices started to rise. My guess is that Aramco is quite happy where they are market-wise and, like many companies, reversed course quite quickly when they actually read the disclosure requirements for publicly traded companies. After all, what good does it do a swing producer to have to actually publish updated reserve data, financial metrics, detailed shareholdings… no, far better to keep Aramco a mysterious yet powerful all-seeing controller of the oil market.


I also heard some Trump guys got a bit jammed up. Meh, that’s hardly surprising. Old news!


Finally, this just in – China has decided to add tariffs to Chinese imports of US oil products and coal as an escalation in everyone’s fun and easy to win tariff war. Holy crap! Talk about hitting where it hurts. I am sure that the White House is fielding calls from angry donors from Texas, Wyoming and everywhere in between at this very moment. Still no tariffs on crude, but surely this is only a matter of time. This could have a major impact on US energy producers seeking markets for LTO. Not a problem for China of course as they will continue to buy sanctioned Iranian oil with impunity, shipping them on their own ships or Iranian ones and paying in yuan.


Anyway, with those four things out of the way, I guess it is time to move on to the super-boring subject I was actually writing about before I was so rudely interrupted by current events.


As I was sayiong, vacation. And as I so often do on vacation, I had far too much time to muse on what is one of my favourite subjects – natural gas. Yes. That again.





Because it is it that time of year. Time to fantasize wistfully about what could be for Alberta royalty-wise if the state of the gas market in North America would just shape up a bit. A bunch of conjecture in the vain hope it will be better this year. And of course then to blog some thoughts on why it may actually be better this year. Only to have my hopes crushed like Bambi in Bambi vs Godzilla. Remember that one? Sigh?


So, with that said, let’s get after it, shall we?


Well here we are doggedly approaching the end of another injection season in the US. That is the time of year when underground storage finishes getting replenished and tips over into withdrawals as consumers start to heat their homes because of the horrific winters we all endure here in North America. This used to typically be around October. Or at least it used to.


Because now, as with everything energy related, the rules are changing and what’s old is no longer typical, up is no longer down.


Consumption in the summer is way up compared to prior years. Why? Any of a number of reasons, but let’s start with how coal plants are being retired (no matter what Donald trump says) and are being replaced primarily by gas driven electrical generation (no matter what Bill McKibben wants) and summer temperatures are getting higher (no matter what the Friends of Science claim).


Add in robust economic growth, a burgeoning petrochemical industry, more electronic toys and some good old fashioned Bitcoin mining and demand for natural gas as an input for power and product is soaring. Final leg of the stool is a slower rate of growth in drilling for gas than oil and you have a wonderful confluence of supply and demand fundamentals.


And at some point this should all catch up, right? We are consuming way more and producing more, but the production growth lags the consumption growth. Ultimately this results in the lower weekly additions to storage that we have seen this year despite record production levels and pretty much normal levels of consumption in the past few winters.


Which, of course, all points to higher prices. Right?


Except when it doesn’t.


What gives?


Seriously. What gives?


We are all familiar with the story in Western Canada. “Gas is free” is the running joke in Alberta, except it’s no laughing matter for producers or governments  in the province where AECO spot prices were negative for a period of time and underscores why LNG is such a game changer.


But it’s not just Western Canada. Everywhere purports to be awash with gas. And gas everywhere else in the continent is cheap, notwithstanding localized shortages. Consider everyone’s favourite Permian Basin where gas is a by-product of light tight oil production and a lack of offtake capacity means massive flaring and bargain pricing. Meanwhile, the US keeps building LNG export facilities and pipelines to Mexico. Oh, those localized shortages? New England. They didn’t want a pipeline. So they pay more.


Why is this? Why do the fundamentals signal what should be a tightening supply situation while the lagging price environment indicates a glut.


I’m guessing that a lot of it is driven by the mixed messages we get about gas and the 150 year supply we hear so much about that was a shortage a decade ago. Even though conventional production has been in terminal decline, the shale gas assets of the Utica and Marcellus are sure to continue growing  forever, just like the Barnett, the Eagle Ford … or… umm. Yet the record shows all of these prior shale deposits clearly peaking. So why is it different this time?


It’s gotten quite convoluted. So much so that ‘m not sure which way is up anymore. Maybe it’s not so different this time. Maybe that’s why I feel like I’m being hustled.


Don’t you?


And there’s nothing people like more than a good hustle. An elaborate Ocean’s 11 type scheme to deceive and make someone believe one thing when in fact, there is some completely different going on. Three card monty, pigeon drop, energy independence – you know, all those.


Where am I going with this? Nowhere really. Well back to my vacation actually. A little self-indulgent because I wrote the outline of this while observing a variation of the oldest of hustles – I will call it the “Hotel Guest Hustle”. So I claim the right to weave that into my narrative.


On with the show. As you know, earlier this week I was in Montreal and while there I had occasion to observe a true master at his craft at work in the hotel bar whilst enjoying a glass of wine (the circumstances of why I was relegated to the hotel bar by my family shall remain out of bounds for now).. At any rate, while enjoying my wine, I watched* the epic hustle unfold. (* Note to anyone at a hotel bar – if you feel like the person sitting by themselves near you fiddling on their phone might be spying on you, it’s probably me)


Anyway, the basic story, while I was musing about natural gas, I noticed this 35’ish year old guy paying way too much attention to a 65 + American couple. They were chatting away and laughing like old friends but I quickly realized they were not associated. And how they chatted. Or, come to think of it, how the marks chatted and how much he listened. And how much he pumped them for information. And they gave it, willingly.  Where they lived (Oklahoma I believe). Where they owned a condo (San Diego). Where precisely in San Diego (ocean-front). The neighbours’ names in San Diego. The 9 months out of the year they don’t use their ocean front place. Their kids’ names. The name of their boat and what marina. Where they hide the freaking key. It was all out there for the taking. Life details which would allow the shiny newcomer to take advantage of the trusting old couple. And they had no clue they were being hustled.


The piece de resistance was at the end when he did the requisite fumble-rama with his bar tab and some BS about not wanting to charge his room for expense purposes – boom, tab paid. Conversation over, buddy is gone. Done.


Look, I have an active imagination. I don’t know if this was a con. But it sure seemed like one. And if something looks weird, or doesn’t add up, something has to give or you are being deceived.


Anyway, I only bring this up to point out how easy it is to be deceived. And that not everything is as it seems.


Like maybe the gas market.


We have waited 6 years. No wait, 10 years. No wait, 12 freaking years for it to recover. And we may finally be on the cusp of it happening. But everyone you talk to thinks otherwise. Because of shale gas and the 150 year supply and the fracking revolution. The same mindset of unlimited supply that is feeding the beast in the Permian.


But consider the following in a different context.


Storage shortages. Currently storage sits about 25% below last year’s levels and about 20% behind the five year average. Why is this significant? The last time this happened was in 2014 when gas prices did actually spike. If production is so darn prolific, why are we losing ground during injection season? Clearly demand is higher than anyone expected. Why else is this significant? Because current prices and the forward strip are behind where they were last year when we had way more slack in the system.


And the United States continues to find ways to get rid of natural gas. Consider all the LNG export facilities currently under construction and the export pipelines to a needy Mexico market, never mind all the petrochemical facilities planned. At current projections and if all the projects come to fruition, almost a quarter of US production will be designated for export. That’s a lot by the way.


Don’t even get me started on flaring.


And where is all the gas going to come from? Well right now, some 40% of US natural gas comes from the Marcellus which also accounts for pretty much 100% of the growth in production. What happens if it hiccups and isn’t carrying its share of the load anymore? The Utica isn’t catching up, New York won’t allow fracking and the last time I checked, drilling massive horizontal wells under Philadelphia isn’t in the cards. Exaggeration for dramatic effect, but you get the point/thesis.


That’s a lot of eggs in one basket – what if the egg gest rotten?


For better or worse, the demand beast has been unleashed in North America and currently there is only one major field experiencing any growth. One or two cold winters, another hot summer – the storage picture is far more likely to get a lot more “chilling” for a lot of people. Which I believe is very bullish for gas – long term.


Is there something out there to help solve this looming issue? Of course there is. It’s red and white and continually tearing itself apart over petty issues. It’s Canada.


Look, I’m an unabashed homer. I can’t help it. And clearly as a firm we benefit by increased activity in Canada. But the reality is that Canada has prolific gas resources both conventional and unconventional – wet and dry. We used to be THE major exporter into the United States (well, we still are, just less major than major) and more than likely will be again, notwithstanding absurdly bullish production forecasts from the Trump Administration.


Demand is clearly rising in the US faster than production. It is only a matter of time until prices start to reflect that reality. We should be ready.


I’m not saying that it’s imminent or that we should scrap LNG plans since those are needed. But we should be ready when called on to grow our supply to the US market as needed. Let them export, flare and consume to their heart’s content, we will sit back and wait.


May we can call it the Canadian Gas Drop.

Prices as at August 24th, 2018 (Aug 17, 2018)

  • The price of oil fell then rose sharply during the week on trade worries and a big drop in inventories
    • Storage posted a big decrease
    • Production was flat
    • The rig count in the US was down
  • After a smaller than expected injection, natural gas gave up some ground then rallied thru the end of the week…


  • WTI Crude: $68.72 ($65.91)
  • Nymex Gas: $2.917 ($2.946)
  • US/Canadian Dollar: $0.76785 ($ 0.76635)



  • As at Aug 17, 2018, US crude oil supplies were at 408.4 million barrels, a decrease of 5.8 million barrels from the previous week and 59.1 million barrels below last year.
    • The number of days oil supply in storage was 23.0 behind last year’s 26.5.
    • Production increased for the week at 11.000 million barrels per day. Production last year at the same time was 9.528 million barrels per day. The increased production this week came from increased production in Alaska and increased production in the Lower 48.
    • Imports fell from 9.014 million barrels a day to 7.518 compared to 8.790 million barrels per day last year.
    • Exports from the US fell to 1.155 million barrels a day from 1.592 last week and 0.936 a year ago
    • Canadian exports to the US were 3.350 million barrels a day, down from 3.456.
    • Refinery inputs were down marginally during the week at 17.892 million barrels a day
  • As at August 17, 2018, US natural gas in storage was 2.435 billion cubic feet (Bcf), which is 20% lower than the 5-year average and about 22% less than last year’s level, following an implied net injection of 48 Bcf during the report week
    • Overall U.S. natural gas consumption was down 1% during the report week
    • Production for the week was up 1%. Imports from Canada were down 3% from the week before. Exports to Mexico were down 2% from the week before.
    • LNG exports totalled 25.7 Bcf.
  • As of August 24th the Canadian rig count was 229 (AB – 159; BC – 16; SK – 49; MB – 4; Other – 1. Rig count for the same period last year was 217.
  • US Onshore Oil rig count at August 24, 2018 was at 860, down 9 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was down 4 at 182.
    • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
  • Offshore rig count was down 3 at 16.
    • Offshore rig count at January 1, 2015 was 55

US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 62%/38%


  • All that stuff above
  • Trump Watch: Manafort. Cohen.
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